82 FR 24377 - Proposed Changes to the Methodology Used for Estimating Fair Market Rents

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Federal Register Volume 82, Issue 101 (May 26, 2017)

Section 8(c)(1) of the United States Housing Act of 1937 requires the Secretary to publish FMRs periodically, but not less than annually, adjusted to be effective on October 1 of each year. The primary uses of FMRs are to determine payment standards for the Housing Choice Voucher (HCV) program, to determine initial renewal rents for some expiring project-based Section 8 contracts, to determine initial rents for housing assistance payment contracts in the Moderate Rehabilitation Single Room Occupancy program, and to serve as rent ceilings for rental units in both the HOME Investment Partnerships program and the Emergency Solutions Grants program. HUD also uses FMRs in the calculation of maximum award amounts for Continuum of Care grantees and in the calculation of flat rents for Public Housing units. In furtherance of that effort, HUD proposes several methodological changes in this notice and seeks public comment on the proposed changes.

[Federal Register Volume 82, Number 101 (Friday, May 26, 2017)]
[Notices]
[Pages 24377-24381]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-10907]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-6021-N-01]


Proposed Changes to the Methodology Used for Estimating Fair 
Market Rents

AGENCY: Office of the Assistant Secretary for Policy Development and 
Research, HUD.

ACTION: Notice of Proposed Material Changes for Estimation of Fair 
Market Rents (FMRs).

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SUMMARY: Section 8(c)(1) of the United States Housing Act of 1937 
requires the Secretary to publish FMRs periodically, but not less than 
annually, adjusted to be effective on October 1 of each year. The 
primary uses of FMRs are to determine payment standards for the Housing 
Choice Voucher (HCV) program, to determine initial renewal rents for 
some expiring project-based Section 8 contracts, to determine initial 
rents for housing assistance payment contracts in the Moderate 
Rehabilitation Single Room Occupancy program, and to serve as rent 
ceilings for rental units in both the HOME Investment Partnerships 
program and the Emergency Solutions Grants program. HUD also uses FMRs 
in the calculation of maximum award amounts for Continuum of Care 
grantees and in the calculation of flat rents for Public Housing units. 
In furtherance of that effort, HUD proposes several methodological 
changes in this notice and seeks public comment on the proposed 
changes.

DATES: Comment Due Date: June 26, 2017.

ADDRESSES: HUD invites interested persons to submit comments regarding 
the proposed changes to the calculation of the FMRs to the Regulations 
Division, Office of General Counsel, Department of Housing and Urban 
Development, 451 Seventh Street SW., Room 10276, Washington, DC 20410-
0001. Communications must refer to the above docket number and title 
and should contain the information specified in the ``Request for 
Comments'' section. There are two methods for submitting public 
comments.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451

[[Page 24378]]

7th Street SW., Room 10276, Washington, DC 20410-0500. Due to security 
measures at all federal agencies, however, submission of comments by 
mail often results in delayed delivery. To ensure timely receipt of 
comments, HUD recommends that comments submitted by mail be submitted 
at least two weeks in advance of the public comment deadline.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow 
instructions provided on that site to submit comments electronically.

