HUD’s 2530 Previous Participation Clearance System Goes Electronic
 
November 19, 2003
 
La Fonte Nesbitt- Washington
Stephen Niles - Washington

Important Information for Current or Prospective Participants in HUD/FHA Programs

HUD’s 2530 Previous Participation Clearance System – HUD’s procedure for approving project owners, developers, managers, investors and others for participation in certain HUD programs – is being converted from its existing “paper-based” system to an electronic system. While the new electronic system is expected to expedite certain aspects of the 2530 clearance process, it also imposes some new and significant burdens on program participants. Below is a brief summary of the 2530 Previous Participation Clearance system,
and some of the key changes anticipated as a result of its conversion to an electronic system.

A. Summary of 2530 Previous Participation Process

HUD’s 2530 Previous Participation Clearance system is HUD’s method of determining whether the “past performance” of a “principal” (as defined by HUD), and other aspects of the principal’s record, justify approval of the principal for participation in certain types of HUD programs. Principals seeking approval for participation in such projects must complete HUD’s “Previous Participation Certification,” also referred
to as the “2530 Form.”

The types of projects/transactions subject to the 2530 filing requirements include, among others:

1.     Projects financed with mortgages insured under the National
        Housing Act (e.g., Section 221(d)(4) new construction and
        substantial rehabilitation loans, Section 223(f) acquisition
        or refinancing loans, etc.).

2.     Projects in which 20 percent or more of the units receive
        a subsidy in the form of (a) project-based Section 8, (b)
        interest reduction payments under Section 236 of the
        National Housing Act, and/or (c) rent supplement payments
        under Section 101 of the Housing and Urban Development
        Act of 1965.

3.     Projects financed under Section 202 of the Housing Act of
        1959 (elderly and handicapped).

4.     Purchase of a project subject to a HUD-insured or HUD-
        held mortgage loan, or purchase of a HUD-owned project.

5.     Proposed substitution or addition of a principal, or
        proposed participation by a principal in a different capacity
        from that previously approved for the same project, such as
        a limited partner that is becoming a general partner.

In general, the types of entities and individuals deemed principals for 2530 purposes include the following:

1.     An individual, joint venture, partnership, corporation,
        trust, nonprofit association, or any other public or private
        entity proposing to participate in a project as a sponsor,
        owner, prime contractor, turnkey developer, management
        agent, nursing home administrator or operator, packager
        or consultant.

2.     If the principal is a partnership, all general partners and
        each limited partner having a 25 percent or greater interest
        in the partnership.

3.     If the principal is a public or private corporation or govern-
        mental entity: (a) the president, vice president, secretary
        and treasurer and any other executive officers who are
        directly responsible to the board of directors or its equiva-
        lent, (b) all directors, and (c) each stockholder having a 10
        percent or greater interest. [1]

4.     Any “affiliates” of a principal – meaning, any person or
        business concern that directly or indirectly controls policy
        of a principal or has the power to do so. Affiliates also
        include persons and business concerns controlled by the
        same third party.

B. The Automated 2530 Filing System

As indicated above, HUD currently requires submission of
a “paper” 2530 Form. HUD’s new automated system, the so-called “Active Partners Performance System” (APPS), will only permit electronic filings. The new system is planned to be up and running on January 1, 2004. In fact, staff in HUD’s 2530 Office have said that they will no longer accept any paper
2530 filings after January 1, 2004.

We have our doubts about whether the automated system will be operational as of January 1, 2004. Many people in the 2530 Office, as well as the various HUD Field Offices located around the country, have not yet been trained on the new computer software for the APPS system. Nonetheless, given that HUD appears committed to staying as close to the January 1 deadline as possible, we recommend that you contact HUD and register to use the system as soon as possible. The person in charge of such registration in HUD’s 2530 Office is Jim Collins. He can be reached at 202-708-0614, extension 3279.

Once registered, you will receive a “Secure Systems ID and password” that are used to access the automated system and input the relevant information. You are required to identify a “Coordinator” and one or more “Standard Users” who will input the required information. The Coordinator is the system administrator for the entity making the filing. The Standard Users are additional people who can access the system and input information.

Information for the automated 2530 is input into a series of computer screens that follow the same format as the paper form. Although the system is supposed be streamlined, we have been advised by clients that it can be a very difficult and burdensome task.

HUD hasn’t published much guidance on the new automated system. However, HUD’s “APPS Quick Reference Guide,” which can be found at www.hud.gov, explains that there are four different types of 2530 submissions: (1) baseline, (2) property, (3) organization change, and (4) identity change. It also identifies the process by which business entities can register with HUD in order to begin using the automated system.

