In an effort to summarize the highlights of the LEAN Email Blasts that we receive, and rarely have time to review in a timely fashion, we at Pepper Hamilton are providing this quick synopsis of the latest LEAN update. Our aim is to provide pertinent information succinctly as a roadmap to the LEAN Email Blasts, not to replace the LEAN Email Blasts. We hope you find these summaries helpful. Here is a link to the complete December 30, 2014 LEAN Blast.

Final Rule Published Regarding Operator Financials

The Final Rule “Federal Housing Administration (FHA): Section 232 Healthcare Facility Insurance Program — Aligning Operator Financial Reports with HUD’s Uniform Financial Reporting Standards” was published on December 16, 2014. The Final Rule is identical to the Interim Rule published on September 16, 2014, with an effective date of October 16, 2014. Operators have 60 calendar days following the end of a fiscal quarter and 90 calendar days following the end of the fiscal year to comply with HUD’s financial statement reporting requirements.

Early Start and Commencement Instructions and Checklist

ORCF has updated the Early Start and Early Commencement Instructions and Checklist.

Facility Management Certifications

ORCF requested that all Lenders provide clear, succinct and accurate information regarding the services and compensation details of the Management Agreement presented in the Management Certification - Residential Care Facility (HUD-9839-ORCF). “See Management Agreement” is not acceptable detail. The form memorializes ORCF’s approval of the specific details.

Interest Rate Reductions (IRR)

ORCF has received more than 120 IRR submissions, realizing well over $6 million in annual savings. ORCF’s Preliminary Reviews are being processed by a specialized team in ORCF generally within two–three weeks.

Additional IRR Guidance/Clarification: Once the Preliminary Review is completed by the ORCF team, the Lender is notified and instructed to submit final modification documents reflecting the locked-in interest rate to ORCF and the Office of General Counsel (OGC) for approval within 30 days in order to proceed to effectuate the IRR.

  • OGC Checklist: The OGC checklist identifies documents needed to complete the expedited legal review of streamlined IRRs.
  • Title Policy/Lender Certification: As a general matter, HUD will not require a title endorsement in connection with an IRR. OGC has developed a Lender Certification that confirms continued first lien priority for use in these types of transactions. It is up to the Lender to determine what diligence it needs in order to provide the required certification to HUD. OGC will accept a title endorsement if the Lender chooses to submit one in lieu of the certification.
  • Modification of Mortgage: The security instrument must be modified only if the form of that document or an addendum thereto identifies the interest rate or if other changes have been approved.
  • IRR Submission Signatories: IRR applications (see Sample Lender Analysis) must be reviewed and approved by a Section 232 HUD-approved underwriter.

ORCF wants to remind all Lenders that streamlined processing is solely for IRRs. Therefore, other substantive changes (e.g., TPA, change of operator/manager, changes to A/R Lines) must be processed as part of a normal asset management and legal review, and not incorporated into the IRR.

Lender Performance in Underwriting FY 2014

The individual ORCF Lender Performance Profiles have been sent to each Lender who participated in Section 232 underwriting in FY 2014. The profiles reflect ORCF feedback on underwriting for deals brought to the Loan Committee from October 2013 to September 2014. Specifically, ORCF underwriters, workload managers and appraisers provide feedback on issues causing significant delays with Lender performance based on six metrics: math calculations, quality control, responsiveness, due diligence, program/legal requirements and Lender assessment of 3rd party reports. The feedback is compiled and quantified to determine any patterns of problems and then shared with Lenders in the spirit of continuous improvement.

In summary, for all deals submitted in FY 2014, ORCF staff identified significant issues for 10 percent of the deals submitted (compared to a 19 percent error rate in FY 2013 and a 25 percent error rate in FY 2012). In addition, 18 of the 39 Lenders that participated in Section 232 underwriting activity in FY 2014 had no issues identified with their Firm Application submissions. Quality control and math calculations topped the list of issues that ORCF communicated as contributing to delays in underwriting. As communicated in underwriting training in July 2014, prospective underwriting was a common issue of concern observed at the Loan Committee. However, ORCF continued to see improvement throughout FY 2014, which ended with a 7 percent error rate in the last quarter.

Any Lender wishing to further discuss ORCF metrics or their specific profile should contact Mary Walsh, Lender Relations Liaison, at mary.v.walsh@hud.gov.

Revised 'Save the Date' for Lender Dialog Meetings to 2/25 and 2/26

At the Fall MBA Roundtable, ORCF announced a save the date for a potential Lender and ORCF meeting in Jacksonville, Florida, in mid-February. Due to a conflict, ORCF has moved the possible dates to February 25 and February 26, 2015. Further details will be provided in a future Email Blast.

Optional Fast-Track Signing of Regulatory Agreements and Note

Effective immediately, the HUD Closer may permit early execution of the Regulatory Agreement and Note if all of the following have occurred:

  1. Draft closing packages have been received by the HUD Attorney and HUD Closer. [Note: HUD reserves the right to withhold permission for early execution if the draft closing packages have serious omissions or defects.]
  2. The Lender represents to ORCF that
    a. there are no known impediments to close
    b. the interest rate is locked, and
    c. the loan amount is finalized.
  3. The HUD Attorney has reviewed and approved the Regulatory Agreements and Note.
  4. The HUD Closer has reviewed and approved the Regulatory Agreements and Note.

A Closer’s permission to send in documents for signature is not express permission to record or close. The Regulatory Agreement may not be recorded until the HUD Attorney expressly authorizes the title company to record. HUD will continue to sign the documents last, only after documents are fully executed by other parties.