Federal Register Vol. 81, No.207,

Table of Contents I. Introduction A. Background B. Overview of the Proposal C. Consultation with U.S. Financial Regulators D. Overview of Statutory Authority and Purpose II. Proposed Restrictions on QFCs of GSIBs A. Covered FSIs B. Covered QFCs C. Definition of “Default Right” D. Required Contractual Provisions Related to the U.S. Special Resolution Regimes E. Prohibited Cross-Default Rights F. Process for Approval of Enhanced Creditor Protections III. Transition Periods IV. Expected Effects V. Revisions to Certain Definitions in the FDIC's Capital and Liquidity Rules VI. Regulatory Analysis A. Paperwork Reduction Act B. Regulatory Flexibility Act: Initial Regulatory Flexibility Analysis C. Riegle Community Development and Regulatory Improvement Act of 1994 D. Solicitation of Comments on the Use of Plain Language I. Introduction A. Background

This proposed rule addresses one of the ways the failure of a major financial firm could destabilize the financial system. The disorderly failure of a large, interconnected financial company could cause severe damage to the U.S. financial system and, ultimately, to the economy as a whole, as illustrated by the failure of Lehman Brothers in September 2008. Protecting the financial stability of the United States is a core objective of the Dodd-Frank Act,1 which Congress passed in response to the 2007-2009 financial crisis and the ensuing recession. One way the Dodd-Frank Act helps to protect the financial stability of the United States is by reducing the damage that such a company's failure would cause to the financial system if it were to occur. This strategy centers on measures designed to help ensure that a failed company's resolution proceeding—such as bankruptcy or the special resolution process created by the Dodd-Frank Act—would be more orderly, thereby helping to mitigate destabilizing effects on the rest of the financial system.2

On May 3, 2016, the FRB issued a Notice of Proposed Rulemaking, the FRB NPRM, pursuant to section 165 of the Dodd-Frank Act.3 The FRB's proposed rule stated that it is intended as a further step to increase the resolvability of U.S. global systemically important banking organizations (GSIBs) 4 and global systemically important foreign banking organizations (foreign GSIBs) that operate in the United States (collectively, “covered entities”).5 Subsequent to the FRB NPRM, the OCC issued the OCC NPRM, which applies the same QFC requirements to “covered banks” within the OCC's jurisdiction.

The FDIC is issuing this parallel proposed rule applicable to FSIs that are subsidiaries of a “covered entity” as defined in the FRB NPRM and to subsidiaries of such FSIs (collectively, “covered FSIs”). The policy objective of this proposal focuses on improving the orderly resolution of a GSIB by limiting disruptions to a failed GSIB through its FSI subsidiaries' financial contracts with other companies. The FRB NPRM, the OCC NPRM, and this proposal complement the ongoing work of the FRB and the FDIC on resolution planning requirements for GSIBs, and the FDIC intends this proposed rule to work in tandem with the FRB NPRM and the OCC NPRM.6

As discussed in Part I.D. below, the FDIC has a strong interest in preventing a disorderly termination of covered FSIs' QFCs upon a GSIB's entry into resolution proceedings. In fulfilling the FDIC's responsibilities as (i) the primary federal supervisor for SNMBs and state savings associations; 7 (ii) the insurer of deposits and manager of the Deposit Insurance Fund (DIF); and (iii) the resolution authority for all FDIC-insured institutions under the FDI Act and, if appointed by the Secretary of the Treasury, for large complex financial institutions under Title II of the Dodd-Frank Act, the FDIC's interests include ensuring that large complex financial institutions are resolvable in an orderly manner, and that FDIC-insured institutions operate safely and soundly.8

The proposed rule specifically addresses QFCs, which are typically entered into by various operating entities in a GSIB group, including covered FSIs. These covered FSIs are affiliates of U.S. GSIBs or foreign GSIBs that have OTC derivatives exposure, making these entities interconnected with other large financial firms. The exercise of default rights against an otherwise healthy covered FSI resulting from the failure of its affiliate—e.g., its top-tier U.S. holding company—may cause it to weaken or fail. Accordingly, FDIC-supervised affiliates of U.S. or foreign GSIBs are exposed, through the interconnectedness of their QFCs and their affiliates' QFCs, to destabilizing effects if their counterparties or the counterparties of their affiliates exercise default rights upon the entry into resolution of the covered FSI itself or its GSIB affiliate.

These potentially destabilizing effects are best addressed by requiring all GSIB entities to amend their QFCs to include contractual provisions aimed at avoiding such destabilization. It is imperative that all entities within the GSIB group amend their QFCs in a similar way, thereby eliminating an incentive for counterparties to concentrate QFCs in entities subject to fewer restrictions. Therefore, the application of this proposed rule to the QFCs of covered FSIs is not only necessary for the safety and soundness of covered FSIs individually and collectively, but also to avoid potential destabilization of the overall banking system.

This proposed rule imposes substantively identical requirements contained in the FRB NPRM on covered FSIs. The FDIC consulted with the FRB and the OCC in developing this proposed rule, and intends to continue coordinating with the FRB and the OCC in developing the final rule.

Qualified financial contracts, default rights, and financial stability. Like the FRB NPRM, this proposal pertains to several important classes of financial transactions that are collectively known as QFCs.9 QFCs include swaps, other derivatives contracts, repurchase agreements (also known as “repos”) and reverse repos, and securities lending and borrowing agreements.10 GSIBs enter into QFCs for a variety of purposes, including to borrow money to finance their investments, to lend money, to manage risk, and to enable their clients and counterparties to hedge risks, make markets in securities and derivatives, and take positions in financial investments.

QFCs play a role in economically valuable financial intermediation when markets are functioning normally. But they are also a major source of financial interconnectedness, which can pose a threat to financial stability in times of market stress. This proposal—along with the FRB NPRM and OCC NPRM—focuses on a context in which that threat is especially great: The failure of a GSIB that is party to large volumes of QFCs, likely including QFCs with counterparties that are themselves systemically important.

QFC continuity is important for the orderly resolution of a GSIB because it helps to ensure that the GSIB entities remain viable and to avoid instability caused by asset fire sales. Together, the FRB and FDIC have identified the exercise of certain default rights in financial contracts as a potential obstacle to orderly resolution in the context of resolution plans filed pursuant to section 165(d) of the Dodd-Frank Act,11 and have instructed systemically important firms to demonstrate that they are “amending, on an industry-wide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings.” 12 More recently, in April 2016,13 the FRB and FDIC noted the important changes that have been made to the structure and operations of the largest financial firms, including the adherence by all U.S. GSIBs and their affiliates to the ISDA 2015 Universal Resolution Stay Protocol.14

Direct defaults and cross-defaults. Like the FRB NPRM and the OCC NPRM, this proposal focuses on two distinct scenarios in which a non-defaulting party to a QFC is commonly able to exercise default rights. These two scenarios involve a default that occurs when either the GSIB entity that is a direct party 15 to the QFC or an affiliate of that entity enters a resolution proceeding.16 The first scenario occurs when a GSIB entity that is itself a direct party to the QFC enters a resolution proceeding; this preamble refers to such a scenario as a “direct default” and refers to the default rights that arise from a direct default as “direct default rights.” The second scenario occurs when an affiliate of the GSIB entity that is a direct party to the QFC (such as the direct party's parent holding company) enters a resolution proceeding; this preamble refers to such a scenario as a “cross-default” and refers to default rights that arise from a cross-default as “cross-default rights.” A GSIB parent entity will often guarantee the derivatives transactions of its subsidiaries and those derivatives contracts could contain cross-default rights against a subsidiary of the GSIB that would be triggered by the bankruptcy filing of the GSIB parent entity even though the subsidiary continues to meet all of its financial obligations.

Importantly, like the FRB NPRM and the OCC NPRM, this proposal does not affect all types of default rights, and, where it affects a default right, the proposal does so only temporarily for the purpose of allowing the relevant resolution authority to take action to continue to provide for continued performance on the QFC. Moreover, the proposal is concerned only with default rights that run against a GSIB entity—that is, direct default rights and cross-default rights that arise from the entry into resolution of a GSIB entity. The proposal would not affect default rights that a GSIB entity (or any other entity) may have against a counterparty that is not a GSIB entity. This limited scope is appropriate because, as described above, the risk posed to financial stability by the exercise of QFC default rights is greatest when the defaulting counterparty is a GSIB entity.

Single-point-of-entry resolution. Cross-default rights are especially significant in the context of a GSIB failure because GSIBs typically enter into large volumes of QFCs through different entities controlled by the GSIB. For example, a U.S. GSIB is made up of a U.S. bank holding company and numerous operating subsidiaries that are owned, directly or indirectly, by the bank holding company. As stated in the FRB NPRM, from the standpoint of financial stability, the most important of these operating subsidiaries are generally a U.S. insured depository institution, a U.S. broker-dealer, or similar entities organized in other countries.

Many complex GSIBs have developed resolution strategies that rely on the single-point-of-entry (SPOE) resolution strategy. In an SPOE resolution of a GSIB, only a single legal entity—the GSIB's top-tier bank holding company—would enter a resolution proceeding. The effect of losses that led to the GSIB's failure would pass up from the operating subsidiaries that incurred the losses to the holding company and would then be imposed on the equity holders and unsecured creditors of the holding company through the resolution process. This strategy is designed to help ensure that the GSIB subsidiaries remain adequately capitalized, and that operating subsidiaries of the GSIB are able to stabilize and continue meeting their financial obligations without immediately defaulting or entering resolution themselves. The expectation that the holding company's equity holders and unsecured creditors would absorb the GSIB's losses in the event of failure would help to maintain the confidence of the operating subsidiaries' creditors and counterparties (including their QFC counterparties), reducing their incentive to engage in potentially destabilizing funding runs or margin calls and thus lowering the risk of asset fire sales. A successful SPOE resolution would also avoid the need for separate resolution proceedings for separate legal entities run by separate authorities across multiple jurisdictions, which would be more complex and could therefore destabilize the resolution. An SPOE resolution can also avoid the need for insured bank subsidiaries, including covered FSIs, to be placed into receivership or similar proceedings as the likelihood of their continuing to operate as going concerns will be significantly enhanced if the parent's entry into resolution proceedings does not trigger the exercise of cross-default rights. Accordingly, this proposed rule, by limiting such cross-default rights based on an affiliate's entry into resolution proceedings, assists in stabilizing both the covered FSIs and the larger banking system.

Multiple-Point-of-Entry Resolution. This proposal would also yield benefits for other approaches to resolution. For example, preventing early terminations of QFCs would increase the prospects for an orderly resolution under a multiple-point-of-entry (MPOE) strategy involving a foreign GSIB's U.S. intermediate holding company going into resolution or a resolution plan that calls for a GSIB's U.S. insured depository institution to enter resolution under the FDI Act. As discussed above, this proposal would help support the continued operation of affiliates of an entity experiencing resolution to the extent the affiliate continues to perform on its QFCs.

U.S. Bankruptcy Code. While insured depository institutions are not subject to resolution under the Bankruptcy Code, if a bank holding company were to fail, it would likely be resolved under the Bankruptcy Code. When an entity goes into resolution under the Bankruptcy Code, attempts by the debtor's creditors to enforce their debts through any means other than participation in the bankruptcy proceeding (for instance, by suing in another court, seeking enforcement of a preexisting judgment, or seizing and liquidating collateral) are generally blocked by the imposition of an automatic stay.17 A key purpose of the automatic stay, and of bankruptcy law in general, is to maximize the value of the bankruptcy estate and the creditors' ultimate recoveries by facilitating an orderly liquidation or restructuring of the debtor. The automatic stay thus solves a collective action problem in which the creditors' individual incentives to become the first to recover as much from the debtor as possible, before other creditors can do so, collectively cause a value-destroying disorderly liquidation of the debtor.18

We invite interested people to take part in this rulemaking by sending written comments, data, or views. The most helpful comments reference a specific portion of the special conditions, explain the reason for any recommended change, and include supporting data.

We will consider all comments we receive by the closing date for comments. We may change these special conditions based on the comments we receive.

On May 30, 2012, Bombardier applied for an amendment to type certificate no. T00003NY to include the new Model BD-700-2A12 and BD-700-2A13 airplanes. These airplanes are derivatives of the Model BD-700 series of airplanes and are marketed as the Bombardier Global 7000 (Model BD-700-2A12) and Global 8000 (Model BD-700-2A13). These airplanes are twin-engine, transport-category, executive-interior business jets. The maximum passenger capacity is 19 and the maximum takeoff weights are 106,250 lbs. (Model BD-700-2A12) and 104,800 lbs. (Model BD-700-2A13).

Under the provisions of Title 14, Code of Federal Regulations (14 CFR) 21.101, Bombardier must show that the Model BD-700-2A12 and BD-700-2A13 airplanes meet the applicable provisions of the regulations listed in Type Certificate no. T00003NY, or the applicable regulations in effect on the date of application for the change, except for earlier amendments as agreed upon by the FAA.

In addition, the certification basis includes other regulations, special conditions, and exemptions that are not relevant to these proposed special conditions. Type Certificate no. T00003NY will be updated to include a complete description of the certification basis for these airplane models.

If the Administrator finds that the applicable airworthiness regulations (i.e., 14 CFR part 25) do not contain adequate or appropriate safety standards for the Model BD-700-2A12 and BD-700-2A13 airplanes because of a novel or unusual design feature, special conditions are prescribed under the provisions of § 21.16.

Special conditions are initially applicable to the model for which they are issued. Should the type certificate for that model be amended later to include any other model that incorporates the same novel or unusual design feature, or should any other model already included on the same type certificate be modified to incorporate the same novel or unusual design feature, these special conditions would also apply to the other model under § 21.101.

In addition to the applicable airworthiness regulations and special conditions, the Model BD-700-2A12 and BD-700-2A13 airplanes must comply with the fuel-vent and exhaust-emission requirements of 14 CFR part 34, and the noise-certification requirements of 14 CFR part 36.

The FAA issues special conditions, as defined in 14 CFR 11.19, in accordance with § 11.38, and they become part of the type-certification basis under § 21.101.

Bombardier Inc. Model BD-700-2A12 and BD-700-2A13 airplanes will incorporate the following novel or unusual design feature: The fuselage will be fabricated using aluminum-lithium materials instead of conventional aluminum.

The certification basis for the Bombardier Model BD-700-2A12 and BD-700-2A11 airplanes does not include the burn-through requirements defined in § 25.856(b) because both airplane models have a passenger capacity of fewer than 20. The Model BD-700-2A12 and BD-700-2A13 airplanes are introducing a new material other than what has traditionally been shown to be survivable from a “toxic” standpoint. The applicant must ensure that the material being installed on an airplane does not introduce a new hazard that would reduce the survivability of the passengers during a post-crash situation, or that would provide levels of toxic fumes that would be lethal or incapacitating, thus preventing evacuation of the airplane in a crash scenario.

In accordance with § 21.16, fuselage structure that includes aluminum-lithium construction is an unusual design feature for large, transport-category airplanes certificated under 14 CFR part 25.

Regulations applicable to burn requirements, including §§ 25.853 and 25.856(a), remain valid for these airplanes, but do not reflect the threat generated from potentially toxic levels of gases produced from aluminum-lithium materials.

These proposed special conditions contain the additional safety standards that the Administrator considers necessary to establish a level of safety equivalent to that established by the existing airworthiness standards.

As discussed above, these special conditions are applicable to the Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes. Should Bombardier apply at a later date for a change to the type certificate to include another model incorporating the same novel or unusual design feature, these special conditions would apply to the other model as well.

This action affects only certain novel or unusual design features on Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes. It is not a rule of general applicability.

The authority citation for these special conditions is as follows:

Accordingly, the Federal Aviation Administration (FAA) proposes the following special conditions as part of the type certification basis for Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes.

The Model BD-700-2A12 and BD-700-2A13 airplanes must show that toxic levels of gases produced from the aluminum-lithium material, when exposed to a post-crash fire threat, are in no way an additional threat to the passengers, including, but not limited to, their ability to evacuate, when compared to traditional aluminum airplane materials.

Comments Invited

We invite interested people to take part in this rulemaking by sending written comments, data, or views. The most helpful comments reference a specific portion of the special conditions, explain the reason for any recommended change, and include supporting data.

