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New Proposed Rule Changes on NSPIRE for HUD Programs

A notice was published in the federal register on January 13, 2021, Docket No. FR-6086-P-01
24, related to NSPIRE implementation. This notice is applicable to several HUD funding programs, including HUD Multifamily Section 8, Public Housing, Voucher programs (HCV and PBV), HOME, Mod Rehab, Housing Trust Fund, and Office of Community Planning and Development Programs. CFR Parts 5, 92, 93, 200, 574, 576, 578, 880, 882, 884, 886, 902, 982, 983, and 985. This notice outlines proposed rule changes and an invitation for owners, PHAs, and industry stakeholders to provide comments on these proposed new rule changes. Below is a summary of some of the highlights of the proposed rule changes.

It is important to remember that NSPIRE is still in a demonstration program period. As such, all of these proposed rules are anticipated to be implemented when the demonstration programs have been completed.

Aligning Inspection Protocols and Processes

This notice deals largely with the regulatory implementation of NSPIRE, as HUD describes it as “the processes and procedures.” This alignment includes the regulatory merger of Housing Quality Standards (HQS) and the Uniform Physical Condition Standards (UPCS).

It also deals with the challenges and promises of aligning standards and practices across most affordable housing programs while addressing each program’s “unique circumstances.” HUD’s approach for aligning these programs accounts for the:

  • Unique statutory requirements related to the standards of individual units rather than the project as a whole;
  • Nature of the entity responsible for conducting inspections (the PHA rather than HUD);
  • Relationship of housing quality standards to State and local codes;
  • Pass/fail nature of inspections; and
  • Frequency of inspections.

These rule changes attempt to address the fundamental distinctions of “risk-based” inspections conducted by REAC and initial qualification inspections conducted under HQS. With REAC Inspections, questions about adequate minimum code compliance were largely addressed at the time of loan and assistance. With HQS Inspections, agencies determine if private owners “pass or fail” basic standards and layout for rent reasonableness.  The questions outlined in this notice attempt to address the fundamental question “can these two programs with two very different circumstances for inspection share the same inspection protocol?”

The Challenges of Program Alignment as Part of NSPIRE Implementation

Based on this notice, the NSPIRE process and procedure rulemaking and changes will be implemented through updates to the Federal Register.

During the NSPIRE implementation and in parallel to formal rulemaking, HUD plans to draft Federal Register notices that would outline the specific standards, scoring, and protocols under NSPIRE. All updated standards and scoring methodologies would be published—as required by this proposed rule—through a Federal Register Notice at least once every 3 years, with the opportunity for public comment before implementation.

While NSPIRE will align the largest of the HUD Programs, voucher-based assistance and program-based assistance (PHA and PBRA), it also aims to align smaller programs such as HOME and HTF rental housing and homeownership programs, downpayment assistance, HOME TBRA, programs for persons with AIDS, and other locally administered programs. In this notice, HUD poses the question,

“Should HUD establish a different set of minimum deficiencies” for these programs? Also, should HUD create a separate set of standards for group homes, Single Room Occupancy (SRO), congregate housing, and other types of housing?”

New NSPIRE Inspection Standards Under Consideration

Based on this notice’s language, there are additional considerations of new goals and standards to be added to NSPIRE, including:

  • Water Safety Standards
  • Electrical Outlets (Adequate Number of Outlets)
  • AFCI and GFCI
  • Requiring HVAC Equipment in all units
  • Lighting Standards

HUD is still seeking comments on these new requirements. Owners, PHAs, and stakeholders are encouraged to add comments to eliminate conflicts in the implementation period of NSPIRE. For example, there is no provision for an exclusion for “required Heating and Cooling equipment” in tropical locations where such equipment is not standard.

Frequency of NSPIRE Inspections

This section discusses the proposed change to the required frequency of inspections. Currently, depending on the recent REAC score, inspections occur annually to every three years. The Proposed Rule seeks to amend the inspection frequency range to be every 2 to 5 years. This would be for the “risk-based” inspections, which apply to properties inspected by REAC.

A project’s ability to change to the longer inspection cycle is contingent on (a) positive results of REAC inspections and (b) implementation of the “self-inspection” requirement. The “self-inspection” requirement would require owners to inspect units and report the inspection and repair results to HUD. As of this notice, there is no specific outline of the scoring results that would need to be achieved to result in a five-year inspection cycle.

Voucher-based programs would continue to follow the rules outlined in HOTMA and their own Admin Plans standards.