    Note:  To receive consideration as public comments, comments 
must be submitted through one of the two methods specified above. 
Again, all submissions must refer to the docket number and title of 
the notice.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications regarding this notice submitted to HUD will 
be available for public inspection and copying between 8 a.m. and 5 
p.m. weekdays at the above address. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the public 
comments must be scheduled by calling the Regulations Division at 202-
708-3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number through TTY by calling the 
Federal Relay Service at 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Questions on this notice may be 
addressed to Marie L. Lihn or Peter B. Kahn of the Economic and Market 
Analysis Division, Office of Economic Affairs, Office of Policy 
Development and Research, HUD Headquarters, 451 7th Street SW., Room 
8208, Washington, DC 20410; telephone number 202-402-2409 (this is not 
a toll-free number), or they may be reached at [email protected]. Persons 
with hearing or speech impairments may access HUD numbers through TTY 
by calling the Federal Relay Service at 800-877-8339 (toll-free). For 
technical information on the methodology used to develop FMRs or a 
listing of all FMRs, please call the HUD USER information line at 800-
245-2691 (toll-free) or access the information on the HUD USER Web site 
https://www.huduser.gov/portal/datasets/fmr.html.
    Electronic Data Availability. This Federal Register notice will be 
available electronically from the HUD User page at https://www.huduser.gov/portal/datasets/fmr.html. Federal Register notices also 
are available electronically from https://www.federalregister.gov/, the 
U.S. Government Printing Office Web site.
    Complete documentation of the impact of these methodology changes 
and calculation of hypothetical FY 2017 FMRs \1\ with these changes are 
available at https://www.huduser.gov/portal/datasets/fmr.html. Small 
Area FMRs for all metropolitan FMR areas incorporating these material 
changes in methodology have also been calculated and are available at: 
https://www.huduser.gov/portal/datasets/fmr/smallarea/index.html. 
Changes to FMR calculations prescribed in the Small Area FMR rule (81 
FR 80567) are not incorporated into the calculation of hypothetical FY 
2017 FMRs.
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    \1\ HUD will provide a set of FY 2017 FMRs calculated with all 
the methodological changes proposed in this notice for the public to 
review. The FMRs with all the proposed changes will be referred to 
as FY 2017 hypothetical FMRs.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 8 of the United States Housing Act of 1937 (USHA) (42 
U.S.C. 1437f) authorizes housing assistance to aid lower-income 
families in renting safe and decent housing. Housing assistance 
payments are limited by Fair Market Rents (FMRs) established by HUD for 
different geographic areas. In the Housing Choice Voucher (HCV) 
program, the FMR is the basis for determining the ``payment standard 
amount'' used to calculate the maximum monthly subsidy for an assisted 
family. See 24 CFR 982.503. HUD also uses the FMRs to determine initial 
renewal rents for some expiring project-based Section 8 contracts, 
initial rents for housing assistance payment contracts in the Moderate 
Rehabilitation Single Room Occupancy program, rent ceilings for rental 
units in both the HOME Investment Partnerships program and the 
Emergency Solution Grants program, calculation of maximum award amounts 
for Continuum of Care grantees, and calculation of flat rents in Public 
Housing units. In general, the FMR for an area is the amount that would 
be needed to pay the gross rent (shelter rent plus utility costs) of 
privately owned, decent, and safe rental housing of a modest (non-
luxury) nature with suitable amenities and is set at the 40th 
percentile of the distribution of gross rents for recent movers. HUD's 
FMR calculations represent HUD's best effort to estimate the 40th 
percentile gross rents paid by recent movers into standard quality 
units in each FMR area.
    In recent years, commenters have expressed a number of concerns 
about FMRs. Some have pointed out that FMRs are a primary operating 
parameter in the HCV program and that extreme year-to-year fluctuations 
in FMRs can cause difficulties in program operations. Additionally, 
concerns have been raised that the FMRs are either not timely enough or 
not based on enough local information. HUD is proposing several changes 
to the manner in which HUD calculates FMRs in order to improve the FMR 
estimates and to address the concerns of commenters noted at the 
beginning of this paragraph.