We will consider all comments we receive by the closing date for comments. We may change these special conditions based on the comments we receive.

On May 30, 2012, Bombardier applied for an amendment to type certificate no. T00003NY to include the new Model BD-700-2A12 and BD-700-2A13 airplanes. These airplanes are derivatives of the Model BD-700 series of airplanes and are marketed as the Bombardier Global 7000 (Model BD-700-2A12) and Global 8000 (Model BD-700-2A13). These airplanes are twin-engine, transport-category, executive-interior business jets. The maximum passenger capacity is 19 and the maximum takeoff weights are 106,250 lb. (Model BD-700-2A12) and 104,800 lb. (Model BD-700-2A13).

Under the provisions of Title 14, Code of Federal Regulations (14 CFR) 21.101, Bombardier must show that the Model BD-700-2A12 and BD-700-2A13 airplanes meet the applicable provisions of the regulations listed in Type Certificate no. T00003NY, or the applicable regulations in effect on the date of application for the change, except for earlier amendments as agreed upon by the FAA.

In addition, the certification basis includes other regulations, special conditions, and exemptions that are not relevant to these proposed special conditions. Type Certificate no. T00003NY will be updated to include a complete description of the certification basis for these airplane models.

If the Administrator finds that the applicable airworthiness regulations (i.e., 14 CFR part 25) do not contain adequate or appropriate safety standards for the Model BD-700-2A12 and BD-700-2A13 airplanes because of a novel or unusual design feature, special conditions are prescribed under the provisions of § 21.16.

Special conditions are initially applicable to the model for which they are issued. Should the type certificate for that model be amended later to include any other model that incorporates the same novel or unusual design feature, or should any other model already included on the same type certificate be modified to incorporate the same novel or unusual design feature, these special conditions would also apply to the other model under § 21.101.

In addition to the applicable airworthiness regulations and special conditions, the Model BD-700-2A12 and BD-700-2A13 airplanes must comply with the fuel-vent and exhaust-emission requirements of 14 CFR part 34, and the noise-certification requirements of 14 CFR part 36.

The FAA issues special conditions, as defined in 14 CFR 11.19, in accordance with § 11.38, and they become part of the type-certification basis under § 21.101.

Bombardier Inc. Model BD-700-2A12 and BD-700-2A13 airplanes will incorporate the following novel or unusual design feature: The fuselage will be fabricated using aluminum-lithium materials instead of conventional aluminum.

The Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes will be fabricated using aluminum-lithium materials. The performance of airplanes consisting of a conventional aluminum fuselage, in an in-flight, inaccessible-fire scenario, is understood based on service history, and extensive intermediate- and large-scale fire testing. Experience has shown that eliminating fire propagation of the interior and insulation materials tends to increase survivability because other aspects of in-flight fire safety (e.g., toxic-gas emission and smoke obscuration) are typically byproducts of the propagating fire. The fuselage itself does not contribute to in-flight fire propagation. This may not be the case for a fuselage fabricated from aluminum-lithium materials. Therefore, a special condition is necessary so that the Model BD-700-2A12 and BD-700-2A13 airplanes provide protection against in-flight fires propagating along the surface of the fuselage.

In the past, fatal in-flight fires have originated in inaccessible areas of airplanes where thermal or acoustic insulation was located adjacent to the airplane's aluminum fuselage skin. Research revealed that this area has been the path for flame propagation and fire growth. The FAA determined, in five incidents in the 1990s, that unexpected flame spread along thermal and acoustic insulation-film covering material, raising concerns about the fire performance of this material. In all cases, the ignition source was relatively modest and, in most cases, was electrical in origin (e.g., electrical short circuit, arcing caused by chafed wiring, ruptured ballast case, etc.).

In 1996, the FAA Technical Center began a program to develop new fire-test criteria for insulation films directly relating to in-flight fire resistance. This development program resulted in a new test method—the radiant-panel test—and also resulted in test criteria specifically established for improving the in-flight fire ignition and flame propagation of thermal and acoustic insulation materials based on actual, on-board fire scenarios.

The FAA determined that a test similar to the test for the measurement of insulation burnthrough resistance (14 CFR part 25, Appendix F, Part VII, “Test Method to Determine the Burnthrough Resistance of Thermal/Acoustic Insulation Materials”) could be used to assess the flammability characteristics of the proposed fuselage aluminum-lithium material. The only change to the test is the size of the sample and the sample holder, to accommodate panels of the fuselage material.

Bombardier must use the test method contained in Part VII of Appendix F, Test Method, to determine the burnthrough resistance of thermal-acoustic insulation materials, with the slight changes to the sample size and sample holder, as described in these special conditions, to show compliance with applicable requirements.

These proposed special conditions contain the additional safety standards that the Administrator considers necessary to establish a level of safety equivalent to that established by the existing airworthiness standards.

As discussed above, these special conditions are applicable to Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes. Should Bombardier apply at a later date for a change to the type certificate to include another model incorporating the same novel or unusual design feature, these special conditions would apply to the other model as well.

This action affects only certain novel or unusual design features on Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes. It is not a rule of general applicability.

The authority citation for these special conditions is as follows:

Accordingly, the Federal Aviation Administration (FAA) proposes the following special conditions as part of the type certification basis for Bombardier Model BD-700-2A12 and BD-700-2A13 airplanes.

1. Bombardier Inc. must demonstrate that the aluminum-lithium material has equal or better flammability-resistance characteristics than the aluminum-alloy sheet material typically used as skin material on similar airplanes.

2. The test set-up and methodology must be in accordance with the tests described in 14 CFR part 25, Appendix F, Part VII, except for the following.

a. Each test sample must consist of a flat test specimen. A set of three samples of aluminum-lithium sheet material must be tested. The size of each sample must be 16 inches wide by 24 inches long by 0.063 inch thick.

b. The test samples must be installed into a steel-sheet subframe with outside dimensions of 18 inches by 32 inches. The subframe must have a 14.5-inch by 22.5-inch opening cut into it. The tests samples must be mounted onto the subframe using 0.250-20 UNC threaded bolts.

c. Test specimens must be conditioned at 70 °F ± 5 °F, and 55% ± 5% humidity, for at least 24 hours before testing.

3. The aluminum-lithium material must not ignite during any of the tests.

We invite interested people to take part in this rulemaking by sending written comments, data, or views. The most helpful comments reference a specific portion of the special conditions, explain the reason for any recommended change, and include supporting data.

We will consider all comments we receive by the closing date for comments. We may change these special conditions based on the comments we receive.

On June 26, 2015, Aerocon applied for a supplemental type certificate to install an access hatch between the cabin and Class C cargo compartment in the Boeing Model 777-200 airplane. This airplane is a twin-engine, transport-category airplane with a VIP interior configuration. The Model 777-200 has a maximum passenger capacity of 440, and a maximum takeoff weight of 535,000 pounds.

Under the provisions of Title 14, Code of Federal Regulations (14 CFR) 21.101, Aerocon must show that the Boeing Model 777-200 airplane, as changed, continues to meet the applicable provisions of the regulations listed in Type Certificate No. T00001SE, or the applicable regulations in effect on the date of application for the change, except for earlier amendments as agreed upon by the FAA.

If the Administrator finds that the applicable airworthiness regulations (i.e., 14 CFR part 25) do not contain adequate or appropriate safety standards for the Boeing Model 777-200 airplane because of a novel or unusual design feature, special conditions are prescribed under the provisions of § 21.16.

Special conditions are initially applicable to the model for which they are issued. Should the applicant apply for a supplemental type certificate to modify any other model included on the same type certificate to incorporate the same novel or unusual design feature, these special conditions would also apply to the other model under § 21.101.

In addition to the applicable airworthiness regulations and special conditions, the Boeing Model 777-200 airplane, as modified by Aerocon, must comply with the fuel-vent and exhaust-emission requirements of 14 CFR part 34, and the noise-certification requirements of 14 CFR part 36

The FAA issues special conditions, as defined in 14 CFR 11.19, in accordance with § 11.38, and they become part of the type certification basis under § 21.101.

The Boeing Model 777-200 airplane, as modified by Aerocon, will incorporate the following novel or unusual design feature: An access hatch installed between the cabin and the Class C cargo compartment, to allow in-flight access to the Class C cargo compartment.

The VIP operator requests to have access to the aft lower-deck Class C cargo compartment on their Boeing Model 777-200 airplane to store trash during flight. The installation consists of an access hatch from the main passenger cabin, with an access ladder, and a trash container mounted on its own standard airliner pallet in the lower-deck Class C cargo compartment.

The FAA considers that the access hatch may impact the isolation of the passenger cabin from the cargo compartment. Isolation is necessary to protect the passengers, as required by § 25.857(c), from fire and smoke that may start within the cargo compartment. In addition, the in-flight access to the lower-deck Class C compartment creates unique hazards resulting from passengers having access to cargo and baggage in the compartment. These hazards include the safety of the persons entering the cargo compartment, possible hazards to the airplane as a result of the access, and security concerns with access to the checked baggage and cargo. The proposed special conditions defined herein provide additional requirements necessary to ensure sufficient cabin isolation from fire and smoke in this unusual design configuration, and for passenger safety while occupying the Class C compartment.

The current rules relating to Class C cargo compartments do not address provisions for in-flight accessibility. The intent of the Class C cargo compartment was that it be a self-contained and isolated compartment intended to carry baggage and cargo, but not intended for human habitation. The FAA gave no consideration to an in-flight-accessible Class C cargo compartment when the classification was first developed, as no manufacturer had ever incorporated such a feature into their design. Inherently, a “cargo compartment” was not intended for in-flight access, especially by the traveling public. An allowance has been made specifically for crew access into a Class B cargo compartment for the express purpose of firefighting. Access into a cargo compartment carries with it an increased level of risk to the occupant entering the compartment, and to the airplane, as baggage or cargo could shift, a decompression could occur in the compartment, or a fire could develop during flight.

The FAA has determined that the existing airworthiness standards do not contain adequate or appropriate safety standards relative to passenger access to cargo compartments. As a result, special conditions are the appropriate means to address this and all future in-flight-accessible Class C cargo compartments.

Based upon the above discussion, the cargo-compartment isolation criterion is the main concern related to the access-hatch design, which is intended to be installed between the cabin and the Class C cargo compartment.

These proposed special conditions contain the additional safety standards that the Administrator considers necessary to establish a level of safety equivalent to that established by the existing airworthiness standards.

As discussed above, these proposed special conditions are applicable to the Boeing Model 777-200 airplane modified by Aerocon. Should Aerocon apply at a later date for a supplemental type certificate to modify any other model included on Type Certificate No. T00001SE to incorporate the same novel or unusual design feature, these special conditions would apply to that model as well.

This action affects only certain novel or unusual design features on one model series of airplane. It is not a rule of general applicability and affects only the applicant who applied to the FAA for approval of these features on the airplane.

The authority citation for these special conditions is as follows:

Accordingly, the Federal Aviation Administration (FAA) proposes the following special conditions as part of the type certification basis for Boeing Model 777-200 airplanes modified by Aerocon.

1. The flight deck must contain an indicator to advise the flightcrew when the access hatch is opened.

2. One cabin crewmember must be present to monitor the hatch from the main cabin when another cabin crewmember is using the access hatch to access the aft lower-deck Class C cargo compartment. This access-hatch procedure must be included in the Cabin Crew Operating Manual.

3. Means must be provided to keep the access hatch open while the aft lower-deck Class C cargo compartment is occupied during flight.

4. Access to the aft lower-deck Class C cargo compartment or using the access hatch is not allowed during:

a. Taxi, takeoff, and landing,

b. when the fasten-seat-belt sign is illuminated,

c. in the event of emergency not limited to smoke and fire detected in the cargo compartment.

5. A placard stating, “Do Not Enter During Taxi, Takeoff, Landing, or Emergency” (or similar wording) must be located outside of, and on or near the access hatch of, the aft lower-deck Class C cargo compartment.

6. The airplane must be operated as private, not for hire, not for common carriage. This provision does not preclude the operator from receiving remuneration to the extent consistent with 14 CFR parts 125 and 91, subpart F, as applicable.

7. Use of the access hatch, and access to the aft Class C cargo compartment, is limited to the crew only. A placard stating, “Crew Only Access” must be located outside of, and on or near the access hatch of, the aft lower-deck Class C cargo compartment.

8. The Airplane Flight Manual must instruct the crew to close the access hatch when crew are not accessing the aft lower-deck Class C cargo compartment.

9. Special conditions 4, 6, and 7 must be documented in the Limitations section of the Airplane Flight Manual.

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-9300; Directorate Identifier 2016-NM-124-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

We have received a report of a fuel leak in a Model C-118A airplane. The fuel leak, discovered during a post-flight inspection, resulted from a crack in the wing lower skin just inboard of the number 2 nacelle attach angle at wing station 175.

Related AD 80-12-02 R1, Amendment 39-5499, applies to Model DC-6, DC-6A, DC-6B, R6D, and C-118 series airplanes. AD 80-12-02 R1 requires repetitive inspections for cracking of the left and right wing lower skin at certain locations. Although wing station 175 is covered by the inspection mandated in AD 80-12-02 R1, the crack was missed during an AD-required inspection.

Boeing Alert Service Bulletin DC6-57A001, dated April 28, 2016 (“ASB DC6-57A001, Revision 0”) is an alternative method of compliance (AMOC) to the inspections required by paragraph (c)(1) of AD 80-12-02 R1. This AMOC only applies to the areas inspected in accordance with ASB DC6-57A001, Revision 0. The service information referenced in this NPRM contains revised inspection procedures for crack detection in the area around wing station 175. Such cracking in the wing lower skin could adversely affect the structural integrity of the wing.

We reviewed ASB DC6-57A001, Revision 0. The service information describes procedures for radiographic, ETHF, and ETLF inspections for cracking of the wing lower skin at station 175, and repairs. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of these same type designs.

This proposed AD would require accomplishing the actions specified in the service information described previously, except as discussed under “Differences Between this Proposed AD and the Service Information.” For information on the procedures and compliance times, see this service information at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-9300.

ASB DC6-57A001, Revision 0, specifies to contact the manufacturer for certain instructions, but this proposed AD would require accomplishment of repair methods, modification deviations, and alteration deviations in one of the following ways:

• In accordance with a method that we approve; or

• Using data that meet the certification basis of the airplane, and that have been approved by the Boeing Commercial Airplanes Organization Designation Authorization (ODA) whom we have authorized to make those findings.

We estimate that this proposed AD affects 36 airplanes of U.S. registry. We estimate the following costs to comply with this proposed AD:

We have received no definitive data that would enable us to provide cost estimates for the on-condition actions specified in this proposed AD.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-9298; Directorate Identifier 2015-NM-161-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

Structural fatigue damage is progressive. It begins as minute cracks, and those cracks grow under the action of repeated stresses. This can happen because of normal operational conditions and design attributes, or because of isolated situations or incidents such as material defects, poor fabrication quality, or corrosion pits, dings, or scratches. Fatigue damage can occur locally, in small areas or structural design details, or globally. Global fatigue damage is general degradation of large areas of structure with similar structural details and stress levels. Multiple-site damage is global damage that occurs in a large structural element such as a single rivet line of a lap splice joining two large skin panels. Global damage can also occur in multiple elements such as adjacent frames or stringers. Multiple-site-damage and multiple-element-damage cracks are typically too small initially to be reliably detected with normal inspection methods. Without intervention, these cracks will grow, and eventually compromise the structural integrity of the airplane, in a condition known as WFD. As an airplane ages, WFD will likely occur, and will certainly occur if the airplane is operated long enough without any intervention.

The FAA's WFD final rule (75 FR 69746, November 15, 2010) became effective on January 14, 2011. The WFD rule requires certain actions to prevent structural failure due to WFD throughout the operational life of certain existing transport category airplanes and all transport category airplanes that will be certificated in the future. For existing and future airplanes subject to the WFD rule, the rule requires that DAHs establish a limit of validity (LOV) of the engineering data that support the structural maintenance program. Operators affected by the WFD rule may not fly an airplane beyond its LOV, unless an extended LOV is approved.