Initially, each entity participating in HUD projects will need to complete a “baseline” 2530 electronic filing identifying the principals of each entity that is likely to apply to HUD in the future for 2530 clearance for one or more projects. Once a particular project is identified, a “property” 2530 filing must be submitted requesting 2530 clearance for an entity to play a specific role (e.g., limited partner, management agent) in that project. The property filing will automatically incorporate all of the information from the baseline filing. Therefore,
it should not be necessary to re-submit any of the baseline information.

C. Material Changes in the 2530 Filing Requirements

None of HUD’s written guidance issued to date indicates that there will be any material changes in the 2530 filing requirements. However, staff in HUD’s 2530 Office claim that the new system will make a few significant changes to the old HUD procedures relating to 2530 filings and clearances.

Death of “Three-Tier Rule”

Under HUD’s Previous Participation Handbook (HUD Handbook 4065.1, REV-1) and current HUD practice, an applicant seeking 2530 clearance must make disclosure of principals “through the third tier.” For example, if a project is owned by a partnership, all principals in the partnership must be listed on the 2530 Form – this is tier one. If any of the principals listed in tier one are entities, such as corporations or partnerships, the principals in these entities must be listed – this is tier two. And if any of the principals listed in tier two are entities, the principals in these entities must be listed as well – this is tier three.

According to HUD staff, under the new electronic filing system there will be no limit on the number of tiers of principals that must be identified as part of the 2530 filing. Instead, HUD staff claim that applicants will have to identify all tiers until they get down to only “natural persons.” Given the complexity of many ownership structures with multiple layers of entities, such as tax credit partnerships, this requirement may prove to be extremely burdensome. Moreover, in many instances it may result in the disclosure of information that is irrelevant for purposes of enabling HUD to determine whether any “bad actors” are seeking to participate in HUD programs.

Short-Form 2530

HUD staff have advised us that entities with large numbers of officers and directors may request HUD’s approval to file something akin to a short-form 2530 in order to limit the number of officers and directors that must be identified. Without a short-form filing, some companies would be forced to list hundreds of persons with the title “vice president,” for example. Although no specific written guidance has been provided, HUD staff indicate that the entity will be expected to include in such filing: (1)those officers/directors "responsible for the success of the overall organization,” and (2) those officers/directors “who have responsibility for oversight of the particular investment.” For parties who may want to use a short-form 2530, we recommend that you work with your legal counsel and HUD to reach agreement on which officers and directors will need to be identified as part of the filing.

2530 Flags

HUD Field Offices may input a “flag” in HUD’s 2530 system if a project or program participant fails to comply with certain HUD requirements. For example, a flag may result due to a default on a HUD-insured mortgage loan, an unacceptable physical inspection, or a HUD Regulatory Agreement violation. In the past, many program participants did not know a 2530 flag had been placed in HUD’s system until they submitted a new request for 2530 clearance. While HUD often provided letters indicating that a particular situation may affect a party’s future 2530 clearance, HUD often did not specifically notify the participant that a flag had actually been entered into the 2530 system. According to HUD staff, the new system will allow principals to regularly review their 2530 filings on-line and confirm what 2530 flags, if any, have been filed or remain in effect. According to HUD officials, the new automated system will allow HUD to input information that indicates when issues relating to a particular 2530 flag have been resolved to HUD’s satisfaction. While the 2530 flags may be retained in the system for historical purposes, the resolved flags should not, at least in theory, prevent a participant from obtaining future 2530 clearance.

Less Filling, Less Time

Finally, as you might imagine, HUD’s staff indicates that the new automated system will greatly reduce the amount of paperwork that a program participant will need to submit to HUD. Also, they insist that the automated system will reduce by at least 50 percent the time period for HUD to complete its review of individual 2530 clearance requests. Only time will tell.

Important Reminder
 

Again, HUD’s adoption of an automated 2530 system may, ultimately, expedite the 2530 clearance process. However, we anticipate that the initial completion of the “screens” for the baseline and property 2530s will likely prove time-consuming and confusing for many program participants. Also, we expect that the elimination of the “three-tier” rule will further complicate a number of 2530 filings for ownership structures with multiple layers of entities. We strongly urge you, therefore, to begin the process of coordinating the completion of the new automated 2530s with HUD as soon as possible.

For more information, e-mail Stephen Niles or La Fonte Nesbitt at stephen.niles@hklaw.com or lafonte.nesbitt@hklaw.com, respectively, or call the Washington, D.C. office at 202-955-3000 or
call toll free, 1-888-688-8500.

__________________________

1. The HUD regulations do not expressly identify which persons/entities are principals of a limited liability company. However, in our experience, HUD has required disclosure of any member-manager, any member with governance interests equaling or exceeding 10 percent, and any member with financial interests exceeding 25 percent.