II. Procedures for Developing FMRs

    Section 8(c)(1) of the USHA requires the Secretary of HUD to 
publish FMRs periodically, but not less frequently than annually. 
Section 8(c)(1)(B) as amended by the Housing Opportunities Through 
Modernization Act of 2016 (HOTMA) (Pub. L. 114-201, approved July 29, 
2016), requires that HUD publish for comment in the Federal Register a 
notice of proposed material changes in the methodology for estimating 
FMRs and a notice containing HUD's final decisions regarding such 
proposed substantial methodological changes and responses to public 
comments.
    On August 26, 2016, HUD announced the publication of the FY 2017 
FMRs, requested comments on the FY 2017 FMRs, and requested public 
comment on what should be considered ``material changes'' in FMR 
estimation methods for the purpose of triggering public notice and 
comment under HOTMA (81 FR 58952). Following a review of public comment 
on what should be considered ``material changes'', HUD determined that 
initially any change in FMR calculation methods should be subject to 
public comment. HUD, thus, responded to the comments in a notice 
published March 30, 2017, stating that HUD would not take a position on 
what FMR changes would be considered material and that HUD would 
initially

[[Page 24379]]

request comment on all FMR method changes (82 FR 15711). While HUD 
recognizes that year-to-year fluctuations in FMRs may cause operational 
difficulties in program operations, HUD seeks to improve the FMR 
calculation methods, using as much local information as possible while 
trying to preserve stability in the estimates. In an effort to address 
these concerns and recognizing that addressing one issue may impact 
another issue, HUD proposes several methodological changes and requests 
public comments on those changes through this notice, in compliance 
with HOTMA.

III. FMR Methodology Changes

    This section provides a brief overview of how HUD computed the FY 
2017 FMRs and three proposed changes to this methodology.
    To calculate the FY 2017 FMRs, HUD assigned each area a two-bedroom 
standard quality base rent from the 2010-2014 5-year American Community 
Survey (ACS) tabulations. Each base rent was updated with a recent 
mover adjustment factor calculated from the 1-year 2014 ACS data. The 
2014 ACS recent mover data is adjusted to be ``as of'' FY 2017 using 
local or regional Consumer Price Index (CPI)-measured changes in gross 
rents measured between 2014 and 2015 and a nationally forecasted trend 
factor measuring the expected growth in gross rents from 2015 to FY 
2017. For complete information on how HUD determines FMR areas, and on 
how HUD derives each area's FY 2017 FMR, see the online documentation 
at https://www.huduser.gov/portal/datasets/fmr.html#2017_query.
    The following is a summary of the two general changes to the 
calculation methods HUD is proposing to incorporate into the 
calculation of FY 2018 FMRs and a third change specific to the 
calculation of Small Area FMRs.
    (1) The first method change is in the manner in which HUD selects 
American Community Survey (ACS) estimates for use in the calculation of 
FMRs. Currently, HUD uses an ACS estimate if the error of the estimate 
is less than half the size of the estimate itself. HUD is proposing to 
require that each ACS estimate used in the calculation of FMRs be based 
on at least one hundred (100) survey responses. In other words, this 
notice proposes to couple the error ratio criterion with an additional 
review of the number of survey observations supporting the ACS 
estimate. If the survey data does not meet both criteria, HUD will use 
an average of the three most recent years of data.
    (2) The second method change focuses on the way that HUD calculates 
the ``recent mover factor.'' Currently, HUD calculates the ``recent 
mover factor'' based on a geographic area that is sometimes larger than 
an FMR area when the two-bedroom recent mover rents are not 
statistically reliable. HUD is proposing the use of ``all-bedroom'' 
recent mover rents as the basis for the recent mover factor when the 
two-bedroom recent mover rents are not statistically reliable (i.e., 
100 or more observations and a margin of error that is smaller than 
half of the estimate itself) before moving to a larger encompassing 
geography for the recent mover factor.
    (3) Finally, HUD is proposing to use the gross rent estimates 
calculated by ZIP Code Tabulation Areas (ZCTAs), where statistically 
reliable, to estimate Small Area FMRs (SAFMRs) directly rather than the 
``ratio'' method HUD used in FY 2017 and earlier SAFMR estimates.