The WFD rule (75 FR 69746, November 15, 2010) does not require identifying and developing maintenance actions if the DAHs can show that such actions are not necessary to prevent WFD before the airplane reaches the LOV. Many LOVs, however, do depend on accomplishment of future maintenance actions. As stated in the WFD rule, any maintenance actions necessary to reach the LOV will be mandated by airworthiness directives through separate rulemaking actions.

In the context of WFD, this action is necessary to enable DAHs to propose LOVs that allow operators the longest operational lives for their airplanes, and still ensure that WFD will not occur. This approach allows for an implementation strategy that provides flexibility to DAHs in determining the timing of service information development (with FAA approval), while providing operators with certainty regarding the LOV applicable to their airplanes.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive AD 2015-0173, dated August 24, 2015 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Model A300 series airplanes. The MCAI states:

Required actions include an inspection to determine if certain modifications have been done. For airplanes on which the specified modifications have not been done, this proposed AD would require accomplishing those modifications, including doing related investigative and corrective actions if necessary. Depending on airplane configuration, the compliance times for modifying the airplane structure range between 13,300 flight cycles and 48,000 flight cycles since first flight of the airplane,. You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-9298.

Airbus issued the following service information:

• Airbus Service Bulletin A300-53-0239, Revision 02, dated March 6, 2000. This service information describes procedures to modify the longitudinal junction. The modification includes the addition of external doublers and installation of interference fit attachments and related investigative and corrective actions. The related investigative actions are rotary probe inspections for cracking of the fastener holes. The corrective action is repair.

• Airbus Service Bulletin A300-53-0247, Revision 02, dated July 20, 1990. This service information describes procedures to modify the fuselage upper door frame structure, which consists of eddy current inspections of certain structure for cracks, and structural modification or repair.

• Airbus Mandatory Service Bulletin A300-53-0271, Revision 05, dated June 21, 2013. This service information describes procedures to modify the fuselage frame (FR), which includes cold expansion of the fastener holes between FR 41 and FR 54, and related investigative and corrective actions. The related investigative actions including rotary probe inspections for cracking of the fastener holes. The corrective action is repair.

• Airbus Mandatory Service Bulletin A300-53-0366, dated April 7, 2005. This service information describes procedures to modify the fuselage frame, which includes installing an additional external doubler on the fuselage lap joint at fuselage stringers (STGR) 22, left and right, between FR 26 and FR 40.

• Airbus Service Bulletin A300-53-0368, dated April 7, 2005. This service information describes procedures to modify the rear fuselage, which includes installing an additional external doubler on the fuselage lap joint at STGR 51, left and right, between FR 72 and FR 80.

• Airbus Mandatory Service Bulletin A300-53-0369, Revision 03, dated September 1, 2010. This service information describes procedures to modify the rear fuselage, which includes reinforcing the butt joint at FR 72 by installation of an additional external doubler at the butt joint of FR 72 at STGR 14, left and right.

• Airbus Mandatory Service Bulletin A300-53-0373, Revision 03, dated September 1, 2010. This service information describes procedures to modify the rear fuselage, which includes reinforcing the butt joint at FR 65 by installation of an additional external doubler at the butt joint of FR 65 between STGR 13 left and right.

• Airbus Mandatory Service Bulletin A300-53-0374, Revision 04, dated July 5, 2013. This service information describes procedures to modify the rear fuselage, which includes reinforcing the butt joints at FR 55 and FR 58 by installation of additional external doublers without cutout at certain butt joints.

• Airbus Mandatory Service Bulletin A300-53-0375, Revision 01, dated June 24, 2013. This service information describes procedures to modify the forward fuselage, which includes reinforcing the fuselage circumferential butt joint at FR 26 by installation of an additional external doubler at the butt joint of FR 26 between STGR 13 left and STGR 13 right.

• Airbus Mandatory Service Bulletin A300-53-0393, dated September 27, 2013. This service information describes procedures to modify the fuselage frame which includes reinforcing the longitudinal butt joints with additional butt straps at certain fuselage frames and stringers.

• Airbus Mandatory Service Bulletin A300-57-0203, Revision 04, dated February 18, 2015. This service information describes procedures to modify the outer wing, which includes removal of the wing stringer and run-out plate at STGR 19 on the bottom wing skin; replacement of the taper-lok bolts with interference fit parallel bolts; and related investigative and corrective actions. Related investigative actions include detailed visual and high frequency eddy current (HFEC) inspections for cracks and damage in the stringer run-outs; and eddy current inspections for cracks initiating from certain fastener holes. Corrective actions include repair.

• Airbus Mandatory Service Bulletin A300-57-0258, dated September 30, 2014. This service information describes procedures to modify the wing structure, which includes a first oversize of the critical holes on certain wing stringers, and related investigative and corrective actions. Related investigated actions include detailed visual inspections for damage of the top wing skin external surface and the stringer joint; and roto-probe inspections for damage of the fastener holes. Corrective actions include repair.

• Airbus Mandatory Service Bulletin A300-57-0259, dated September 30, 2014. This service information describes procedures to modify the wing structure, which includes a first oversize of the critical holes on certain wing stringers, and related investigative and corrective actions. Related investigated actions include detailed visual inspections for damage of the top wing skin external surface and the stringer joint; and roto-probe inspections for damage of the fastener holes. Corrective actions include repair.

This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.

We estimate that this proposed AD affects 8 airplanes of U.S. registry.

We also estimate that it will take about 3,291 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $142,845 per product. Based on these figures, we estimate the cost of this proposed AD on U.S. operators to be $3,380,640, or $422,580 per product.

In addition, we estimate that any necessary follow-on actions would take about 15 work-hours and require parts costing $10,000, for a cost of $11,275 per product. We have no way of determining the number of aircraft that might need this action.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-8836; Directorate Identifier 2016-NE-07-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

We received a report of an uncontained failure of an HPT hub during takeoff. The root cause of the event is a machining anomaly (cutter mismatch) in the aft web/rim fillet area of the HPT 1st stage hub. The machining mismatch raises the stress and significantly reduces the life of the hub. The defect was introduced when the part was originally manufactured. This condition, if not corrected, could result in failure of the HPT 1st stage hub, uncontained hub release, damage to the engine, and damage to the airplane.

We reviewed PW Service Bulletin (SB) PW4G-112-72-342, dated September 23, 2016. This PW SB provides guidance on performing the HPT 1st stage hub web/rim fillet replication inspection and measurement for the affected HPT hubs. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require an inspection to measure the surface condition of the aft side web/rim fillet of HPT 1st stage hubs and removal from service of hubs that fail inspection.

We estimate that this proposed AD affects 119 engines installed on airplanes of U.S. registry. We also estimate that it would take about 1 hour per engine to do the inspection. The average labor rate is $85 per hour. Based on these figures, we estimate the cost of this proposed AD on U.S. operators to be $10,115.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction, and

(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-9299; Directorate Identifier 2016-NM-119-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

Transport Canada Civil Aviation (TCCA), which is the aviation authority for Canada, has issued Canadian Airworthiness Directive CF-2013-36, dated November 19, 2013 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Bombardier Inc. Model DHC-8-102, -103, and -106 airplanes; DHC-8-200 series airplanes; and Model DHC-8-300 series airplanes. The MCAI states:

Corrective actions include reconnecting any incorrect wiring of the auto-ignition system and performing a functional test. You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-9299.

We reviewed Bombardier Service Bulletin 8-74-05, Revision B, dated April 14, 2014. This service information describes procedures for inspecting the auto-ignition system for correct wiring, and doing corrective actions that include rewiring if needed, followed by a functional test of the auto-ignition system. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.

We estimate that this proposed AD affects 88 airplanes of U.S. registry.

We estimate the following costs to comply with this proposed AD:

In addition, we estimate that any necessary corrective actions would take about 2 work-hours, for a cost of $170 per product. We have no way of determining the number of aircraft that might need these actions.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

Comments Invited

We invite you to participate in this rulemaking by submitting written comments, data, or views. We also invite comments relating to the economic, environmental, energy, or federalism impacts that might result from adopting the proposals in this document. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. To ensure the docket does not contain duplicate comments, commenters should send only one copy of written comments, or if comments are filed electronically, commenters should submit only one time.

We will file in the docket all comments that we receive, as well as a report summarizing each substantive public contact with FAA personnel concerning this proposed rulemaking. Before acting on this proposal, we will consider all comments we receive on or before the closing date for comments. We will consider comments filed after the comment period has closed if it is possible to do so without incurring expense or delay. We may change this proposal in light of the comments we receive.

On June 13, 2014, we issued AD 2014-12-12, Amendment 39-17873 (79 FR 36638, June 30, 2014) for Airbus Helicopters Model EC120B helicopters with serial numbers up to and including 1367 and with a sliding door part number (P/N) C526A2370101 installed and Model EC130B4 helicopters with sliding door P/N C526S1101051 installed. AD 2014-12-12 does not apply to helicopters with modification (MOD) 07 3796 or 07 2921 installed. AD 2014-12-12 requires inspecting the upper and lower locking pin control rod fittings and the star support pin for a crack and reinforcing the sliding door star support stringer by installing three carbon fabric plies.

AD 2014-12-12 was prompted by AD No. 2013-0093, dated April 15, 2013, and corrected on April 17, 2013, issued by EASA, which is the Technical Agent for the Member States of the European Union. EASA AD No. 2013-0093 was issued to correct an unsafe condition for Model EC120B and EC130B4 helicopters after a case was reported where passengers could not open a helicopter's sliding door after landing. EASA advises that an investigation revealed a failure of the sliding door star axle support.

Since we issued AD 2014-12-12, EASA has issued EASA AD No. 2015-0020, dated February 11, 2015, to correct an unsafe condition for Model EC120B helicopters with sliding door P/N C526A2370101 and Model EC130B4 helicopters sliding door P/N C526S1101051. EASA AD No. 2015-0020 does not apply to helicopters with MOD A00565, 07 3796, or 07 2921. EASA AD No. 2015-0020 supersedes EASA AD No. 2013-0093. EASA advises that after it issued AD No. 2013-0093, it discovered that the doors could be installed on all serial-numbered EC120B helicopters. Also, Eurocopter (now Airbus Helicopters) learned of difficulties with installing the angle bracket and plate used to reinforce the sliding door star support. Because of the distance between the star support pin and the bottom of the stringer on composite sliding doors, installation of the angle bracket and plate is not possible in a small number of sliding doors. Eurocopter subsequently revised its repair procedures to provide an alternate method for reinforcing the sliding door star support.

EASA advises that it consequently issued AD No. 2015-0020 to extend the applicability to all serial-numbered EC120B helicopters with the affected sliding doors. EASA AD No. 2015-0020 also requires compliance with the revised service information.

These helicopters have been approved by the aviation authority of France and are approved for operation in the United States. Pursuant to our bilateral agreement with France, EASA, its technical representative, has notified us of the unsafe condition described in its AD. We are proposing this AD because we evaluated all known relevant information and determined that an unsafe condition is likely to exist or develop on other products of the same type design.

We reviewed Eurocopter (now Airbus Helicopters) Alert Service Bulletin (ASB) No. EC120-52A014, Revision 2, dated October 28, 2013, for Model EC120B helicopters and ASB No. 130-52A009, Revision 1, dated January 25, 2013, for Model EC130B4 helicopters. This service information specifies visual and dye penetrant inspections of sections of the sliding door attachment assembly and reinforcement of the sliding door star support. ASB EC120-52A014 was changed at Revision 2 to expand the applicability for all serial-numbered Model 120B helicopters and provides an alternative procedure for reinforcing the sliding door star support.

This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

This proposed AD would require, within 165 hours time-in-service (TIS):

• Visually inspecting each upper and lower locking pin control rod end fitting (control end fitting) and replacing it before further flight if it is bent, twisted, or broken.

• Cleaning and dye-penetrant inspecting the star support pin for a crack and replacing it before further flight if it is cracked.

• Reinforcing the sliding door star support stringer by installing three carbon fabric plies.

This proposed AD would also prohibit installing a sliding door P/N C526A2370101 on a Model EC120B helicopter, or a sliding door P/N C526S1101051 on a Model EC130B4 helicopter, unless the sliding door star support stringer is reinforced as required by this proposed AD.

We estimate that this proposed AD would affect 261 helicopters of U.S. Registry and that labor costs average $85 a work hour. Based on these estimates, we expect the following costs:

• Visually inspecting the control rod end fittings would require 1 work-hour and a minimal amount for consumable materials for an estimated cost of $85 per helicopter, or $22,185 for the U.S. fleet.

• Replacing the control rod end fittings with airworthy fittings would require 5 work-hours for a labor cost of $425. Parts would cost about $242 for an estimated total cost of $667 per helicopter.

• Dye-penetrant inspecting the star support pin for a crack would require 2 work-hours and no parts for an estimated cost of $170 per helicopter and $44,370 for the U.S. fleet.

• Replacing the star support pin would require 5 work-hours. Parts would cost about $200 for an estimated total cost of $625 per helicopter.

• Installing three carbon fabric plies to reinforce the sliding door star support would require 5 work-hours. Parts would cost $200 for an estimated total cost of $625 per helicopter and $163,125 for the U.S. fleet.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed, I certify this proposed regulation:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

We prepared an economic evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

I. Background

Production of ODSs has been phased out worldwide under the terms of the Montreal Protocol on Substances that Deplete the Ozone Layer (Montreal Protocol) (September 16, 1987, S. Treaty Doc. No. 10, 100th Cong., 1st sess., 26 I.L.M. 1541 (1987)). In accordance with the provisions of the Montreal Protocol, under authority of Title VI of the Clean Air Act (section 601 et seq.), the manufacture of ODSs, including CFCs, in the United States was generally banned as of January 1, 1996. To receive permission to manufacture CFCs in the United States after the phase-out date, manufacturers must obtain an exemption from the phase-out requirements from the parties to the Montreal Protocol. Procedures for securing an essential-use exemption under the Montreal Protocol are described in a request by EPA for applications for exemptions (60 FR 54349, October 23, 1995).

A drug, device, cosmetic, or food contained in an aerosol product or other pressurized dispenser that releases a CFC or other ODS propellant is generally not considered an essential use of the ODS under the Clean Air Act except as provided in § 2.125(c) and (e) (21 CFR 2.125(c) and (e)). This prohibition is based on scientific research indicating that CFCs and other ODSs reduce the amount of ozone in the stratosphere and thereby increase the amount of ultraviolet radiation reaching the Earth. An increase in ultraviolet radiation will increase the incidence of skin cancer, and produce other adverse effects of unknown magnitude on humans, animals, and plants (80 FR 36937, June 29, 2015). Section 2.125(c) and (e) provide exemptions for essential uses of ODSs for certain products containing ODS propellants that FDA determines provide unique health benefits that would not be available without the use of an ODS.

Firms that wish to use ODSs manufactured after the phase-out date in medical devices (as defined in section 601(8) of the Clean Air Act (42 U.S.C. 7671(8)) covered under section 610 of the Clean Air Act (42 U.S.C. 7671i) must receive exemptions for essential uses under the Montreal Protocol. EPA regulations implementing the provisions of section 610 of the Clean Air Act contain a general ban on the use of ODSs in pressurized dispensers, such as metered-dose inhalers (MDIs) (40 CFR 82.64(c) and 82.66(d)). These EPA regulations exempt from the general ban “medical devices” that FDA considers essential and that are listed in § 2.125(e). Section 601(8) of the Clean Air Act defines “medical device” as any device (as defined in the Federal Food, Drug, and Cosmetic Act (the FD&C Act) (21 U.S.C. 321), diagnostic product, drug (as defined in the FD&C Act), and drug delivery system, if such device, diagnostic product, drug, or drug delivery system uses a class I or class II ODS for which no safe and effective alternative has been developed (and, where necessary, has been approved by the Commissioner of Food and Drugs), and if such device, diagnostic product, drug, or drug delivery system has, after notice and opportunity for public comment, been approved and determined to be essential by the Commissioner in consultation with the Administrator of EPA. Class I substances include CFCs, halons, carbon tetrachloride, methyl chloroform, methyl bromide, and other chemicals not relevant to this document (see 40 CFR part 82, appendix A to subpart A). Class II substances include hydrochlorofluorocarbons (see 40 CFR part 82, appendix B to subpart A).