Adding Tenant Survey Comments to REAC NSPIRE Inspections

This notice also discusses the possible addition of asking residents for input on their dwelling units’ condition. Specifically,

HUD is soliciting comments on how to involve tenants in helping REAC identify poor performing properties. For example, could tenants provide a “1-5 rating” of their units with “1” being “poor” and “5” being “excellent?” Could tenants recommend their units for inspection separate from the statistical sample for scoring purposes to inform HUD’s risk analysis of the property?

Self-Inspection Requirements and Electronic Reporting

Changes to the inspection rules would also align expectations for owners and PHAs. These changes include adding specific language requiring privately-owned PBRA programs to conduct annual inspections and new language on electronic reporting of such annual inspections.

The proposed rule would add a new regulation that would explicitly require annual self-inspections of all units in a project and add a new electronic reporting requirement. … The procedures for this reporting would be outlined in future Federal Register Notices.

Handling “Tenant Induced Damage” under NSPIRE

One topic included in this notice is a significant concern of PHAs and owners. Specifically, HUD has opened the door to a possible rule change for “tenant damage.” There is no specific rule change proposed within this notice, but there is a request for comment.

HUD is soliciting comments on how to fairly approach tenant-induced damage to units and properties in such a way that it will have a positive impact on HUD-assisted properties. What could be used as incentives or disincentives to discourage tenant-induced damage?

Owners/PHAs/Industry stakeholders are encouraged to submit comments and suggestions to address challenges related to an owner’s ability to independently distinguish tenant damage from “normal wear or tear” and “owner negligence.” Once the distinction is made, what action would be appropriate to take? Would the deficiency be non-scoring? Could the distinction of tenant damage vs. non-tenant damage be the subject of a technical review? Public comments may shape these decisions, so we encourage everyone to provide thoughtful, constructive, and reasonable feedback.

Small Housing Authorities Changes to SEMAP and PHAS

Much of the rulemaking here includes changes to recent regulations for small PHAs and small rural PHAs. The proposed rules would change the overall rating requirements under PHAS and SEMAP and the number of years between inspections. These proposed rule changes also include updates to rating standards for overall agency evaluation and a different threshold for troubled PHAs. Additionally, small rural PHAs would be subject to triannual inspections under PHAS. Any small housing authority is encouraged to read the entire notice as many elements may affect these agencies. Now is the time to provide comments if these changes are perceived to have a negative or burdensome effect.

Technical Review of the Results (Appeals)

Under this proposed rule change, a technical review of inspection results will have to be filed no later than the 45th calendar day following the inspection report’s release. These appeals may include objectively verifiable proof of adverse conditions beyond the owner’s control or inspection errors. Under this new proposed rule change, if HUD determines that there is information sufficient enough to show that errors made on the scoring of the inspection “were likely to result in a significant improvement in the scoring [defined in this notice as “an increase that would cross an administrative threshold”], then HUD will (a) undertake a new inspection, (b) correct the original inspection, or (c) issue a new inspection score.

One of the most significant changes included in the proposed rule relates to any severe health and safety issues reported as corrected by the owner. If upon reinspection, it is determined that such issues were not corrected as certified by the owner, then the owner would have to reimburse HUD for the inspection cost. This clause would also apply if the owner/PHA requests a reinspection, and there is no significant improvement in the score. If there is no significant score improvement,  the PHA/Owner would be responsible for paying for a new inspection cost, and this expense would not be an eligible project expense.

In this notice, HUD outlines the substantial and very real challenges to the substantial undertaking of addressing the concerns that started the NSPIRE reforms and the desire to align programs. We expect to see several similar notices and requests for comments during the NSPIRE demonstration program for PHAs/Owners and voucher programs.

Changes to the Low Income Housing Tax Credit Program (LIHTC) Inspections

This notice does not specifically mention LIHTC inspections; however, 24 CFR 5.703 (currently references UPCS inspections) would be modified to reflect the changes in the notice regarding the inspection protocol. Treasury Regulation 1.42 -5 established UPCS as an inspection protocol for LIHTC and directly references 24 CFR 5.703.   Treas, Reg 6 CFR § 1.42-5;d-2(ii) states,

The Agency must review any local health, safety, or building code violations reports or notices retained by the owner under paragraph (b)(3) of this section and must determine… Whether the buildings and units satisfy, as determined by the Agency, the uniform physical condition standards for public housing established by HUD (24 CFR 5.703).

Essentially, as the Treasury Regulation cites HUD’s regulation and not “UPCS” specifically, once NSPIRE is implemented, any changes made to 24 CFR 5.703 will carry over to the LIHTC program.

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