1. FY 2018 FMR Proposed Changes

A. Base Year Rent Changes
    Since FY 2012, HUD has used the 5-year ACS data to determine base 
rents for most FMR areas. HUD used 2010-2014 ACS data, released in 
December 2015, in the FY 2017 FMR calculations. HUD evaluates the 
statistical validity of the ACS data before using the information in 
the calculation of FMRs. HUD proposes to update these statistical 
reliability criteria. Previously, HUD used ACS estimates for two-
bedroom unit rents within the FMR area where the margin of error of the 
estimate was less than half the size of the estimate itself (i.e., a 
margin of error of less than 50 percent). HUD now proposes to couple 
this ``margin of error'' test with an additional test based on the 
number of survey observations supporting the estimate. The Census 
Bureau does not provide HUD with an exact count of the number of 
observations supporting the ACS estimate; rather, the Census Bureau 
provides HUD with categories of the number of survey responses 
underlying the estimate, including whether the estimate is based on 
more than 100 observations. Using these categories, HUD proposes that 
ACS rent estimates must be based on at least 100 observations in order 
to be used as base rents.
    For areas in which the 5-year ACS data for two-bedroom, standard 
quality gross rents do not pass the statistical reliability tests 
(i.e., have a margin of error greater than 50 percent or fewer than 100 
observations), HUD will use an average of the base rents over the three 
most recent years (provided that there is data available for at least 
two of these years),\2\ or if such data is not available, using the 
two-bedroom rent data within the next largest geographic area, which 
for a non-metropolitan area would be the state non-metro area rent 
data.
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    \2\ Using FY 2017 as an example, the three years of ACS data in 
question are 2012, 2013 and 2014. The 2012 data are adjusted to be 
denominated in 2014 dollars using the growth in CPI-based gross 
rents measured between 2012 and 2014. Similarly, the 2013 gross rent 
data is adjusted to 2014 denominated dollars using the growth in 
CPI-based gross rents measured between 2013 and 2014.
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B. Recent Mover Factor Changes
    HUD is proposing changes to the calculation of the recent mover 
factor that include a change to the statistical reliability assessment 
of ACS recent mover data (consistent with the change for base rents) 
and a change in the data used when the number of ``two-bedroom'' 
observations within the FMR area is insufficient. The following 
describes the current process for calculating the recent mover factor, 
and the proposed revisions.
    HUD historically based FMRs on gross rent data for recent movers 
(those who have moved into their current residence in the last 24 
months). However, due to the way in which the Census Bureau constructs 
the 5-year ACS data, HUD developed a new methodology for using recent 
mover data to calculate FMRs in FY 2012. As of FY 2012, HUD assigns all 
areas a base rent, which is the two-bedroom, standard quality 5-year 
ACS gross rent estimate, and then applies a recent mover factor in 
order to calculate recent mover gross rents and publish them in 
accordance with 24 CFR 888.113. HUD calculates the recent mover factor 
as the ratio of the 1-year recent mover gross rent to the 5-year 
standard quality gross rent for the recent mover factor area. HUD does 
not allow recent mover factors to reduce the standard quality base 
rent; therefore, if the 5-year standard quality rent is larger than the 
comparable 1-year recent mover rent, the recent mover factor is set to 
1. Applying the recent mover factor to the standard quality base rent 
produces a recent mover two-bedroom gross rent for the FMR area that is 
``as of'' the most recent ACS year.
    In general, HUD has used the 1-year ACS-based two-bedroom recent 
mover gross rent estimate from the smallest geographic area 
encompassing the FMR area for which the estimate is statistically 
reliable to calculate the recent mover factor.\3\ HUD calculates