Faced with the statutorily mandated phase-out of the production of ODSs, drug manufacturers have developed alternatives to MDIs and other self-pressurized drug dosage forms that do not contain ODSs. Examples of these alternative dosage forms are MDIs that use non-ODSs as propellants and dry-powder inhalers. The availability of alternatives to the ODSs means that certain drug products listed in § 2.125(e) are no longer essential uses of ODSs. Therefore, due to the lack of marketing of approved products containing ODSs, and the availability of alternative products that do not contain ODSs, FDA is proposing to amend its regulations to remove essential-use designations for sterile aerosol talc administered intrapleurally by thoracoscopy for human use (§ 2.125(e)(4)(ix)) and for metered-dose atropine sulfate aerosol human drugs administered by oral inhalation (§ 2.125(e)(4)(vi)).

There is currently one sterile aerosol talc product containing ODSs that is approved for administration intrapleurally by thoracoscopy for human use for the treatment of recurrent malignant pleural effusion in symptomatic patients. Section 2.125(g) sets forth standards for determining whether the use of an ODS in a medical product is no longer essential. Under § 2.125(g)(3), an essential-use designation for individual active moieties marketed as ODS products and represented by one new drug application may no longer be essential if:

• At least one non-ODS product with the same active moiety is marketed with the same route of administration, for the same indication, and with approximately the same level of convenience of use as the ODS product containing that active moiety;

• Supplies and production capacity for the non-ODS product(s) exist or will exist at levels sufficient to meet patient need;

• Adequate U.S. postmarketing-use data are available for the non-ODS product(s); and

• Patients who medically require the ODS product are adequately served by the non-ODS product(s) containing that active moiety and other available products (§ 2.125(g)(3)).

On June 29, 2015, FDA published a notice and request for comment concerning its tentative conclusion that sterile aerosol talc administered intrapleurally by thoracoscopy for human use no longer constitutes an essential use under the Clean Air Act under the criteria in (§ 2.125(g)(3). FDA requested comment on its findings that sterile aerosol talc is currently marketed for intrapleural administration in two non-ODS formulations and on its finding that the route of administration, indications, and level of convenience appear to be the same for the ODS and non-ODS formulations of sterile aerosol talc. FDA also requested comment on its finding that the non-ODS products are available in sufficient quantities to serve the current patient population. FDA received no comments on these findings or on its tentative conclusion that sterile aerosol talc administered intrapleurally by thoracoscopy for human use no longer constitutes an essential use of ODSs under the Clean Air Act.

In the same document published on June 29, 2015, FDA requested comments concerning its tentative conclusion that metered-dose atropine sulfate aerosol human drugs administered by oral inhalation no longer constitute an essential use under the Clean Air Act under the criteria in (§ 2.125(g)(1). FDA requested comment concerning its finding that metered-dose atropine sulfate aerosol human drugs administered by oral inhalation are no longer marketed in an approved ODS formulation. Under § 2.125(g)(1), an active moiety may no longer constitute an essential use (§ 2.125(e)) if it is no longer marketed in an approved ODS formulation. The failure to market indicates nonessentiality because the absence of a demand sufficient for even one company to market the product is highly indicative that the use is not essential. FDA received no comments concerning its finding that metered-dose atropine sulfate aerosol human drugs administered by oral inhalation are no longer marketed in an ODS formulation or concerning its tentative conclusion that these drugs no longer constitute an essential use of ODSs under the Clean Air Act.

Accordingly, FDA is proposing to amend its regulation to remove sterile aerosol talc administered intrapleurally by thoracoscopy for human use (§ 2.125(e)(4)(ix)) and to remove metered-dose atropine sulfate aerosol human drugs administered by oral inhalation (§ 2.125(e)(4)(vi)) as essential uses under the Clean Air Act.

This proposed rule is a companion document to the direct final rule published elsewhere in this issue of the Federal Register. FDA is proposing to amend § 2.125 to remove essential-use designations for sterile aerosol talc administered intrapleurally by thoracoscopy for human use and for metered-dose atropine sulfate aerosol human drugs administered by oral inhalation. This proposed rule is intended to make noncontroversial changes to existing regulations. The Agency does not anticipate receiving any significant adverse comment on this rule.

Consistent with FDA's procedures on direct final rulemaking, we are publishing elsewhere in this issue of the Federal Register a companion direct final rule. The direct final rule and this companion proposed rule are substantively identical. This companion proposed rule provides the procedural framework within which the proposed rule may be finalized in the event the direct final rule is withdrawn because of any significant adverse comment. The comment period for this proposed rule runs concurrently with the comment period of the companion direct final rule. Any comments received in response to the companion direct final rule will also be considered as comments regarding this proposed rule.

FDA is providing a comment period for the proposed rule of 60 days after the date of publication in the Federal Register. If we receive a significant adverse comment, we intend to withdraw the direct final rule before its effective date by publishing a notice in the Federal Register within 30 days after the comment period ends. A significant adverse comment explains why the rule either would be inappropriate, including challenges to the rule's underlying premise or approach, or would be ineffective or unacceptable without a change. In determining whether an adverse comment is significant and warrants withdrawing a direct final rule, the Agency will consider whether the comment raises an issue serious enough to warrant a substantive response in a notice-and-comment process in accordance with section 553 of the Administrative Procedure Act (5 U.S.C. 553).

Comments that are frivolous, insubstantial, or outside the scope of the proposed rule will not be considered significant or adverse under this procedure. For example, a comment recommending a regulation change in addition to the changes in the proposed rule would not be considered a significant adverse comment unless the comment states why the proposed rule would be ineffective without the additional change. In addition, if a significant adverse comment applies to an amendment, paragraph, or section of this proposed rule and that provision can be severed from the remainder of the rule, FDA may adopt as final the provisions of the proposed rule that are not the subject of a significant adverse comment.

If FDA does not receive any significant adverse comment in response to the proposed rule, the Agency will publish a document in the Federal Register confirming the effective date of the direct final rule. The Agency intends to make the direct final rule effective 30 days after publication of the confirmation document in the Federal Register.

A full description of FDA's policy on direct final rule procedures may be found in a guidance for FDA and industry entitled “Direct Final Rule Procedures” (available at http://www.fda.gov/RegulatoryInformation/Guidances/ucm125166.htm) that was announced in the Federal Register on November 21, 1997 (62 FR 62466).

We have examined the impacts of the proposed rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We have developed a comprehensive Economic Analysis of Impacts that assesses the impacts of the proposed rule. We believe that this proposed rule is not a significant regulatory action as defined by Executive Order 12866.

The Regulatory Flexibility Act requires us to analyze regulatory options that would minimize any significant impact of a rule on small entities. We propose to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This proposed rule would not result in an expenditure in any year that meets or exceeds this amount.

This rule is necessary to comply with the Montreal Protocol under authority of Title VI of the Clean Air Act (section 601 et seq.), which banned the manufacture of ODSs, including CFCs, to reduce the depletion of the ozone layer in the United States as of January 1, 1996. EPA regulations exempted from the ban medical devices, diagnostic products, drugs, and drug delivery systems that FDA considered essential and that are listed in § 2.125(e) when they use a class I or class II ODS for which no safe and effective alternative has been developed. The proposed rule would remove the exemptions for sterile aerosol talc products and for metered-dose atropine sulfate aerosol human drugs containing ODSs.

There is currently at least one sterile aerosol talc product not containing ODSs approved for administration intrapleurally by thoracoscopy for human use that is a safe and effective alternative, and which meets the criteria outlined in § 2.125(g)(3). Accordingly, the sterile aerosol talc product containing ODSs no longer meets the requirements for essential use and should no longer be exempted from the ban.

Metered-dose atropine sulfate aerosol human drugs administered by oral inhalation are no longer available in the product market in an approved ODS formulation. The current absence of the product in the market indicates both a lack of demand for the product and that the product is nonessential, under § 2.125(g)(1). With the adoption of this rule, the manufacturer of the sterile aerosol talc with ODSs and any potential future manufacturers of metered-dose atropine sulfate aerosols will have notice of the requirement to comply with the ban of products from containing ODSs.

The affected entities covered by this rule are the manufacturing facilities of the products that would have exemptions from the ban removed. Only one manufacturer, the Bryan Corporation that manufactures the sterile aerosol talc product containing ODSs at a single facility, would be affected. Currently, there are no manufacturers of metered-dose atropine sulfate aerosols.

The potential social costs from removing the exemptions are (1) the costs to patient consumers or to their insurers for paying a higher price for alternative non-ODS formulations of sterile aerosol talc products and (2) the costs for disposing of and destroying any remaining product inventory that remains after the effective date of the final rule. We lack data about the stocks of product inventory that are likely to remain after the effective date of the final rule and the relative price that consumers or their insurers would pay. Because significant notice has been given to the manufacturer about the impending removal of the exemptions, we do not believe a significant stock of inventory will remain for the sterile aerosol talc product. The most recent publicly available information shows that the annual revenues for Bryan Corporation are about $10 million (Ref. 1). Public information about this company shows that it manufactures three different surgical and medical instruments including the talc. If total profits for the exempt talc product are 10 percent of the total annual revenues, and if total revenues are exclusively from the exempt talc, then $1 million represents an upper bound for the total social cost of removing the sterile aerosol talc product from the market. Because it is unlikely that the company's total profits are exclusively from the sterile aerosol talc, it is more likely that the foregone profits are at most one-third of the $1 million; in fact, the true social cost could be significantly less than the total foregone profit of this product.

Metered-dose atropine sulfate aerosol human drugs that would be affected by this rule are no longer marketed; consequently, removal of the exemption for these products would not present the public, consumers, insurers, or producers with any costs.

The proposed rule would implement the requirements of the Clean Air Act that ban the use of products containing ODSs that no longer meet the requirements for essential use. The social benefits of the proposed rule derive from greater compliance with the Clean Air Act. The ODSs that either would have been emitted by sterile aerosol talcs that contain them, or from potential market entrants that would have manufactured metered-dose atropine sulfate aerosols that contain ODSs will no longer be emitting them, which will help reduce the depletion of the ozone layer and the ultraviolet radiation reaching the Earth. We lack the ability to quantify the health benefits from the reduced exposure to and from the reduced risk associated with ultraviolet light that result from removing the exemptions to the ban. Because the change in exposure and resulting risk from the proposed rule is likely to be small, the incremental health impact is likely to be too small to measure.

The proposed rule, if finalized, will remove the exemptions for sterile aerosol talc products and for metered-dose atropine sulfate aerosol human drugs containing ODSs. The primary public health benefit from adoption of the proposed rule is to reduce the depletion of the ozone layer to decrease human exposure to ultraviolet radiation. The reduction in exposure to ultraviolet radiation because of the rule is likely to be too small to measure. The potential social costs of the proposed rule would occur if patient consumers or their health care insurers would have to pay more for otherwise comparable products and if the product manufacturers would have to safely destroy any remaining product inventories after the effective date of the rule. We estimate that the social cost of the proposed rule is likely to be significantly less than $1 million but no more than the upper-bound estimate of the foregone annual profit of the company that manufactures the sterile aerosol talc or $1 million. Because the metered-dose atropine sulfate aerosol is not currently in the market, there would be no social cost for removing its exemption from the ban.

Imposing no new federal requirement is the baseline for a regulatory analysis. With no new regulation, there are no compliance costs or benefits to the proposed rule. However, because sterile aerosol talc is no longer an essential use of ODSs, under the Clean Air Act, there is no longer a pathway for sterile aerosol talc products containing ODSs to remain on the market.

FDA has examined the economic implications of the proposed rule as required by the Regulatory Flexibility Act. If a rule will have a significant economic impact on a substantial number of small entities, the Regulatory Flexibility Act requires Agencies to analyze regulatory options that would lessen the economic effect of the rule on small entities. We certify that the final rule will not have a significant economic impact on a substantial number of small entities. This analysis, together with other relevant sections of this document, serves as the proposed regulatory flexibility analysis, as required under the Regulatory Flexibility Act.

We have determined under 21 CFR 25.30(h) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

FDA tentatively concludes that this proposed rule contains no collection of information. Therefore, clearance by the Office of Management and Budget under the Paperwork Reduction Act of 1995 is not required.

We have analyzed this proposed rule in accordance with the principles set forth in Executive Order 13132. We have determined that this proposed rule does not contain policies that have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, we conclude that the rule does not contain policies that have federalism implications as defined in the Executive order and, consequently, a federalism summary impact statement is not required.

The following reference is on display in the Division of Dockets Management (see ADDRESSES) and is available for viewing by interested persons between 9 a.m. and 4 p.m., Monday through Friday; it is also available electronically at http://www.regulations.gov. FDA has verified the Web site address, as of the date this document publishes in the Federal Register, but Web sites are subject to change over time.

Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs, we propose that 21 CFR part 2 be amended as follows:

I. Background

Production of ODSs has been phased out worldwide under the terms of the Montreal Protocol on Substances that Deplete the Ozone Layer (Montreal Protocol) (September 16, 1987, S. Treaty Doc. No. 10, 100th Cong., 1st sess., 26 I.L.M. 1541 (1987)). In accordance with the provisions of the Montreal Protocol, under authority of Title VI of the Clean Air Act (section 601 et seq.), the manufacture of ODSs, including CFCs, in the United States was generally banned as of January 1, 1996. To receive permission to manufacture CFCs in the United States after the phase-out date, manufacturers must obtain an exemption from the phase-out requirements from the parties to the Montreal Protocol. Procedures for securing an essential-use exemption under the Montreal Protocol are described in a request by EPA for applications for exemptions (60 FR 54349, October 23, 1995).

Firms that wished to use ODSs manufactured after the phase-out date in medical devices (as defined in section 601(8) of the Clean Air Act (42 U.S.C. 7671(8)) covered under section 610 of the Clean Air Act (42 U.S.C. 7671i) must receive exemptions for essential uses under the Montreal Protocol. EPA regulations implementing the provisions of section 610 of the Clean Air Act contain a general ban on the use of ODSs in pressurized dispensers, such as metered-dose inhalers (MDIs) (40 CFR 82.64(c) and 82.66(d)). These EPA regulations exempt from the general ban “medical devices” that FDA considers essential and that are listed in § 2.125(e) (21 CFR 2.125(e)). Section 601(8) of the Clean Air Act defines “medical device” as any device (as defined in the Federal Food, Drug & Cosmetic Act (the FD&C Act) (21 U.S.C. 321)), diagnostic product, drug (as defined in the FD&C Act), and drug delivery system, if such device, diagnostic product, drug, or drug delivery system uses a class I or class II ODS for which no safe and effective alternative has been developed (and, where necessary, has been approved by the Commissioner of Food and Drugs), and if such device, diagnostic product, drug, or drug delivery system has, after notice and opportunity for public comment, been approved and determined to be essential by the Commissioner in consultation with the Administrator of EPA. Class I substances include CFCs, halons, carbon tetrachloride, methyl chloroform, methyl bromide, and other chemicals not relevant to this document (see 40 CFR part 82, appendix A to subpart A). Class II substances include hydrochlorofluorocarbons (see 40 CFR part 82, appendix B to subpart A).

A drug, device, cosmetic, or food contained in an aerosol product or other pressurized dispenser that releases a CFC or other ODS propellant generally is not considered an essential use of the ODS under the Clean Air Act except as provided in § 2.125(c) and (e). This prohibition is based on scientific research indicating that CFCs and other ODSs reduce the amount of ozone in the stratosphere and thereby increase the amount of ultraviolet radiation reaching the Earth. An increase in ultraviolet radiation will increase the incidence of skin cancer, and produce other adverse effects of unknown magnitude on humans, animals, and plants (80 FR 36937, June 29, 2015). Sections 2.125(c) and (e) provide exemptions for essential uses of ODSs for certain products containing ODS propellants that FDA determines provide unique health benefits that would not be available without the use of an ODS.

Faced with the statutorily mandated phase-out of the production of ODSs, drug manufacturers have developed alternatives to MDIs and other self-pressurized drug dosage forms that do not contain ODSs. Examples of these alternative dosage forms are MDIs that use non-ODSs as propellants and dry-powder inhalers. The availability of alternatives to ODSs means that certain drug products listed in § 2.125(e) are no longer essential uses of ODSs. Therefore, due to lack of marketing of an approved product containing an ODS, and the availability of alternative products that do not contain an ODS, FDA is proposing to amend its regulations to remove the essential-use designation for anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application (§ 2.125(e)(4)(iii)).

