HOTMA Final Rule – Overview of Program Changes

The Department of Housing & Urban Development (HUD) has released a Final Rule implementing the Housing Opportunity Through Modernization Act of 2016 (HOTMA). This final rule has not yet been published in the Federal Register. Publication in the Federal Register will establish the effective dates of the rule.

 The Housing Opportunity Through Modernization Act (HOTMA) was signed into law on July 29, 2016, amending many aspects of Multifamily Housing programs (as well as programs administered through the Offices of Public and Indian Housing and Community Planning and Development). HOTMA was intended to streamline processes and reduce burdens on housing providers. On September 17, 2019, HUD issued a proposed rule to update its regulations according to HOTMA’s statutory mandate. The final rule, published on January 9, 2023, considers public comment received on the proposed rule and provides additional guidance for implementing Sections 102, 103, and 104 of HOTMA.

Which Programs will be Affected by the Final Rule?

 The Section 8 PBRA (including RAD), Section 202/811 PRAC, 202/8, 202/162 PAC, Senior Preservation Rental Assistance Contract (SPRAC), and Section 811 Project Rental Assistance (811 PRA) programs will see changes due to HOTMA.

This is the first in a series of articles I will write on the sweeping changes that will be made to HUD affordable housing programs. This article will focus on some of the “definitional” changes made to the programs, with follow-up articles on specific areas, including income, assets, HOME program changes, Housing Trust Fund changes, and changes that affect HOPWA, Section 202 and 811, public housing, and general requirements.

This final rule implements a number of definitional changes. One particularly important change is the definition of “earned income.” In this final rule, HUD is expanding the definition of “earned income” to explain that “transfer payments” (which are not included in earned income) mean payments made or income received in which no goods or services are being paid for. This will include welfare, social security, and certain governmental subsidies.

HUD has also provided a precise definition of “unearned income,” which is essentially any income other than income from employment. The final rule specifies that the term “unearned income” is broad, encompassing any annual income that is not earned income.

HUD is revising the definition of “medical expenses” to be “health and medical care expenses” consistent with the language used in HOTMA, and to reflect the IRS definition of the term. The final rule adds “long-term care premiums” as an example of what is included in the definition of health and medical care expenses. This conforms the final regulation to guidance that was already in the HUD Handbook 4350.3, which states that “long-term care premiums” are examples of deductible health and medical care expenses.

With regard to assets, HUD clarifies that net family assets do not include the value of “non-necessary” items of personal property with a total combined value of $50,000 or less, to be adjusted annually by an inflation factor. HUD will issue formal guidance – possibly in Change 5 of 4350.3 – to assist owners/agents (O/As) in determining whether an item is a “necessary item of personal property” or whether the value of the item should be included in calculating the value of all non-necessary items of personal property for the $50,000 threshold. The definition of net family assets also excludes Federal tax refunds or refundable tax credits for a period of 12 months after receipt by the family. The final rule also indicates that non-revocable trusts will not be included as an asset as long as the Trust is not within the control of a member of the household. This indicates that voluntarily setting up a non-revocable trust may no longer be considered an asset disposed of for less than fair market value. Finally, HUD is excluding as an asset the value of any “baby bond” account created, authorized, or funded by Federal, State, or local government.

HUD is also narrowing the definition of “nonrecurring income.” Since this type of income is excluded, HUD is including definitions for “day laborer,” “independent contractor,” and “seasonal worker,” to assist owners in better determining what income must be included.

HUD provides more detail relating to the status of foster children and adults. While foster adults and foster children are members of the household (and therefore will be considered when determining appropriate unit size and utility allowance), they are not considered members of the family for purposes of determining either annual and adjusted income or net family assets, nor are the assets of foster adults or children considered for purposes of the asset limitations in HUD programs. Since the HUD Office of Multifamily Housing has treated foster children and adults as family members, this revised definition will change the treatment of foster children and adults. In other words, these individuals will not count as household members for income purposes, similar in nature to the treatment of a live-in aide. This change eliminates the program quirk that allowed a family with a child in foster care and the foster care family to both claim the child as a household member. Handbook 4350.3 will be updated to reflect this new rule.

The new rule provides additional guidance relative to over-income families in public housing. Such families will be permitted to remain in public housing as long as they pay an “alternative non-public housing rent.” Such families will no longer be considered public housing program participants.

Obviously, these changes are complex and far-reaching. Future articles will go into detail on the major elements of the final rule in order to simplify what is likely to be a year-long transition to the new rules.