[[Page 24380]]

some areas' recent mover factors using data collected solely within the 
FMR area. However, HUD currently bases other areas' recent mover 
factors on larger geographic areas if this is necessary to obtain 
statistically reliable estimates.
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    \3\ HUD currently assesses recent mover estimates to be 
statistically reliable if the margin of error of the estimate is 
smaller than half the size of the estimate itself (i.e., less than 
50%).
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    When data from a larger geographic unit is required, data from 
progressively larger areas is considered until a statistically reliable 
result is obtained. The order of consideration depends on the type of 
area for which the recent mover factor is being calculated. For 
metropolitan FMR areas that are subareas of larger metropolitan areas, 
the order is the FMR area, the metropolitan area, the aggregated 
metropolitan parts of the state, and the entire state. Metropolitan 
areas that are not divided follow a similar progression from FMR area 
data, to data from the aggregated metropolitan parts of the state, to 
state-level data. In non-metropolitan areas, HUD bases the recent mover 
factor on data from within the FMR area, or from the aggregated non-
metropolitan parts of the state, or if that is not available, from the 
whole state.
    HUD proposes to modify the test of statistical reliability for ACS 
recent mover data in the same manner as the proposed change discussed 
under base rents. In addition, when an FMR area does not have 
statistically reliable two-bedroom data, HUD proposes that before using 
data from a larger geographic area to calculate the recent mover 
factor, HUD would first check to see if the data aggregated across 
``all-bedroom'' count units is statistically reliable for the FMR area. 
If so, HUD will use the ``all-bedroom'' data to calculate the recent 
mover factor instead of moving to the next larger geography. 
Incorporating ``all-bedroom'' rents into the recent mover factor 
calculation when statistically reliable two-bedroom data is not 
available preserves the use of local information to the greatest extent 
possible. However, where statistically reliable ``all-bedroom'' data is 
not available, HUD will continue to use data from the larger 
geographical area(s), as described above.

2. Small Area Fair Market Rents Methodology Changes

    Currently, HUD calculates Small Area FMRs \4\ using a rent ratio 
determined by dividing the median gross rent across all bedrooms for 
the Small Area ZCTAs by the similar median gross rent for the parent 
metropolitan area of the ZIP code. In order to maintain stability in 
the rent ratio, HUD averages the three most current rent ratios and 
multiplies this averaged rent ratio by the most recent two-bedroom FMR 
for the parent metropolitan area. HUD is proposing updates to the 
calculation of Small Area FMRs that are consistent with the other 
proposed methodology changes in this Notice.
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    \4\ More information regarding the history of Small Area FMRs, 
including information concerning the Small Area FMR Demonstration is 
available at: https://www.huduser.gov/portal/datasets/fmr/smallarea/index.html.
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A. Alternative to the Rent Ratio Method
    In order to use more local data, HUD is proposing to calculate 
Small Area FMRs directly from the standard quality gross rents provided 
to HUD by the Census Bureau for ZCTAs, when such data is statistically 
reliable, instead of using the current rent ratio calculation. For each 
ZCTA with statistically reliable gross rent estimates, using the 
expanded test of statistical reliability proposed elsewhere in this 
notice (i.e., estimates with margins of error ratios below 50 percent 
and based on at least 100 observations), HUD will calculate a two-
bedroom equivalent 40th percentile gross rent using either one-, two-, 
or three-bedroom gross rent data. The order preference for using the 
gross rent distribution data would be: Two-bedroom gross rents, one-
bedroom gross rents, and three-bedroom gross rents. If either the one-
bedroom or three-bedroom gross rent data is used because the two-
bedroom gross rent data is not statistically reliable, the one-bedroom 
or three-bedroom 40th percentile gross rent will be converted to a two-
bedroom equivalent rent using the bedroom ratios for the ZCTA's parent 
metropolitan area. In order to add increased stability to these Small 
Area FMR estimates, HUD will average the latest three years of gross 
rent estimates.\5\ For ZCTAs without usable gross rent data, HUD will 
continue to calculate Small Area FMRs using the rent ratio method 
currently employed.
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    \5\ For example, for (hypothetical) FY 2017 FMRs using this 
methodology, HUD would average the gross rents from 2012, 2013 and 
2014 5-Year ACS estimates. The 2012 and 2013 gross rent estimates 
would be adjusted to 2014 dollars using the metropolitan area's 
gross rent CPI adjustment factors.
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    For ZCTAs relying on the rent ratio method (i.e., in small areas 
where the standard quality median gross rent is not statistically 
reliable), HUD will continue its current practice of substituting the 
median gross rent for the county containing the ZCTA in the numerator 
of the rent ratio calculation. The denominator remains the median gross 
rent for the ZCTA's parent metropolitan area (discussed below in 
section B). HUD will continue to multiply this rent ratio by the 
current two-bedroom rent for the entire metropolitan area containing 
the small area to generate the current year two-bedroom rent for the 
small area. HUD will continue to use a rolling-average of ACS data in 
calculating the Small Area FMR rent ratios. HUD believes coupling the 
most current data with previous years' data minimizes excessive year-
to-year variability in Small Area FMR rent ratios due to sampling 
variance. Therefore, HUD will update the rent ratios each year.
B. ZCTA to Metropolitan Area Link
    HUD is also proposing to change the linkage between a ZCTA and its 
parent metropolitan area. Currently, HUD links each ZCTA to its parent 
OMB-defined Core Based Statistical Area (CBSA). Going forward, HUD 
proposes to link each ZCTA to its published FMR area; that is, each 
ZCTA will be linked to its parent HUD Metropolitan Fair Market Rent 
Area (HMFA), if it exists. If no parent HUD FMR exists, the ZCTA will 
continue to be linked to its parent CBSA. This change is being proposed 
to take advantage of the more localized recent mover factors for 
subareas of OMB-defined metropolitan areas when available.
    New, hypothetical FY 2017 Small Area FMRs incorporating all 
proposed calculation changes are available at https://www.huduser.gov/portal/datasets/fmr/smallarea/index.html.