On June 29, 2015, FDA published a notice and request for comment concerning its tentative conclusion that anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application no longer constitute an essential use under the Clean Air Act (June 2015 notice). FDA requested comment concerning its tentative finding that anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application are no longer being sold in an approved ODS formulation. Under § 2.125(g)(1), an active moiety may no longer constitute an essential use (§ 2.125(e)) if it is no longer marketed in an approved ODS formulation. The failure to market indicates nonessentiality because the absence of a demand sufficient for even one company to market the product is highly indicative that the use is not essential.

FDA received one comment concerning its tentative finding that anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application are no longer marketed in an approved ODS formulation and, therefore, no longer constitute an essential use (see June 2015 notice). On August 21, 2015, Cetylite Industries, Inc. (Cetylite) submitted a comment stating that “FDA's belief that no products are marketed under this exemption is incorrect” (Comment 1). According to the comment, Cetylite manufactures Cetacaine Spray (CETACAINE), a topical anesthetic spray with an active ingredient combination of benzocaine, tetracaine HCl, and butamben that uses a blend of CFCs as the propellant under the essential-use exemption found in § 2.125(e)(4)(iii). However, CETACAINE is not an approved drug product and does not qualify as an essential use under § 2.125(e)(4)(iii). As described in § 2.125(c), an aerosol drug product or other pressurized dispenser that releases an ODS is an essential use of the ODS under the Clean Air Act only if it is listed in § 2.125(e) and if an investigational application or an approved marketing application is in effect.

Cetylite states that CETACAINE has been marketed continuously since the mid-1950s under a request for a Drug Efficacy Study Implementation (DESI) review that was submitted in 1976. FDA published a DESI notice (DESI 8076 (Docket No. 75N-0203) in the Federal Register of December 9, 1975 (40 FR 57379)) in which the Agency offered an opportunity for a hearing on a proposal to withdraw approval of a combination drug product containing two of the three ingredients contained in CETACAINE. In response to this DESI notice, Cetylite requested a hearing regarding the effectiveness of CETACAINE. While FDA's review of the product's effectiveness has been pending, Cetylite has been marketing CETACAINE without an approved new drug application.

In 1979, based on a citizen petition submitted by Cetylite regarding its CETACAINE product, FDA proposed that anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application were essential uses of ODSs (44 FR 33114, June 8, 1979) (1979 Proposed Rule). In the preamble to the 1979 Proposed Rule, FDA noted that its tentative finding as to CETACAINE's essentiality under § 2.125 was “conditional” on the product being found effective. Similarly, in the preamble to the Final Rule amending § 2.125, FDA stated that “the determination in this document that CETACAINE Aerosol is an essential use of a chlorofluorocarbon is also conditional” on a finding that CETACAINE is effective for the use described in § 2.125(e)(4)(iii) (45 FR 22902, April 4, 1980).

To date, FDA has not made a finding that CETACAINE is effective for the use described in § 2.125(e)(4)(iii). There is no investigational new drug application or approved marketing application in effect for the ODS formulation of CETACAINE, as required for a finding of essentiality under § 2.125(c). Accordingly, CETACAINE does not meet the conditions to qualify as an essential use of ODSs under § 2.125(e)(4)(iii), and FDA believes that its proposed finding that anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application are no longer marketed in an approved ODS formulation remains correct. Moreover, alternative products for the same use that do not use ODSs, such as lidocaine, are now available, further suggesting that anesthetic drugs for topical use are no longer an essential use of ODSs. In addition, a recently completed laboratory study demonstrated that lidocaine may be a safer alternative to benzocaine (Ref. 1). The study found that benzocaine was substantially more likely than lidocaine to form methemoglobin, the cause of the serious blood disorder called methemoglobinemia.

We have examined the impacts of the proposed rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We have developed a comprehensive Economic Analysis of Impacts that assesses the impacts of the proposed rule. We believe that this proposed rule is not a significant regulatory action as defined by Executive Order 12866.

The Regulatory Flexibility Act requires Agencies to analyze regulatory options that would minimize any significant impact of a rule on small entities. We propose to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This proposed rule would not result in an expenditure in any year that meets or exceeds this amount.

This rule is necessary to comply with the Montreal Protocol under authority of Title VI of the Clean Air Act (section 601 et seq.), which banned the manufacture of ODSs, including CFCs, to reduce the depletion of the ozone layer in the United States as of January 1, 1996. EPA regulations exempted from the ban medical devices, diagnostic products, drugs, and drug delivery systems that FDA considered essential and that are listed in § 2.125(e) when they use a class I or class II ODS for which no safe and effective alternative has been developed.

Anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application are not available in the product market in an approved ODS formulation. Because the product is not marketed under an investigational new drug (IND), new drug application (NDA), or abbreviated new drug application (ANDA) and alternative products for the same use that do not use ODSs, such as lidocaine, are now available, the product is nonessential under § 2.125(g)(1). With the adoption of this rule, any potential manufacturers of these anesthetic drugs will have notice about their requirements to comply with the ban of products from containing ODSs.

There are no affected entities covered by this rule because there are no current manufacturers of approved products that would qualify as “essential” products under the current regulation.

ODS-containing anesthetic products for topical use on accessible mucous membranes of humans where a cannula is used for application are not marketed under an IND, NDA, or ANDA and would not qualify as “essential” products under the current regulation; consequently, removal of the exemption for such drugs would not present the public, consumers, insurers, or producers with any costs.

The proposed rule would implement the requirements of the Clean Air Act that ban the use of products containing ODSs that no longer meet the requirements for essential use. The benefits stem from preventing the ODSs that would have been emitted by potential market entrants. The social benefits of the proposed rule derive from greater compliance with the Clean Air Act. Because there will not be any change in exposure and any resulting risk from the proposed rule, there will not be any direct public health benefits.

The proposed rule, if finalized, will remove the essential-use exemption for anesthetic drugs for topical use on accessible mucous membranes of humans where a cannula is used for application. The primary public health benefit from adoption of the proposed rule is to reduce the depletion of the ozone layer to decrease human exposure to ultraviolet radiation. Because anesthetic drugs for topical use are not currently sold in the market in an approved form, there would be no health benefit or social cost for removing the exemption for such products from the ban.

FDA has examined the economic implications of the proposed rule as required by the Regulatory Flexibility Act. If a rule will have a significant economic impact on a substantial number of small entities, the Regulatory Flexibility Act requires Agencies to analyze regulatory options that would lessen the economic effect of the rule on small entities. We propose to certify that this proposed rule will not have a significant economic impact on a substantial number of small entities. This analysis, together with other relevant sections of this document, serves as the proposed regulatory flexibility analysis.

We have determined under 21 CFR 25.30(h) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

FDA tentatively concludes that this proposed rule contains no collection of information. Therefore, clearance by the Office of Management and Budget under the Paperwork Reduction Act of 1995 is not required.

We have analyzed this proposed rule in accordance with the principles set forth in Executive Order 13132. We have determined that this proposed rule does not contain policies that have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, we conclude that the rule does not contain policies that have federalism implications as defined in the Executive Order and, consequently, a federalism summary impact statement is not required.

The following reference is on display in the Division of Dockets Management (see ADDRESSES) and are available for viewing by interested persons between 9 a.m. and 4 p.m., Monday through Friday; it are also available electronically at http://www.regulations.gov.

Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs, we propose that 21 CFR part 2 be amended as follows:

General. Section 8(t) of the U.S. Housing Act of 1937 (1937 Act) (42 U.S.C. 1437f(t)) provides unified authority for families to be offered enhanced vouchers upon the occurrence of an “eligibility event,” which is defined in section 8(t)(2) as one of four categories of events that results in families in the project being eligible for enhanced voucher assistance under one of three statutes: (1) The Low-Income Housing Preservation and Resident Homeownership Act of 1990, 12 U.S.C. 4101 et seq. (LIHPRHA), (2) the Multifamily Assisted Housing Reform and Affordability Act of 1997, 42 U.S.C. 1437f note (MAHRA), or (3) of the Housing and Community Development Amendments of 1978, 42 U.S.C. 5301 note (HCDA). The four categories of events are: (1) The prepayment of a mortgage that results in families residing in the project being eligible under section 223(f) of LIHPRHA for an enhanced voucher; (2) the voluntary termination of the insurance contract that results in families residing in the project being eligible under section 223(f) of LIHPRHA for an enhanced voucher; (3) the termination or expiration of a project-based section 8 rental assistance contract that results in assisted families residing in the project being eligible under section 515(c)(3) or section 524(d) of MAHRA for an enhanced voucher; 1 and (4) a transaction under which a project that receives or has received assistance under the Flexible Subsidy program is preserved as affordable housing, which results in families residing in the project being eligible under section 201(p) of the HCDA for an enhanced voucher.

Section 8(t) states that enhanced vouchers provided under previous authorities are, regardless of date that the funds were made available, treated and subject to the same requirements as enhanced vouchers under 8(t). Section 8(t) was enacted as section 538, title V, Departments of Veterans Affairs and Housing and Urban Development, Independent Agencies Appropriations Act, 2000 (Pub. L. 106-74) (FY 2000 Appropriation), and the heading of section 538 of the FY 2000 Appropriation was “Unified Enhanced Voucher Authority” (see 113 Stat. 1122). This section heading emphasizes the fact that 8(t) brings current and prior enhanced voucher authority under a single statute and unifies their legal requirements.2

Under the statute, eligibility events are: Owner decisions to opt out of or not renew certain Section 8 project-based contracts; owner prepayment of certain mortgages on the project; voluntary termination of mortgage insurance; the termination or expiration of the contract for rental assistance under section 8 of the 1937 Act (Section 8) for such housing project; or a transaction for preservation of a project that, under certain sections of the MAHRA, results in the tenants of the project being eligible for enhanced vouchers.

Enhanced voucher assistance. Enhanced voucher assistance differs from regular housing choice voucher assistance under section 8(o) of the 1937 Act (42 U.S.C. 1437f(o)) in two major respects. First, a family eligible to receive an enhanced voucher may elect to remain in the project, and, if the family does so, a higher “enhanced” payment standard is used to determine the amount of subsidy when the gross rent exceeds the normally applicable public housing agency (PHA) payment standard. Second, the family must continue to contribute towards rent at an amount that is at least the amount the family was paying for rent at the time of the eligibility event.

Section 8(t)(1)(B) of the 1937 Act (42 U.S.C. 1437f(t)(1)(B)) provides that for enhanced vouchers, if the gross rent for the dwelling unit exceeds the Section 8 payment standard under the regular voucher program, the amount of rental assistance provided on behalf of the family using the enhanced voucher shall be determined using a payment standard that is equal to the gross rent for the dwelling unit (as such rent may be increased from time-to-time). The gross rent for a unit leased by an enhanced voucher holder is subject to the limitation in section 8(o)(10)(A) of the 1937 Act (42 U.S.C. 1437f(o)(10)(A)) that rents shall be reasonable in comparison to rents charged for comparable, unassisted units in the private market, and any other reasonable limits prescribed by the Secretary, such as a use agreement that restricts the rent to an amount below the PHA-determined rent reasonableness cap, State rent controls, or any other similar legally binding, reasonable limitation.

Preservation prepayments. A preservation prepayment occurs when an owner prepays a qualifying mortgage or voluntarily terminates the mortgage insurance on a project that meets the definition of eligible low-income housing under LIHPRHA, 12 U.S.C. 4119 and in such cases, tenant-based assistance is offered to eligible residents of projects. The term “eligible low-income housing” means any housing financed by a loan or mortgage—

(A) That is—

(i) Insured or held by the Secretary under section 221(d)(3) of the National Housing Act and receiving loan management assistance under section 8 of the United States Housing Act of 1937 due to a conversion from section 101 of the Housing and Urban Development Act of 1965;

(ii) Insured or held by the Secretary and bears interest at a rate determined under the proviso of section 221(d)(5) of the National Housing Act;

(iii) Insured, assisted, or held by the Secretary or a State or State agency under section 236 of the National Housing Act; or

(iv) Held by the Secretary and formerly insured under a program referred to in clause (i), (ii), or (iii); and

(B) That, under regulation or contract in effect before February 5, 1988, is or will within 24 months become eligible for prepayment without prior approval of the Secretary. (12 U.S.C. 4119(1)).

Flexible subsidy project. This is any project that receives or has received assistance under Section 201 of the HCDA (the flexible subsidy program) and which project, in accordance with section 201(p), is the subject of a transaction under which the project is preserved as affordable Housing (as determined by HUD). Such a project shall be considered eligible low income housing under section 229 of LIHPRHA for purposes of eligibility of residents for enhanced tenant-based assistance. HUD will determine on a case-by-case basis if a flexible subsidy project meets the requirements of section 201(p) concerning the applicability of enhanced vouchers.

Eligible low-income housing and flexible subsidy projects qualifying under section 201(p) are commonly referred to in PIH guidance as “preservation eligible projects.” A family is eligible for enhanced voucher assistance in preservation eligible projects only if the resident family is residing in the preservation eligible project on the effective date of prepayment or voluntary termination of mortgage insurance (or the effective date of the transaction in the case of a covered flexible subsidy project), and must be income-eligible on that effective date. Both unassisted and assisted residents may be eligible for enhanced voucher assistance as the result of a preservation prepayment.

Eligibility requirements. In preservation-eligible projects, in order to be eligible for enhanced voucher assistance, the resident family must be either:

A low-income family (including a very low-income family);

A moderate-income elderly or disabled family; or

A moderate-income family residing in a low-vacancy area.

HUD determines whether the project where the owner is prepaying or voluntarily terminating the mortgage insurance is located in a low-vacancy area. A low-income family is a family whose annual income does not exceed 80 percent of the median income for the area as determined by HUD. A moderate-income family is a family whose annual income is above 80 percent but does not exceed 95 percent of the area median income as determined by HUD. A resident family who does not fall into one of those categories on the effective date of the prepayment or voluntary termination is not eligible for enhanced voucher assistance. (See notice PIH 2001-41 at p. 22).

By agreeing to administer enhanced vouchers for families affected by conversion actions, the PHA does not relinquish its responsibility for screening potentially eligible families or its ability to deny assistance for any grounds allowed or provided by 24 CFR 982.552 3 and 982.553.4 The screening of families and decisions to deny admission to the program must be consistent with the PHA policy for screening regular admissions of families from the PHA waiting list. The PHA must provide a family with an opportunity for an informal review if it denies the family admission to the voucher program in accordance with the housing choice voucher regulations.

Voluntary termination of mortgage insurance or prepayment of mortgage on Section 236 projects where Section 236 rent rules remain applicable (decoupling actions). Where an owner voluntarily terminates the mortgage insurance or prepays the Section 236 mortgage in a preservation eligible Section 236 project and the rent setting requirements of the Section 236 program are still applicable to the project by the terms of a use agreement, the enhanced voucher rent would be no greater than the Section 236 Basic Rent established in accordance with HUD guidance. (See notice PIH 2001-41 at pp. 23-24.)

Project Based Opt-Outs. An “opt-out” refers to the case of a contract for project-based assistance where the owner opts out of, or elects not to renew, an expiring contract. In such a case, enhanced voucher assistance, subject to appropriations, will be offered to income eligible families covered by the expiring contract. The project must consist of 4 or more dwelling units and be covered in whole or part by a contract for project-based assistance. For the family to be eligible in the event of an owner opt-out, the family must be low-income and must be residing in a unit covered by the expiring Section 8 project-based contract on the date the contract expires. The project-based assistance contract must be for one of the following programs:

The new construction or substantial rehabilitation program under section 8(b)(2) of the 1937 Act (as in effect before October 1, 1983);

The property disposition program under Section 8(b) of the 1937 Act;

The loan management assistance program under Section 8(b) of the 1937 Act;

The rent supplement program under section 101 of the Housing and Urban Development Act of 1965, provided that at the same time there is also a Section 8 project-based contract at the same project that is expiring or terminating on the same day and will not be renewed;

Section 8 of the 1937 Act, following conversion from assistance under section 101 of the Housing and Urban Development Act of 1965; or

The moderate rehabilitation program under section 8(e)(2) of the 1937 Act (as in effect before October 1, 1991).

Sections 515 and 524 of MAHRA. Section 515 of MAHRA addresses section 8 renewals and long-term affordability commitments by owners. Sections 515(c)(3) and (4) of MAHRA address expiring project-based section 8 contracts that are renewed with tenant-based assistance. Covered project-based contracts are those listed above. Families living in units covered by the expiring project-based assistance contract where the project is being renewed with tenant-based assistance are eligible for enhanced voucher assistance. In the case of the expiration of a covered Section 8 project-based contract under 515(c) of MAHRA only, all families assisted under the expiring contract are considered income eligible for enhanced voucher assistance.

Section 524(d) of MAHRA, which applies in the case of a contract for project-based assistance under section 8 for a covered project that is not renewed under section 524(a) or (b) of MAHRA (or any other authority), thereby resulting in the expiration of assistance, provides that enhanced vouchers are to be provided to families residing in the project on the date of the expiration of assistance.

Other situations. If the opt-out of the Section 8 project-based contract by an owner occurs after the owner has prepaid the mortgage or voluntarily terminated the mortgage insurance of a preservation-eligible property, families who do not meet the definition of a low-income family may still be eligible to receive an enhanced voucher. In addition to meeting the usual requirement of residing in a project covered by the expiring contract on the date of expiration, the family must have also resided there on the effective date of prepayment and meet the income requirements for enhanced voucher eligibility for residents affected by a preservation prepayment (see the discussion under the heading “Preservation prepayments” in this preamble). (See notice PIH 2001-41 at p. 20.)

In a case where the owner has materially violated HUD's program regulations or the condition of the project is not decent, safe, and sanitary, resulting in termination of the assistance to the project, the tenants would not remain in the project and would receive regular Section 8 tenant-based assistance. (See notice PIH 2001-41 at p. 4.)

Questions for public comment. In addition to other relevant issues, HUD is interested in receiving public comments on three specific issues. Responses should reference specific data to be utilized in the determination and explain the reasoning to support recommendations.

1. Low-income area. How should the vacancy rate for a “low-vacancy area” be defined? The low-vacancy area designation, because it can result in assistance being provided to families and individuals that are at the moderate income level, which is higher than the program generally is intended to serve, should be a narrow exception. In addition, the following should be considered:

• Whether the low-vacancy area should be based on a constant vacancy percentage applied universally, or whether it should vary with differing factors, such as area population growth, demand for rental, or any other relevant factors;

• Whether the low-vacancy area definition should be unique to this enhanced voucher program, or should be constant across all HUD programs that use the concept of a low-vacancy area.

2. Separate enhanced voucher tenant screening. As proposed, this rule would not revise the regulations concerning discretionary or required tenant screening at §§ 982.307, 982.552 and 982.553. As noted in this preamble, “The screening of families and decisions to deny admission to the program must be consistent with the PHA policy for screening regular admissions of families from the PHA waiting list.” HUD requests comment on whether this result is appropriate, or whether, to the contrary, this constitutes an unnecessary “rescreening” of tenants.

3. Right to remain. Proposed § 982.309(d)(2) states, “[t]he owner may not terminate the tenancy of a family that exercises its right to remain except as provided in § 982.310.” Section 982.310 includes a variety of provisions under which the owner may terminate tenancy. HUD seeks public comment on whether, in consideration of the right to remain under section 8(t) of the 1937 Act (42 U.S.C. 1437f(t)), the exception to the right to remain under § 982.310 (including any specific paragraphs under that section), should be removed, qualified or modified in some way, or made final as stated in this proposed rule.

This proposed rule would amend HUD's regulations in 24 CFR part 982 that govern Section 8 Tenant-Based Assistance: Housing Choice Vouchers to codify HUD's policy on enhanced vouchers. Currently, HUD's policy is based on the statutory requirements, and summarized in guidance provided in PIH notices.5

Definitions. The proposed rule would add definitions for “enhanced voucher assistance,” “enhanced voucher housing assistance payment” and “Eligibility event” to the definitions in § 982.4. The definitions for “enhanced voucher assistance” and “eligibility event” essentially reflect the statutory requirements under section 8(t) of the 1937 Act (42 U.S.C. 1437f(t)), including the basic characteristics of an enhanced voucher, along with some explanation of what constitutes an eligibility event. The definition of “enhanced voucher housing assistance payment” refers to the term as used in § 982.505. Because the rule proposes to revise and reorganize § 982.515, the proposed rule would make technical amendments to the definitions of “Family rent to owner” and “Family share” to remove the references to specific paragraphs of currently codified § 982.515.

Section 982.4 of this rule cross-references the definition of “extremely low-income family” in 24 CFR part 5, subpart F. A general provision of the Consolidated Appropriations Act, 2014, Public Law 113-76, added a statutory definition of “extremely low-income families” at 42 U.S.C. 1437a(b)(2), and required that this new definition, which would amend HUD's current regulatory definition, be implemented by HUD via Federal Register notice followed by rulemaking with public comment (see Pub. L. 113-76, Division L, Title IV, sections 238 and 243). The implementing notice was published at 79 FR 35940 (June 25, 2014). A rule for public comment including this revision, entitled “Streamlining Administrative Regulations for Public Housing, Housing Choice Voucher, Multifamily Housing, and Community Planning and Development Programs,” was published at 80 FR 423 (January 6, 2015).

Determining adjusted per-unit cost. Section 982.102 governs HUD's determination of costs in allocating budget authority for renewals of expiring funding increments. Under § 982.102(e), as currently codified, HUD determines the adjusted per-unit cost based on data from the PHA's most recent HUD-approved year-end statement. This proposed rule would update § 982.102(e)(1)(i) and (e)(3)(iii) to provide that HUD will use data from the PHA's most recent validated Voucher Management System submission.

Eligibility and Targeting Requirements. The proposed rule would revise § 982.201, which addresses eligibility and targeting requirements, to include additional eligibility criteria (but not targeting requirements, which do not apply to enhanced voucher holders) in § 982.201(b)(1) for enhanced vouchers. As proposed to be amended, § 982.201(b)(1) would provide that eligible families include: Families, regardless of income, residing in projects with a project-based Section 8 contract that has expired and is renewed under section 515(c) of MAHRA and its implementing regulations, which may include families residing in projects under section 515(c)(3) of MAHRA (tenant-based assistance based on a rental assistance assessment plan as provided in section 515(c)(2) of MAHRA) and section 515(c)(4) of MAHRA (enhanced voucher assistance) (See notice PIH 2001-41 at pp. 19-20); low-income families residing in a project where the project-based assistance contract has expired and is not renewed (see section 524(d) of MAHRA, 42 U.S.C. 1437f note); certain low and moderate income families, as well as moderate income elderly or disabled families, where the mortgage insurance is voluntarily terminated or prepaid under the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (12 U.S.C. 4113(f)), or where the project is preserved as affordable housing under 12 U.S.C. 1715z-1a(p), which addresses assistance for troubled multifamily housing projects and provides that “any project that receives or has received assistance under this section and which is the subject of a transaction under which the project is preserved as affordable housing, as determined by the Secretary, shall be considered eligible low-income housing under section 229 of the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (12 U.S.C. 4119) for purposes of eligibility of residents of such project for enhanced voucher assistance provided under section 8(t) of the United States Housing Act of 1937 . . .”.

PHA Approval of Assisted Tenancy. The proposed rule would revise § 982.305(a)(5) to provide for an exception to the 40 percent of monthly adjusted income limit at the time the family initially receives HCV assistance, in the case of enhanced voucher assistance. (See notice PIH 2001-41 at p. 8.)

Term of Assisted Tenancy. The proposed rule would amend § 982.309 to add a new paragraph (d) that would provide that, absent repeated lease violation or other good cause, a family that receives an enhanced voucher has a right to remain in the project in which the family qualified for the voucher at the time of the eligibility event. This new paragraph (d) would implement the statutory requirement at section 8(t)(1)(B) of the 1937 Act (42 U.S.C. 1437f(t)(1)(B)), which provides that the assisted family may elect to remain in the same project in which the family was residing at the time of the eligibility event, which has been HUD's policy to date. HUD plans to issue a tenancy addendum to be incorporated into the owner's lease to reflect this right to remain under this new paragraph.

Subsidy Standards. The proposed rule would revise §§ 982.402(c) and (d) to incorporate cross-references to the proposed new enhanced voucher rules, particularly references to oversized units and the payment standard.

Voucher Tenancy: Payment Standard in Restructured Multifamily Housing or in Housing Converted Under Certain Conversion Actions. The proposed rule would revise § 982.504, concerning the payment standard for a family in a restructured subsidized multifamily project where tenant-based assistance is provided to the family pursuant to 24 CFR 402.421 when HUD has approved a restructuring plan and the participating administrative entity has approved the use of tenant-based assistance to provide continued assistance for such family. This section would also apply to conversion actions under other circumstances. Specifically, these would be owner opt-outs or non-renewals of Section 8 project-based contracts; owner prepayments of mortgages or voluntary termination of mortgage insurance on preservation-eligible properties; or where HUD takes an enforcement action against the owner, which in some cases may result in the family being eligible for the enhanced voucher payment standard. (See notice PIH 2001-41 at p. 1.) The payment standard as proposed in § 982.504(b)(2) is the gross rent for the family's unit, that is, the rent to owner plus the applicable PHA utility allowance for any tenant-supplied utilities. The rent must be reasonable as determined by the PHA under § 982.507.

The proposed changes would comply with MAHRA regarding projects that have a project-based assistance contract where the project is eligible for restructuring, the assistance is terminated, the contract is renewed as tenant based assistance, and the tenants who remain are eligible for enhanced vouchers (see section 515(c) of MAHRA) and, through reorganization of § 982.504, address housing converted under certain conversion actions, which result in families receiving enhanced vouchers. The proposed rule would revise paragraphs (a) and (b) of this section to comply with MAHRA. The payment standard for a family living in housing that has undergone certain other conversion actions would largely be addressed in a new paragraph (c). The heading of this section is also revised to clarify that it also addresses housing converted under certain conversion actions.

Section 982.504(a) would establish the events as a result of which families are eligible for enhanced voucher assistance.

New paragraph (b)(2) would establish the enhanced voucher payment standard, which would be the gross rent which must be reasonable, as determined by the PHA, based on comparable rents of private, unassisted units in the local area (comparability would be further defined in § 982.507(b) as proposed to be revised by this rule).

New paragraph (b)(3) would provide that if the rent is increased for an enhanced voucher family, the new gross rent shall be the payment standard for the unit provided such rent is determined reasonable.

New paragraph (b)(4) would codify HUD's policy regarding enhanced voucher families in oversized units (that is, a family living in a unit of a bedroom size greater than what the family qualifies for, as determined by the PHA under current § 982.402, which addresses subsidy standards). Essentially, if the family is over-housed and wishes to remain at the project with enhanced voucher assistance, and an appropriate-sized unit becomes available, the family must move to the appropriate sized unit within 30 days. If the family wishes to stay in the larger unit, their assistance payment will be based on a regular voucher for the appropriate-sized unit and the family will have to pay the remainder of the gross rent. If there is no appropriate-sized unit, the family may remain in the larger unit at the enhanced voucher payment standard for the larger unit size until an appropriate-sized unit or smaller unit that is not smaller than the size unit for which the family qualifies under the PHA's subsidy standards becomes available, in which case the family must move to such unit. Similarly, if a family becomes over-housed due to a change in family size during the enhanced voucher tenancy, the family may remain in the unit at the enhanced voucher payment standard for the larger unit size until an appropriate-sized or smaller sized unit, as stated in the previous sentence becomes available, in which case the family must move within 30 days.

This proposed rule would add § 982.504(b)(4)(vi), which requires the owner of an assisted project to immediately inform the PHA and the over-housed family when an appropriate size unit or smaller size unit as stated in the previous paragraph becomes available in the project. If the owner does not do so, the owner can be subject to an enforcement action (see notice PIH 2016-02) . The rent to owner can be reduced to the reasonable rent for the appropriate or smaller size unit.

Rent to Owner: Reasonable Rent. The proposed rule would amend paragraph (b) of § 982.507 to clarify what is meant by assisted units for comparability purposes. The proposed rule would provide that assisted units are units that are assisted under a Federal, State, or local government program, including Low-Income Housing Tax Credit assistance, and rent-controlled or restricted units except where the restricting law or court order applies to voucher participants. In these cases, the units are not used in the comparability analysis, because they are “assisted” units (§ 982.507(b)(1)).

Proposed § 982.507(b)(2) would also clarify what is meant by assisted units for comparability purposes for projects that undergo a housing conversion action. The proposed rule provides that assisted units include units in a property undergoing a housing conversion action occupied by tenants who, on the date of the eligibility event, do not receive vouchers and where the owner chooses to continue charging below market rents to those families by offering lower rents, rent concessions, or other assistance to those families. (See notice PIH 2010-18 at pp. 2-3, 2011-46 at pp. 1-2.) The comparability analysis performed by the PHA must include the location, quality, size, type, and age of the unit and any amenities.

Proposed § 982.507(b)(3) would apply to unassisted units, that is, those not receiving any form of Federal, State, or local government assistance, but not to projects where the owner simply decides to charge below market rents. Rents for unassisted units must be considered when determining comparability under (b)(4).

Proposed § 982.507(b)(4) provides for comparability analysis, and is similar to currently codified § 982.507(b). The PHA must consider the location, quality, size, unit type, and age of the contract unit; and any amenities, housing services, maintenance and utilities to be provided by the owner in accordance with the lease.

Decoupling transactions. Section 982.511 of this proposed rule would add specificity regarding decoupling transactions. Section 236 of the National Housing Act, 12 U.S.C 1715z-1, authorizes decoupling transactions, where, although the mortgage under section 236 (mortgage insurance for rental or cooperative housing for low income families) is prepaid or refinanced, interest reduction payments (which reduce debt service) are retained and continued “if the project owner enters into such binding commitments as the Secretary may require” to continue to operate the project as low-income housing. In these decoupling transactions the 236 rent rules remain in effect by the terms of a use agreement. As such, where an owner voluntarily terminates the mortgage insurance on a Section 236 project or prepays the Section 236 mortgage in a preservation eligible Section 236 project, and the rent setting requirements of the Section 236 program are still applicable to the project, the enhanced voucher rent would be no greater than the HUD-approved basic rent for the 236 program.

Family Share: Family Responsibility. The proposed rule would amend § 982.515 to add a new paragraph specifying that the current prohibition in § 982.515 against the PHA using housing assistance payments or other program funds, including any administrative fee reserve, to pay the family share applies. The enhanced voucher housing assistance payment would be discussed in new § 982.505(e). As provided in section 8(t) of the 1937 Act (42 U.S.C. 1437f(t)), a family that was previously assisted under a project-based Section 8 contract on the date of the eligibility event, shall, under the enhanced voucher, pay no less than the dollar amount of the total tenant payment on that date. Similarly, a family living in the project that was assisted under the regular voucher program, and not living in a unit assisted under the project based contract, shall, with an enhanced voucher, pay no less than the dollar amount of the family share of rent and utilities on the date of the eligibility event.

A family residing in the project, but living in an unassisted unit (i.e., not receiving assistance under either the Section 8 project based contract nor receiving assistance under the regular voucher program), if eligible for enhanced voucher assistance, shall pay no less than the dollar amount of the gross rent on the date of the eligibility event (minimum rent). A family assisted under the enhanced voucher program shall pay the enhanced voucher minimum rent, notwithstanding any other requirement of the voucher program, even if it means the family pays more than 40 percent of their adjusted income for rent, an amount which is prohibited for initial tenancy under the housing choice voucher program (see §§ 982.305(a)(5); 982.508, which would be revised to clarify this point in this proposed rule). This can occur, for example, if a family was paying for rent more than 40 percent of their adjusted income on the date of the eligibility event.