IV. Request for Public Comments on Changes

    HUD continually strives to calculate FMRs that can serve as an 
effective program parameter while meeting the statutory requirement to 
use ``the most recent available data.'' Therefore, HUD is requesting 
specific comments on these methodological changes, noting that HUD's 
objectives are to: (1) Limit volatility in annual FMR changes by adding 
an observation count requirement of at least 100, and by averaging 
prior year rent data when the new requirements for statistical 
reliability are not met; (2) improve the use of local data in 
calculating the recent mover factor by allowing the use of ``all-
bedroom'' observations in the calculation of the recent mover factor 
before using data from a larger area; and (3) involve the use of more 
local data in the calculation of Small Area FMRs when possible, 
including by using ZCTA gross rents and making changes to the rent 
ratio calculation.
    These methodology changes are not monodirectional; for example, the

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application of a stricter statistical significance test may lower rents 
in an area, while the use of the more local ``all-bedroom'' recent 
mover factor may increase rents in the same area.
    In addition, HUD solicits comments on the possible effects of 
changes in FMR methodology on the achievement of fair housing and other 
civil rights goals and objectives, including increasing mobility of 
low-income persons to areas of high opportunity and lower poverty, and 
whether other methodological changes might better ensure appropriate 
fair housing outcomes.
    HUD respectfully requests that comments filed in response to this 
notice remain focused on the proposed calculation changes. Hypothetical 
FY 2017 FMRs and Small Area FMRs, using these new methodology changes, 
are published at https://www.huduser.gov/portal/datasets/fmr.html and 
https://www.huduser.gov/portal/datasets/fmr/smallarea/index.html, 
respectively.

V. Environmental Impact

    This notice proposes changes in the way FMRs are calculated and 
does not constitute a development decision affecting the physical 
condition of specific project areas or building sites. Accordingly, 
under 24 CFR 50.19(c)(6), this notice is categorically excluded from 
environmental review under the National Environmental Policy Act of 
1969 (42 U.S.C. 4321).

    Dated: May 4, 2017.
Matthew E. Ammon,
General Deputy Assistant Secretary for Policy Development and Research.
[FR Doc. 2017-10907 Filed 5-25-17; 8:45 am]
 BILLING CODE 4210-67-P