The proposed rule would provide under § 982.518(d) that if the gross income of the family declines significantly, the enhanced voucher minimum rent shall be revised to an amount calculated based on a percentage of current monthly adjusted income, which is the greater of 30 percent or the percentage of monthly adjusted income the family was paying on the date of the eligibility event. Once the minimum rent is changed to a percentage of income, it remains that way unless and until the family's income increases to an amount that the family's enhanced voucher minimum rent established using a percentage of income calculation would require the assisted family to pay an amount that is more than the greater of the family's original enhanced voucher minimum rent payment (established as of the date of the eligibility event) or 30 percent of the family's adjusted income. At such time, the family's enhanced voucher minimum rent shall be determined by the PHA in accordance with § 982.515(b)(1) using the dollar amount of the family's original enhanced voucher minimum rent. In no circumstance shall the family's enhanced voucher minimum rent be less than the amount established as of the date of the eligibility event.

Section 982.518 is revised to include provisions regarding the enhanced voucher minimum rent. The minimum rent under the enhanced voucher would be the amount of rent the family was paying on the date of the eligibility event even if it is more than the 40 percent statutory limitation on the amount of adjusted income a family can initially pay under the voucher program. A family that was residing in a project that has undergone a preservation prepayment on the date of the eligibility event, shall, under the enhanced voucher, pay no less than the dollar amount of the gross rent on the date of the eligibility event (minimum rent). Similarly, a family living in the preservation eligible project on the date of the eligibility event with assistance under the regular voucher program may receive enhanced voucher assistance and shall pay no less than the enhanced voucher minimum rent

Regular Tenancy: How to Calculate Housing Assistance Payment. The proposed rule would address the calculation of the enhanced voucher housing assistance payment in proposed new § 982.505(e), and would add a new § 982.518 to address the enhanced voucher minimum rent. By codifying existing policy and procedures concerning enhanced vouchers, HUD provides PHAs, eligible families, and interested members of the public with a more convenient location to find these requirements.

Through this proposed rule, HUD is not making significant changes to the treatment of enhanced vouchers as has been carried out to date. Much of what is discussed in this preamble is based on statutory requirements and current HUD policy, but HUD welcomes comment on where such requirements may need further clarification or elaboration.

Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) (UMRA) establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. This rule does not impose any Federal mandate on any State, local, or tribal government or the private sector within the meaning of UMRA.

The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. This proposed rule codifies HUD's existing policy on eligibility for and requirements pertaining to enhanced vouchers, which are largely based on statutory requirements, and with which public housing agencies area already familiar. As noted in the preamble, this proposed rule is not significantly revising treatment to date of enhanced vouchers. Therefore, the undersigned certifies that this rule will not have a significant impact on a substantial number of small entities.

Notwithstanding HUD's view that this rule will not have a significant effect on a substantial number of small entities, HUD specifically invites comments regarding any less burdensome alternatives to this rule that will meet HUD's objectives as described in this preamble.

This proposed rule does not direct, provide for assistance or loan and mortgage insurance for, or otherwise govern, or regulate, real property acquisition, disposition, leasing (other than tenant-based assistance), rehabilitation, alteration, demolition, or new construction, or establish, revise or provide for standards for construction or construction materials, manufactured housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this proposed rule is categorically excluded from environmental review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Executive Order 13132 (entitled “Federalism”) prohibits, to the extent practicable and permitted by law, an agency from promulgating a regulation that has federalism implications and either imposes substantial direct compliance costs on State and local governments and is not required by statute or preempts State law, unless the relevant requirements of section 6 of the Executive Order are met. This rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive Order.

The Catalog of Federal Domestic Assistance number for 24 CFR part 982 is 14.871.

Accordingly, for the reasons stated in the preamble, HUD proposes to amend 24 CFR part 982 as follows:

The revision and addition read as follows:

The revisions and addition read as follows:

This document proposes to amend VA regulations to establish reasonable fees in connection with loans made by VA, commonly referred to as vendee loans. The proposed fees associated with vendee loans are standard in the mortgage industry. The vendee loans that would be subject to the fees are not veterans' benefits and are available to any purchasers, including investors, who qualify for the loan.

Specifically, this rulemaking would permit VA to establish a fee to help cover costs associated with loan origination. The proposed rule would also permit certain reasonable fees to be charged following loan origination, during loan servicing. Fees permitted would be those charged for ad hoc services performed at the borrower's request or for the borrower's benefit, as well as standard fees specified in loan instruments. Lastly, third-party fees, those not charged by VA, would be included in this proposed rule solely to clarify for borrowers the various costs that a borrower may incur when obtaining a vendee loan.

When a holder forecloses a VA-guaranteed loan, the holder has the option, pursuant to 38 U.S.C. 3732 and 3720, of conveying the foreclosed property to the Secretary of Veterans Affairs (the Secretary). For properties VA acquires this way, VA sells them as a salvage operation and deposits the sales proceeds into the Veterans Housing Benefit Program Fund (VHBPF), as required by 38 U.S.C. 3722, to help offset the housing operation costs of the Home Loan Guaranty Program.

In addition to selling properties as part of the salvage operation, the Secretary has authority under 38 U.S.C. 3720 and 3733 to finance the sales upon such terms as the Secretary determines reasonable. VA refers to loans made pursuant to these provisions as vendee loans. The loans are not classified as veterans' benefits and are available to any purchaser VA determines creditworthy and whose bid is awarded a sales contract. Purchasers can be individuals or corporations, and the properties can be purchased as owner-occupied residences or as investments. Additionally, the Secretary may make vendee loans to certain entities pursuant to 38 U.S.C. 2041 for the purpose of assisting homeless veterans and their families acquire shelter.

Under 38 U.S.C. 3733(a)(4), vendee loans may generally be made for up to 95 percent of the purchase price of the property. A vendee loan may exceed 95 percent of the purchase price to the extent the Secretary determines necessary to competitively market the property. A vendee loan may also exceed 95 percent of the purchase price in instances where the Secretary includes, as part of the vendee loan, an amount to be used for the purpose of rehabilitating such property. Additionally, 38 U.S.C. 3733(a)(6) provides that the Secretary shall make a vendee loan at an interest rate that is lower than the prevailing mortgage market interest rate in areas where, and to the extent the Secretary determines, in light of prevailing conditions in the real estate market involved, that such lower interest rate is necessary in order to market the property competitively and is in the interest of the long-term stability and solvency of the VHBPF. These provisions demonstrate that this program is to be competitively marketed to borrowers so long as it is financially sustainable. In fiscal years (FYs) 2011 and 2012, the most recent period when VA made direct loans, VA sold, on average, 175 real-estate owned (REO) properties per month with vendee financing, with an average loan amount of $114,925.

Vendee financing is not a veterans' benefit; rather, it is a competitive lending program with the primary goal of providing financing to help VA dispose of its REO properties. Vendee loans enable VA to sell more of its properties and to sell them quicker. Nevertheless, this program helps veterans by contributing to the long-term viability of the VHBPF, as the principal and interest resulting from repayment of vendee loans are deposited into the VHBPF to help offset the housing operation costs of the Home Loan Guaranty Program.

Section 3720 of title 38 U.S.C. states that the Secretary may purchase property upon such terms and for such prices as the Secretary determines to be reasonable, and similarly sell, at public or private sale, any such property. It also authorizes the Secretary to otherwise deal with any property acquired or held pursuant to chapter 37 of title 38, U.S.C.

Section 3720 authorizes the Secretary to sell REO properties upon such terms and for such prices as the Secretary determines reasonable. See 38 U.S.C. 3720(a). Section 3720 further authorizes the Secretary to exercise this discretion notwithstanding any other provision of law. Given the common industry practice of including fees when negotiating the terms and prices of real estate transactions, and for other reasons explained below, the Secretary has determined that it is reasonable to negotiate fees in the terms and prices of any sale of the Secretary's REO properties. The specific types of allowable fees will be explained in-depth later in this preamble.

VA considered alternatives to charging fees. One option was to increase the sales prices of properties to account for the funds that fees would generate. VA decided, however, that increasing sales prices might extend the time that VA must hold properties before selling them. This would also increase costs for taxpayers, rather than the small population of borrowers enjoying the advantages of vendee loans. VA also considered adjusting interest rates, but as explained earlier, Congress has established a preference for lower-than-market interest rates in order to market properties competitively. See 38 U.S.C. 3733(a)(6). Consequently, VA believes that having the flexibility to negotiate fees is the most fiscally sound way to protect the integrity of the VHBPF and ensure that taxpayers who do not participate in the vendee program do not unfairly bear the burden of its costs.

All origination-related fees and post-origination fees proposed under this rule will be deposited into the VHBPF. Under 38 U.S.C. 3722, amounts paid into the VHBPF under section 3729 or any other provision of law or regulation established by the Secretary imposing fees on persons or other entities constitute assets of the VHBPF. See 38 U.S.C. 3722(c)(2). These fees would be designated to the proper account as required under the Federal Credit Reform Act of 1990. See 2 U.S.C. 661, et seq.

To help ensure that VA's REO portfolio is administered in a cost-effective manner, VA is proposing to authorize certain reasonable fees in connection with the origination and post-origination servicing of vendee loans. The proposed fees would prevent against windfalls to the small population of vendee borrowers by ensuring that they, rather than the taxpayers at-large, pay for the unique advantages of vendee financing. The types of fees proposed are standard in the lending industry, and as such, would not significantly affect the program's competitiveness.

In addition to the reasonable fees proposed herein, borrowers obtaining vendee financing may be required to pay certain third-party fees. Third-party fees are collected on behalf of, or payable to, persons other than the Secretary. These include, for instance, recording fees, force-placed insurance premiums, and inspection fees. VA does not control these third-party fees, as they are not collected on behalf of the Secretary. VA is identifying them in this proposed rule to help participants more fully understand the types of expenses that typically could affect borrowers.

VA proposes to add § 36.4500(e) to clarify the applicability of the sections proposed under this rulemaking. It would state that proposed §§ 36.4528, 36.4529, and 36.4530 would be applicable to all vendee loans.

VA also proposes to amend paragraph (c)(2), regarding which vendee loans are qualified mortgages. The purpose and effects of this proposed change are explained later in this preamble in the section on safe harbor qualified mortgages.

VA proposes to update the authority citation for the definition of vendee loan, as provided in § 36.4501. The authority citation currently includes 38 U.S.C. 3720 and 3733. VA proposes to add 38 U.S.C. 2041 to this citation. This change would have no substantive effect on vendee loans but would merely ensure that the authority citation for the definition of vendee loans fully reflects the authorities under which the Secretary may make these loans.

VA also proposes to clarify existing policy with regard to vendee loan terms. The rule would state specifically that the terms of a vendee loan (e.g., amount of down payment; amortization term; whether to escrow taxes, insurance premiums, or homeowners' association dues; fees etc.) are negotiated between the Secretary and the borrower on a case-by-case basis, subject to the requirements of 38 U.S.C. 2041 or 3733. The terms may vary depending on, among other factors, the creditworthiness of the buyer/borrower and the purpose of the realty purchase—investment versus residence. Except for the addition of the Secretary's discretion to negotiate fees, this is not a substantive change. VA would also state that the terms related to allowable fees are subject to proposed §§ 36.4528 through 36.4530 of this part.

In addition, the rule would add a new definition for safe harbor qualified mortgage. The definition is consistent with that in the guaranteed loan program. See 38 CFR 36.4300(b)(1). It is necessary to add the definition to clarify the applicability of safe harbor provisions to all of VA's direct loan programs, not just the guaranteed programs.

VA is proposing a new regulatory provision to be found in 38 CFR 36.4528. Proposed § 36.4528 would authorize an allowable fee that may be charged in connection with the origination of vendee loans. This proposed rule would permit VA to charge an origination fee not to exceed one-and-a-half percent of the loan amount. The proposed origination fee is distinct, and in addition to, the loan fee required to be paid by 38 U.S.C. 3729 for vendee loans made pursuant to 38 U.S.C. 3733. All or part of the proposed origination fee may be paid in cash at loan closing, or all or part of the fee may be included in the loan. In computing the fee, VA would disregard any amount included in the loan to enable the borrower to pay such fee. In other words, if a borrower opts to include the fee into the loan amount, VA would not increase the amount of origination fee due. Under no circumstance may the total fee agreed upon between the Secretary and the borrower result in an amount that would cause the loan to be designated as a high-cost mortgage, as defined by section 103(bb) of the Truth in Lending Act (TILA), codified in 15 U.S.C. 1602(bb), and implementing regulations in 12 CFR part 1026.

VA understands that it is common industry practice for lenders to charge an “origination fee” of approximately one percent of the loan value. Bankrate.com explains that for many loans a one percent origination fee is common.1 This fee is customarily charged by lenders to cover certain expenses involved with evaluating borrowers' creditworthiness and preparing a mortgage loan. VA currently permits a one percent fee to be charged in connection with originating loans in its Home Loan Guaranty Benefit Program (38 CFR 36.4313(d)(2)). Vendee financing is distinct from VA's benefit program. Nonetheless, VA believes that if private lenders are permitted to charge a one percent origination fee to eligible servicemembers and veterans utilizing their home loan benefit, then it is reasonable to establish up to a one-and-a-half percent fee in connection with the origination of non-benefit vendee loans, which may be made to any borrowers, including investors, who qualify.

To the extent the maximum one-and-a-half percent fee proposed herein may on occasion exceed the total amount charged at origination by certain private lenders, the unique characteristics of vendee financing would make the extra one-half percent reasonable and help the vendee program remain competitive. As explained above in the section on vendee loans, 38 U.S.C. 3733(a)(6) requires the Secretary to make vendee loans at an interest rate lower than the prevailing mortgage market interest rate in situations where, based on the local conditions in an area's real estate market, such lower interest rate is necessary to market the property competitively. In such situations, VA does not have the flexibility to charge above market interest rates to offset costs associated with loan origination, as a private lender might. Further, VA offers these lower interest rates without charging discount points collected in exchange for this lower interest rate at the time of loan origination. In private sector transactions, borrowers can pay up to three or four discount points, depending on how much they want to lower their interest rates. One discount point is an upfront payment of one percent of the loan amount, in addition to the other fees. The mortgage's interest rate is usually reduced by a quarter of a percentage point for every discount point paid.

In addition to offering below-market interest rates without discount points, VA offers vendee financing for up to 95 percent of the purchase price of the property and, in instances where the Secretary deems it necessary to market the property competitively, may offer vendee financing in an amount that exceeds 95 percent of the purchase price. The average loan amount to sale price ratio for vendee loans exceeded 85 percent in FY11 and 88 percent in FY12.

Generally, if a borrower's down payment on a home is less than 20 percent of the sale price, a private lender will require mortgage insurance to protect itself in case the borrower defaults on the payments. The borrower pays the premiums, and the lender is the beneficiary.2 Private mortgage insurance typically costs about 0.25 to two percent of the loan balance per year, depending on the amount of the down payment, loan term, and borrower's credit score, and continues until the borrower reaches 20 percent equity.3 In contrast, VA does not require a borrower to purchase private mortgage insurance on any vendee loan, regardless of the loan-to-purchase price ratio.

Furthermore, the rule would provide that under no circumstances may the total fees agreed upon between the Secretary and the borrower result in an amount that would cause the loan to be designated as a high-cost mortgage loan under TILA and its implementing regulations (15 U.S.C. 1602(bb); 12 CFR part 1026). High-cost mortgages are those where the annual percentage rate (APR) or points and fees charged exceed certain threshold amounts. Loans that meet such high-cost coverage tests are subject to special disclosure requirements and restrictions on loan terms.

Accordingly, this rulemaking would include authority for VA to charge an amount not to exceed a one-and-a-half percent origination fee in connection with the origination of vendee loans. Fees that may be charged by third parties at the time of loan origination (for example, courier fees or fees for termite inspection) are not included under 38 CFR 36.4528 and are discussed later in this preamble. In establishing this reasonable fee to cover costs associated with loan origination, VA is managing the non-benefit, vendee loan program in a business-like manner more consistent with private industry standards, and in so doing, ensuring that purchasers who utilize this financing, rather than taxpayers at-large, help bear the expenses associated with originating vendee loans.

VA is also proposing a new regulatory provision, 38 CFR 36.4529, which would allow VA to charge reasonable service-related fees following loan origination. These fees would not constitute the general servicing fee paid by VA to its contractor to perform functions normally considered part of prudent loan servicing activities. Rather, these fees would be charged to the borrower to cover the costs of ad hoc, special services that are requested and performed on the borrower's behalf, and are beyond the regular services performed in connection with loan servicing.

It is common industry practice to charge specific fees in accord with the rendering of additional services on an account. Accordingly, VA is establishing, under proposed § 36.4529(a), maximum amounts to be charged per fee in exchange for the Secretary's performance of certain services that are above and beyond ordinary and customary loan servicing activities. VA surveyed some of the larger private entities that perform loan servicing. The frequency, applicability, and amount of these fees generally vary by state, loan status, and other loan characteristics. As such, VA notes that the amounts proposed in this rulemaking would represent maximums; the specific fees to be charged on each account may be negotiated between the Secretary and the borrower.

Under the proposed rule, VA could charge a borrower an assumption processing fee when a purchaser assumes a VA direct loan. This fee would be assessed when VA approves a request for the transfer of legal liability of repaying the mortgage. VA intends for the assumption fee to help offset the costs associated with processing the application, determining the creditworthiness of the assumptor, and revising the ownership records when the approved transfer is complete. VA would be permitted to charge an amount not to exceed $300, plus the actual cost of any credit report required. If the assumption were denied, VA would only charge the actual cost of the credit report. The disclosed maximum assumption fees in the fee schedules surveyed for this rulemaking ranged from $350 (including the cost of the credit report) to $1300 (however, the $1300 fee also included attorney fees).

The rule would also permit VA to charge the borrower a fee, not to exceed $350, for processing a subordination request to ensure that a modified vendee loan retains first lien position over another debt on the same property. VA will only modify a loan if it will retain its priority lien position on that property. State laws differ as to whether a basic loan modification will affect priority status of a senior loan holder, and in which situations such a modification would affect priority status. Accordingly, if VA consents to the modification of a loan, VA must ensure that its modified mortgage loan retains first-lien position. The maximum subordination fee disclosed by the private servicers surveyed for this rulemaking was $350.

The proposed rule would permit a reasonable partial release fee, not to exceed $350, to be charged when a borrower seeks to exclude some of the collateral from the mortgage contract once a certain amount of the mortgage loan has been paid. A borrower might request a partial release of real property from the security for a number of reasons; for example, to release acreage from the original secured lot so that it can be used for other purposes or to release some portion of the property to adjust the lot line or resolve a lot line dispute. Of the private servicers surveyed, two disclosed a maximum fee of $350 and the third disclosed a maximum fee for this service of $500.

If VA agrees to release an obligor from a mortgage loan in connection with a division of real property, this rule would permit VA to charge a release of lien fee not to exceed $15 for executing and providing documentation of this release. Occasionally, joint owners of real property may be subject to a judicial decree (such as a divorce judgment) that divides the property into separately owned parcels according to each owner's proportionate share in the property. Generally, neither owner receives any cash consideration in connection with the partition. In these circumstances, following this division, the fee may be incurred if the borrower who has possession of the land that is to be released from the security requests a release from liability under the mortgage loan. Consistent with VA's proposed maximum, the maximum fee disclosed in VA's survey of private industry is $15.

VA could charge a fee not to exceed $30 for processing payoff statements. Consistent with VA's proposed maximum, the private industry servicers VA surveyed disclosed a maximum payoff statement fee of $30.

VA could charge a reasonable fee to the borrower to offset the costs of processing payments a borrower may elect to submit by phone. To cover the expenses associated with providing this service, which borrowers may prefer to traditional payment by check, the fee would not exceed $12 when a representative handles the payment, and would not exceed $10 when an interactive voice response system (an automated phone system) handles the payment. The industry fee schedules that VA surveyed for this rulemaking disclosed maximum payment by phone fees that ranged from $9 to $20. The schedules also showed that, when a borrower makes a payment by phone, it usually costs the borrower $3 to $10 more to speak with a representative than it does for the borrower to use an interactive voice response system.

In addition to the proposed fees being standard in private industry, there is precedent for the collection of fees in exchange for the performance of special ad hoc services in another Federal Government direct home loan program. Specifically, the Rural Housing Service (RHS) at the Department of Agriculture (USDA) regulates the collection of fees in exchange for the performance of certain special services. RHS provides financing to help very low and low income individuals, who cannot obtain credit from other sources, obtain housing in rural areas. VA notes that RHS permits these fees even though its loan program is targeted to very low and low income families, whereas sales of REO properties with vendee financing are intended to help VA dispose of its REO inventory helping fund the VHBPF.

For example, 7 CFR 3550.161(c) states that RHS may charge a fee for payoff statements if more than two statements are requested for the same account in any 30-day period. Under § 3550.161(d), RHS explains that borrowers who make cash payments, rather than submitting payment through check, money order, or bank draft, will be assessed a fee to cover the conversion to money order. RHS stated in its Interim Final Rule, Reengineering and Reinvention of the Direct Section 502 and 504 Single Family Housing Programs, published on November 22, 2006 (61 FR 59762, 59772), that two commentators strongly opposed RHS's requirement that a cash payment must be accompanied by an amount sufficient to cover the cost of a money order, stating that such proposal was unfair to very low and low income families. It explained, however, that RHS provides supervised credit. RHS encourages, like all lenders, customers to send payments by check, money order or bank draft. Cash payments in local offices are discouraged. Since RHS must obtain a money order in order to transmit the payment, the customer should pay that fee. Id.

In addition, RHS regulations at 7 CFR 3550.159 provide that certain borrower actions require RHS approval. Specifically, § 3550.159(c) explains that RHS may consent to a transaction affecting the security, such as a sale or exchange of security property, and grant a partial release of the security, so long as certain conditions are met. Among those conditions is the requirement that the proceeds from the sale of any portion of the security property or other similar transaction requiring RHS consent must first be used to pay customary and reasonable costs related to the transaction that must be paid by the borrower. Additionally, if an appraisal must be conducted, the regulation states that the appraisal fee will be charged to the borrower.

As authority for its rule permitting such fees, RHS cites 42 U.S.C. 1480, which provides that the Secretary of Agriculture shall have the power to sell RHS-acquired properties based on terms and conditions the Secretary of Agriculture determines reasonable and to make loans to the purchasers of such properties. The statutory authority cited by RHS to permit fees to cover the costs of performing additional post-origination services is analogous to 38 U.S.C. 3720, which provides the Secretary the power to dispose of VA-owned properties on terms the Secretary determines reasonable. Thus, the proposed rule would be consistent with the rule of at least one other Federal Government direct home loan program that authorizes reasonable fees to cover unanticipated, additional expenses incurred after loan origination.

The rule would state expressly, at proposed § 36.4529(b), that the Secretary may negotiate fees on a case-by-case basis. It would also require the Secretary to review, bi-annually, the maximum fees proposed under § 36.4529(a) to ensure that the fees continue to reflect the reasonable costs for the services performed. If VA determines that the maximum fees listed in § 36.4529(a) no longer reflect the reasonable amounts necessary to perform the associated services, VA would propose amendment of the regulation. This would allow VA to timely address any imbalance in the maximum fee schedule and keep the vendee loan program both cost-effective and competitively priced for its participants.

In addition to the ad hoc post-origination fees proposed under § 36.4529(a), proposed § 36.4529(c) would identify, for informational purposes, standard fees as established in loan instruments. Fees established in loan instruments are generally considered deterrents to default, and a means by which the lender can minimize losses if a loan does default. These expenses often relate to termination of the loan, regardless of whether the loan is ultimately foreclosed, and are capitalized into the indebtedness.

VA, like many lenders, uses the standard loan documents developed and adopted by the Federal National Mortgage Association (Fannie Mae). Fannie Mae's security instruments usually provide that the lender may charge reasonable fees for services performed in connection with default and loan termination to protect the lender's interest in the property and rights under the deed of trust. Various Fannie Mae security instruments can be viewed at https://www.fanniemae.com/singlefamily/security-instruments.

Fannie Mae's standard security instruments also generally provide that if the borrower fails to perform the covenants and agreements contained in the security instrument, the lender may do and pay for whatever is reasonable or appropriate to protect the lender's interest in the property and rights under the security instrument. A lender may not charge any fees prohibited by the instrument or by applicable federal, state, or local laws or regulations. State laws control whether any fees charged by the lender, or amounts expended by the lender to protect its interest in the property and rights under the loan instrument, are to be added to the borrower's indebtedness.

Pursuant to proposed § 36.4529(d), any fee included in the loan instrument and permitted under proposed § 36.4529(c) would be based on the amount customarily charged in the industry for the performance of the service in the particular area, the status of the loan, and the characteristics of the affected property. VA is not prescribing specific maximum amounts for these fees. Rather, as these fees are governed by the loan instrument and may be capitalized into the principal balance of the loan, state law sets the maximum amounts for these fees. Nevertheless, VA seeks to clarify through this rulemaking that any borrower obtaining vendee financing may incur reasonable fees as provided for in standard loan instruments.

An example of a fee permitted by the standard loan instrument would be a property inspection fee that VA could collect. For instance, when a foreclosure seems necessary, VA must perform a limited inspection to determine the physical condition or occupancy status of a property purchased with vendee financing. In situations where VA must perform work to maintain a vacant property, the loan instrument permits a reasonable property preservation fee to be charged to the borrower. As a result, this fee would cover services to protect a vacant property from further damage or to maintain a property to prevent city code violations. Such services could range from mowing the yard to constructing a fence around the property to winterizing the property. The fees charged would need to reflect the reasonable cost of performing the particular type of property preservation service.

Additionally, standard loan instruments used by VA permit VA to collect reasonable appraisal or attorneys' fees. Appraisal fees would include, for example, the cost of obtaining a liquidation appraisal in the event of default to determine the value of a property prior to a liquidation sale or short sale. Appraisal fees could also include the cost of an appraisal of property to determine its value prior to a partial release. Attorneys' fees may be incurred in cases where the property goes into serious delinquency and servicers must hire attorneys to assure VA's interests are protected. Examples of legal work incurring attorneys' fees include providing proper and timely notice to borrowers in the event of foreclosure, determining lien position if there are multiple liens on the property, and, in judicial foreclosure states, assuring correct paperwork is submitted to the court. In addition, attorneys' fees may be incurred in cases where a loan is referred to foreclosure, but the foreclosure is not completed, the default is cured, and the loan is reinstated.

Along with the fees for default-related services, there are other reasonable fees that are specified in the loan instrument that, if incurred, can be capitalized as part of the borrower's total indebtedness. These fees offset the additional expense of collection activities and usually serve as incentives for repaying a loan obligation in a timely manner or, more aptly, as deterrents to delinquency that might otherwise interrupt the Government's scheduled flow of income. These fees include, but are not limited to, late fees incurred to cover the added expense involved in handling delinquent payments, and a returned-check (non-sufficient funds) fee incurred when a mortgage payment is made from an account that does not have sufficient funds to cover the payment. Other fees that are reasonably necessary for the protection of the lender's investment are also permitted under the loan instrument.

VA notes that RHS, in addition to including standard fees in its loan instrument, also addresses some of these fees in regulation. For example, RHS servicing regulations state that RHS may assess reasonable fees including a tax service fee, fees for late payments, and fees returned for insufficient funds (7 CFR 3550.153). In justifying the potential to charge late fees to its very low and low income borrowers, RHS explains that it recognizes its mission to provide supervised credit, but that it also believes a late fee encourages its clients to make payments on a timelier basis. See 61 FR 59763. Further, § 3550.156(a) explains that RHS borrowers are expected to meet a variety of obligations outlined in the loan documents, including maintaining the security property and paying hazard and flood insurance and other related costs when due. Paragraph (b) of the rule states that if a borrower fails to fulfill these obligations, RHS may obtain the needed service and charge the cost to the borrower's account. Accordingly, VA is similarly including reasonable fees established in loan instruments under this proposed rulemaking.

The loan fee required by 38 U.S.C. 3729 and the fees included in proposed 38 CFR 36.4528 and 36.4529 are not the only types of fees associated with vendee loans. There are other types of fees necessary for the origination and servicing of vendee loans that may be permitted under this rulemaking. As such, VA is proposing to add § 36.4530 to clarify for borrowers of vendee loans that they may incur fees associated with their financing, in addition to, and unaffected by, those fees specified in 38 U.S.C. 3729 and proposed §§ 36.4528 and 36.4529.

Other types of fees that that may be charged in connection with vendee loans are fees charged by third parties. These fees, which are also permitted in connection with the guaranteed loan benefit program, are not collected on behalf of the Secretary. These types of fees are collected to pay for goods or services such as termite inspections, hazard and force-placed insurance premiums, courier fees, tax certificates, and recorder's fees. They are standard in closing transactions, and borrowers of vendee loans would be expected to pay these fees for the goods and services provided by the third parties. VA is identifying these fees in this proposed rule to help clarify the types of expenses that may be incurred in connection with vendee financing and ensure that borrowers of vendee loans clearly understand the financial obligations that may be expected of them. The list of third-party fees in proposed 38 CFR 36.4530 is not exhaustive. Rather, it is meant to provide examples.

VA proposes a change to § 36.4500(c)(2) to clarify that all direct loans would be safe harbor qualified mortgages. VA's qualified mortgage rule was first published on May 9, 2014. See 79 FR 26620. Although VA intended to designate as qualified mortgages all VA direct loans, VA did not expressly include all authorities under which VA makes loans. Consequently, it might appear as if VA intentionally excluded some of VA's direct loans from qualified mortgage status.

To eliminate ambiguity, the proposed change would state expressly that any VA direct loan made by the Secretary pursuant to chapter 20 or 37 of title 38, U.S.C., is to be considered a safe harbor qualified mortgage. VA would also revise the authority citation for paragraph (c)(2) to include citations to 38 U.S.C. 2041, 3711, 3720, 3733, and 3761 in addition to the current citation to 38 U.S.C. 3710 and 15 U.S.C. 1639C(b)(3)(B)(ii). Again, this change is not intended to be substantive, but rather, would ensure the paragraph's authority reflects all of the different statutory authorities under which VA may make direct loans.

Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, and other advantages, distributive impacts, and equity). Executive Order 13563 (Improving Regulation and Regulatory Review) emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. Executive Order 12866 (Regulatory Planning and Review) defines a “significant regulatory action” requiring review by the Office of Management and Budget (OMB), unless OMB waives such review, as “any regulatory action that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this Executive Order.”

The economic, interagency, budgetary, legal, and policy implications of this regulatory action have been examined, and it has been determined not to be a significant regulatory action under Executive Order 12866. VA's impact analysis can be found as a supporting document at http://www.regulations.gov, usually within 48 hours after the rulemaking document is published. Additionally, a copy of the rulemaking and its impact analysis are available on VA's Web site at http://www.va.gov/orpm/, by following the link for VA Regulations Published from FY2004 to FYTD.

The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires agencies to prepare an assessment of anticipated costs and benefits before issuing any rule that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year. This proposed rule would have no such effect on State, local, and tribal governments, or on the private sector.

This proposed rule contains no provisions constituting a collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521).

This proposed rule would affect individuals and small businesses who choose to obtain a vendee loan from VA to finance the purchase of a VA-owned property rather than alternate financing. A party who wants to purchase a VA-owned property may choose whatever source of financing he wishes. Presumably the purchaser would select the least expensive financing option available, which may or may not be a VA vendee loan. VA does not believe that this proposed rule would impose any significant economic impact for the following reasons. Should the purchaser decide that the VA vendee program was not the most economically advantageous to the purchaser then he would obtain alternate financing. Parties would have to choose to be subject to the impact, if any, imposed by this rule.

Accordingly, the Secretary certifies that the adoption of this proposed rule would not have a significant economic impact on a substantial number of small entities as they are defined in the Regulatory Flexibility Act (5 U.S.C. 601-612). Therefore, under 5 U.S.C. 605(b), this rulemaking is exempt from the initial and final regulatory flexibility analysis requirements of sections 603 and 604.

The Catalog of Federal Domestic Assistance number and title for the program affected by this document is 64.114, Veterans Housing—Guaranteed and Insured Loans.

The Secretary of Veterans Affairs, or designee, approved this document and authorized the undersigned to sign and submit the document to the Office of the Federal Register for publication electronically as an official document of the Department of Veterans Affairs. Gina S. Farrisee, Deputy Chief of Staff, Department of Veterans Affairs, approved this document on October 18, 2016, for publication.

For the reasons set out in the preamble, VA proposes to amend 38 CFR part 36, subpart D as set forth below:

The revisions and addition read as follows: