Article | RD Issues HOTMA Guidance

The August RD HOTMA Unnumbered Letter (UL) can be found HERE.

• Please see the Helpful Hint before the Summary of the FAQ Attachment A to the UL below for important RD-specific applications of HOTMA and a vital question relating to the treatment of unborn children and income limits. 

Bonus: Take a quiz on the below HERE.

Rural Development has published an Unnumbered Letter (UL) dated August 19, 2024, that discusses the Housing Opportunity Through Modernization Act (HOTMA) impact on RD programs. The UL consists of an overview of HOTMA changes to income and asset calculation as they will apply to RD households and an anticipated timeline for implementation of the changes.

Effective January 1, 2025, all tenant certifications must implement the changes outlined in the UL (and the FAQ attached to the UL). Each household is NOT expected to be recertified on January 1, 2025. Instead, new move-ins and tenant recertifications effective January 1, 2025, or later will follow HOTMA regulations. Before January 1, 2025, RD will not penalize multifamily owners for file errors related to HOTMA during Supervisory reviews.

In October 2024, RD plans to publish a new Form RD 3560-8 Tenant Certification that must be used for all tenant certifications effective on or after January 1, 2025. RD will also update Handbook HB-2-3560 to reflect the HOTMA changes found in 24 CFR 5.609(a) and (b) and 24 CFR 5.611.

UL Highlights

The changes in HOTMA found at 24 CFR 5.609(a) and (b) and 24 CFR 5.611 affect the RD Multifamily Housing portfolio. Due to the September 29, 2023, and February 2, 2024, HUD HOTMA joint implementation notices, RD’s implementation of these changes will follow the projected timeline outlined below:
 

• September 2024 | RD will provide updated Management Interactive Network Connection (MINC)/Industry Interface specifications for software providers. New specifications will be posted on the MINC home page.
   
• October 2024 | RD will publish updated Form RD 3560-8 Tenant Certification. The updated Form will allow for the changes to asset calculations, adjusted income (deductions), as well as additional options for gender and will include an updated Form Manual Insert (Instructions). The updated Form must be used for all tenant certifications with an effective date of January 1, 2025, or later. The current Form RD 3560-8 will remain available for use with tenant certifications effective prior to January 1, 2025.
  • RD will also publish Handbook, HB-2-3560 updates to reflect HOTMA changes found in 24 CFR 5.609(a) and (b) and 24 CFR 5.611. 
• January 2025 | Multifamily Information Systems (MFIS) and MINC systems will be updated to correctly account for the asset and deduction changes.

All tenant certifications effective January 1, 2025, and later must implement

• New calculations for income from assets.
• Dependent deductions will follow HUD’s annually published deduction. For calendar year 2025, this amount remains at $480 per dependent.
• Elderly deductions will follow HUD’s annually published deduction. For calendar year 2025, this will increase from $400 to $525 per household.
• Health and Medical and disability expense phase-in. For new move-ins, combined health and medical expenses and disability assistance expenses exceeding 10 percent of the household’s annual income can be deducted from annual income. Before HOTMA, the threshold was 3 percent of the family’s annual income. For existing tenants completing their annual recertification:
  • Phased-In Relief: Households that qualified for the 3 percent deduction threshold based on their most recent income certification prior to January 1, 2025, will begin receiving the 24-month phased-in relief at their next annual recertification, which occurs on or after January 1, 2025. Households who receive phased-in relief will have eligible expenses deducted that exceed 5 percent of annual income for 12 months. Twelve months after the 5 percent phase-in began, households will have eligible expenses deducted that exceed 7.5 percent of annual income for the immediately following 12 months. After the household has completed the 24 months phase-in at the lower thresholds as described above, the family will remain at the 10 percent threshold, unless the family qualifies for relief under the general hardship relief provision. (See attached Frequently Asked
    Questions document.)
  • If a family moves from one RD property to another RD property, the
    phased-in relief may continue. Owners must establish their own policy if they choose to continue the phased-in hardship relief for households who were eligible for relief as of January 1, 2025, and who are treated as new admissions at their property(s).
• A current checking account statement will be sufficient to verify a checking account balance. HOTMA eliminated the requirement to use a 6-month average balance for checking accounts.
• The actual amount of child support/alimony received by a household will be included in income. The court-ordered amount will no longer be considered.
• Annual income exclusions have been updated which include, but are not limited to, changes related to student financial aid, non-recurring income, payments from trusts, and non-cash contributions.
• HOTMA updates the definition of net family assets, including:
  • Changes to what is excluded when considering net family assets, and
  • Differentiates between necessary personal property and non-necessary personal property.
  • HOTMA changes to the calculation of income from assets that RD will implement:
    • The threshold for calculating imputed income from assets is increasing from $5,000 to $50,000*. 
    • When assets exceed $50,000*, imputed income must be calculated but only on assets where no actual income can be computed. If the actual income can be computed for some assets but not all assets, determine the actual income
      for those assets, then calculate the imputed income for all remaining assets where the actual income cannot be determined, and combine both amounts for total income from assets.

Before January 1, 2025, RD will not penalize multifamily owners for file errors related to HOTMA during Supervisory reviews. Additionally, RD acknowledges that properties with layered financing have faced additional challenges related to the implementation requirements of different funding sources. At properties with layered financing, the following are examples (that are not all-inclusive) where RD will not penalize owners for issues during calendar year 2024:

• Passbook saving rate change | RD implemented the change in passbook savings rate from 0.06% to 0.4% effective January 1, 2024. MFIS & MINC were updated to calculate imputed income based on 0.4%. HUD and other financing agencies have allowed owners to delay this change up to January 1, 2025, when the prevailing rate will change to .45%. For tenants with assets over $5,000, this has most likely caused a difference in annual income calculations. The file review for the tenant would be noted as acceptable. 
• Asset threshold increase from $5,000 to $50,000, as adjusted | The MINC system will be updated to allow for this change effective January 1, 2025. If a property with layered financing was required to make this change before January 1, 2025, the MINC system will not allow for those changes to be submitted accurately. The file review for the tenant would be noted as acceptable.
• Use of new dependent and elderly household deduction amounts | The MINC system will be updated to allow for the changes in deduction amounts effective January 1, 2025. If a property with layered financing was required to use the new amount for elderly deduction ($525) or the phased in percentage for medical expenses exceeding annual income, the MINC system will not allow for those changes to be submitted accurately. The file review for the tenant would be noted as acceptable.

These examples where the tenant file review will be noted as acceptable, will not only affect tenant files but may also cause differences in project rent rolls versus the amounts calculated for Net Tenant Contributions (NTC) and Rental Assistance (RA) on the monthly project worksheets. Note: the differences may not be reconcilable, and it may result in discrepancies when reporting year-end financials, specifically Form RD 3560-7 Multiple Family Housing Project Budget/Utility Allowance - Part I line 1 (Rental Income) and line 2 (RHS Rental Assistance Received).

Summary of the FAQ Attachment A to the UL

[verbatim from the FAQ, except for some examples found in the original text]

Helpful Hint | Much of the below is boilerplate from HUD HOTMA Guidance. However, owners/Agents of RD properties familiar with HOTMA will want to skip to the following RD-specific questions: 2-6, 14, and 17-21.   

Frequently Asked Questions

• Q1 | What is HOTMA?
  A1 | HOTMA stands for the Housing Opportunity Through Modernization Act, signed into law on July 29, 2016. It made changes to the U.S. Department of Housing and Urban Development (HUD) regulation requirements for annual household income calculations found in 24 CFR 5.609, adjusted income calculations found in 24 CFR 5.611, and certain applicable definitions found in 24 CFR 5.603, such as net family assets. These requirements apply to Rural Development (RD) Multi-Family Housing (MFH) Section 514, 515, and 516 funded properties.
• Q2 | When will RD fully implement the HOTMA regulations that are relevant to RD?
  A2 | RD expects implementation of the applicable HOTMA regulations for RD MFH tenant certifications effective January 1, 2025, and after.
  • MFH property management is not expected to recertify every tenant by January 1, 2025. 
  • New move-ins with tenant certifications effective January 1, 2025, or later will follow the HOTMA applicable regulations. 
  • Tenant recertifications that are effective January 1, 2025, or later will follow the HOTMA applicable regulations.
  • After January 1, 2025, if management needs to enter a tenant certification with an effective date that is prior to January 1, 2025, the prior regulations (pre-HOTMA) will be followed. Any retroactive certifications with effective dates December 1, 2024, or earlier will follow the pre-HOTMA income calculations.
• Q3 | Will training be provided to RD MFH staff and property managers?
  A3 | Training will be provided to RD MFH staff. For external stakeholders and property managers,
  there are a variety of training opportunities conducted by industry partners that are available.
• Q4 | Which sections of HOTMA will RD MFH implement?
  A4 | Per RD regulations, MFH will implement 24 CFR 5.609(a) and (b) for income inclusion and exclusion, and 24 CFR 5.611 for determining adjusted income. There are several definitions in 24 CFR 5.100 and 5.603 that RD will utilize as well. These include earned income, foster adult, foster child, health and medical care expenses, net family assets, and unearned income. RD will include the relevant HOTMA definitions within the changes to Handbook, HB-2-3560.
• Q5 | What sections of HOTMA will RD MFH not implement?
  A5 | A partial listing of the HUD regulatory reference and HOTMA changes that RD will NOT implement includes, but is not limited to:
  • 24 CFR 5.609(c)
    • RD will not implement streamlined determination of income.
    • RD will not implement the use of “Safe Harbor” income verification. This is income verification from other federal means-tested programs to verify gross annual income. 
    • RD will not implement the de minimis error of $30 per month or less. HUD: De minimis errors occur when a PHA/MFH owner’s determination of a family’s income deviates from the correct income determination by no more than $30 per month in monthly adjusted income (or $360 in annual adjusted income).
  • 24 CFR 5.618(a)
    • RD will not implement an asset limitation ($100,000) for tenant or rental assistance eligibility.
  • 24 CFR 5.657(c)
    • RD will not implement HUD’s interim reexamination regulations. RD will continue to follow recertification rules found at 7 CFR 3560.152(e) which states “tenant households must be recertified and must execute a tenant certification form at least annually or whenever a change in household income of $100 or more per month occurs. Borrowers must recertify for changes of $50 per month, if the tenant requests that such a change be made.”
  • 24 CFR 5.659(e)
    • RD will not implement self-certification of assets by the household.
  • Until the 7 CFR 3560 regulations can be updated, the RHS Administrator has approved an exception stating that 7 CFR 3560.153 only refers to 24 CFR 5.609(a) and (b). The Housing Act of 1949 does not incorporate the requirement for RD MFH to follow the
    newly added subsection of 24 CFR 5.609(c).
• Q6. What changes will be made to the Form RD 3560-8, Tenant Certification form?
  A6 | Changes will be made to:
  • Part II | Tenant Household Information will change the reference of sex to gender, with the addition of more options for gender designation (based on guidance from the RD Civil Rights
    Office). The applicable designations will be M=male, F=female, N=non-binary, T=transgender, I=intersex, and O=other. Additional information will be provided in HB-2-3560, Chapter 6, Section 6.18 Application Requirements and Processing.
  • Part III | Asset Income
  • Part IV | Income Calculations
• Q7 | What are some of the changes HOTMA made to (1) assets and (2) income from assets, that will apply to RD MFH tenants?
  A7 | The new HUD regulations distinguishes assets as either real property or personal property assets. Personal property assets are further categorized as necessary personal property or nonnecessary personal property assets. Necessary personal property assets are items essential to the family for maintenance, use, and occupancy of the home, or they are necessary for employment, education, or health and wellness or assist a household member with a disability. Items classified as necessary personal
  property are excluded from net family assets and any income from necessary personal property is excluded from household income. Non-necessary personal property assets are items that are not considered as necessary personal property.
  • When the combined value of all non-necessary personal property does NOT exceed $50,000, all non-necessary personal property (assets) is excluded from net family assets. HOWEVER, the actual income from the assets is still included when determining
    household income.
  • When the combined value of all non-necessary personal property EXCEEDS $50,000, imputed income must be calculated for those non-necessary personal property (assets) where actual income cannot be determined.
  • The $50,000 threshold is subject to Consumer Price Index (CPI) adjustments annually.
  • Examples of non-necessary personal property. This is not an all-inclusive list. Bank accounts or other financial investments (i.e. – checking account, savings account, stocks/bonds). Recreational car/vehicle not needed for day-to-day transportation (campers,
    motorhomes, travel trailers, all-terrain vehicles (ATVs), utility terrain vehicles (UTVs) Recreational boat/watercraft. Expensive jewelry without religious or cultural value, or which does not hold family
    significance (this does NOT include wedding or engagement rings)
    Collectibles. Equipment/machinery that is not used to generate income for a business. Items such as gems/precious metals, antique cars, artwork, etc. Income from assets is no longer determined based on the greater of actual or imputed income from the assets. Instead, both actual income and imputed income must be considered:
    
    • Actual income from assets is always included in a family’s annual income, regardless of the total value of net family assets.
    • Imputed income must be calculated for specific assets when three conditions are met:
      • The value of net family assets exceeds $50,000 (as adjusted for inflation).
      • The specific asset is included in net family assets; and
      • Actual asset income cannot be calculated/determined for the specific asset.
• Q8 | What is real property and is real property also considered a net family asset?
  A8 | Real property has the same meaning as that provided under the law of the State in which the property is located. (Typically, real property refers to land, including the land itself and any structures, fixtures, and rights associated with it.) The net value of real property is considered
  as a net family asset if the family has the legal authority to sell in the jurisdiction in which the real property is located. It is not considered as a net family asset if the family does not have the effective legal authority to sell it. Examples when the family does NOT have the ability (legal authority) to sell the real property in the jurisdiction in which the property is located:
  
  • Co-ownership situations where one party cannot unilaterally sell the real property (including those where one owner is a victim of domestic violence)
  • The property is involved in litigation.
  • It is inherited property in dispute.
• Q9 | Is the income received/accrued (interest, dividends, etc.) from any account under a retirement plan recognized as such by the Internal Revenue Service (IRS), including individual retirement arrangements (IRAs), employer retirement plans, and retirement plans for self-employed individuals included in the household income calculation?
  A9 | No, these types of accounts (retirement plans recognized by the IRS) are now specifically identified as excluded from net family assets; therefore, the income received/accrued (interest, dividends, gains, etc.) from these types of accounts is not utilized in the determination of actual
  or imputed income from assets. Except, any distribution of payment from such retirement account will be counted as income at the time it is received by the household. An annuity, if not recognized by the IRS, will be included as a non-necessary personal asset.
• Q10 | HOTMA allows for a Childcare Hardship Exemption. What is a Childcare Hardship Exemption?
  A10 | A household whose eligibility for the childcare expense deduction is ending may request/receive a hardship exemption to continue receiving a childcare expense deduction in certain circumstances when the household no longer has a member that is working, looking for work, or seeking to further their education, and the deduction is necessary because the
  household is unable to pay their rent. The hardship exemption and the resulting alternative adjusted income calculation must remain in place for a period of up to 90 days. Further information regarding the child-care hardship exemption will be described in Handbook, HB-2-3560. There is no change in how the childcare deduction is calculated. It is still applicable for any reasonable childcare expenses necessary to enable a member of the family to be employed or to further his or her education to be used as an eligible adjustment (deduction) to annual income. The amount deducted must not exceed the amount of employment income that is included in
  annual income. Examples when a childcare hardship exemption would be allowed (not all inclusive):
  
  • A household member is no longer employed because they need to take care of a disabled family member.
  • A household member is no longer employed due to a medical condition they are receiving medical care for (example: cancer treatments).
  • A household member’s job ends, and the person is planning to attend college with classes beginning several months after the person’s job ended. If the person removed their child from childcare, they would lose their spot at the daycare provided. They would be eligible for the childcare deduction again when they become a student, therefore, they leave the child in daycare for the several months they are not employed so they do not lose their child’s daycare slot.
• Q11 | When is a household eligible for a Phased-In Relief for medical or disability expense deductions?
  A11 | If an existing household is receiving the medical and disability expense deduction on January 1, 2025, they are eligible for the Phased-in Relief at the household next tenant certification renewal. When determining the medical or disability deduction for the tenant certification renewal after January 1, 2025, the owner/agent will use any out-of-pocket medical and disability expenses that exceed 5% of annual income. After 12 months at 5%, the owner/agent will determine the out-of-pocket medical and disability expenses that exceed 7.5% of annual income. After 12 months at 7.5%, the owner/agent will determine the out-of-pocket medical and disability expenses that exceed 10% of annual income.
• Q12 | What is General Relief as it pertains to medical and disability expenses deduction? How is this different than a Phased-in Relief?
  A12 | To receive General Relief, a household must demonstrate that the household’s unreimbursed medical or disability expenses increased, or the household’s financial hardship is a result of a change in circumstances that would not otherwise require an interim recertification. General Relief is available regardless of whether the household (1) previously received an
  unreimbursed medical or disability expense deduction, (2) is currently receiving Phased-in Relief, or (3) was previously eligible for either General Relief or the Phased-in Relief. If an RD MFH owner determines that a household is eligible for General Relief, the household will receive a deduction for the sum of the eligible expenses that exceed 5% of annual income. The household’s General Relief ends when the circumstances that made the household eligible for the relief are no longer applicable or after 90 days, whichever comes earlier. However, MFH owners may, pursuant to forthcoming RD guidance, extend the relief for one or more additional 90-day periods while the household’s hardship condition continues. Additional
  guidance on General Relief will be included in updates to Handbook, HB-2-3560.
• Q13 | Is student financial assistance considered as household income?
  A13 | Any student financial assistance, not covered under section 479B of the Higher Education Act (HEA), that exceeds the actual costs of attending school must be included as income. Student financial assistance may be paid directly to the student or the educational institution on the
  student’s behalf. The student financial assistance rules apply to both full-time and part-time students. HUD regulation 5.609(b) specifically excludes HEA student financial assistance from a family’s income. The types of financial assistance listed below are considered HEA student financial assistance programs; however, this is not an all-inclusive list.
  • Federal Pell Grants;
  • Teach Grants;
  • Federal Work Study Programs;
  • Federal Perkins Loans;
  • Student financial assistance received under the Bureau of Indian Education;
  • Higher Education Tribal Grant;
  • Tribally Controlled Colleges or Universities Grant Program; 
  • Employment training program under section 134 of the Workforce Innovation and Opportunity Act (WIOA).
• Q14 | Is an unborn child eligible for the dependent deduction?
  A14 | No, an unborn child is not eligible for the dependent deduction and is not included in household size for income eligibility determination. An unborn child may be counted to determine the appropriate unit size.

Note: this treatment of unborn children is NOT a change evident in HOTMA or HUD HOTMA guidance. Clarification is being sought from RD as to whether the intent is for RD to differ from all other affordable housing in this respect as a matter separate from HOTMA.

• Q15 | Are foster children, foster adults, or state or Tribal kinship (alternative to foster care programs) who reside in a household eligible for the dependent deduction?
  A15 | No. Foster children, foster adults, or state or Tribal kinship living with the household are not eligible for the dependent deduction and are not included in household size for income eligibility determination. A foster child, foster adult, or state or Tribal kinship may be counted to determine the appropriate unit size.
  
  • Income of a foster child, foster adult, or state or Tribal kinship person is excluded from the household’s calculation of annual income.
  • Foster child, foster adult, or state or Tribal kinship persons are not eligible for medical or disability assistance expense deductions.
  • For foster child or state or Tribal kinship (if under 13 years of age), reasonable childcare expenses necessary to enable a member of the household to be employed, look for employment, or to further their education, and no other adult member of the household can provide the care, is eligible for childcare expense deduction. In cases where the childcare enables a household member to work, the expense deducted cannot exceed the income generated by that household member.
• Q16 | Is the income of a live-in aide receives included in the household’s calculation of annual income? And is a live-in aide counted to determine unit size?
  A16 | The income of a live-in aide is not included in the household’s calculation of annual income. A live-in aide is counted to determine unit size.
   
• Q17 | The new HUD regulation 24 CFR 5.611(b)(1) gives Public Housing Authorities (PHAs) the option to adopt additional deductions from annual income (sometimes referred to as additional permissive deductions) at the discretion of the PHA or owner, if established by a written policy in their management plan. Will RD allow MFH owners to adopt additional (permissive) deductions from annual income?
  A17 | No, RD MFH owners will not be permitted to adopt permissive deductions.
   
• Q18 | The HOTMA implementation notice (HUD Notice 2023-10 issued February 2, 2024) provides a hierarchy chart for verification methods. It lists tenant-provided information now as preferred over third-party verification. Will RD MFH implement the HOTMA verification hierarchy chart and allow tenant-provided information?
  A18. RD MFH does not plan to incorporate the verification hierarchy chart, but we do plan to provide guidance in the Handbook on acceptable forms of verification. There are some forms of tenant-provided information that may be acceptable and preferred over third party verification forms, such as, Social Security award letters, pay stubs, bank statements, etc.
• Q19 | Is the property owner or management agent required to notify existing tenants of the change in income and adjusted income calculations?
  A19 | They are not required as a part of the HOTMA, however, the Agency strongly encourages the management agent to provide notice to existing tenants of the changes that will occur to the income and adjusted income calculations with their next recertification.
• Q20 | Will RD MFH owners/management agents need to update their current tenant selection policy?
  A20 | No, unless the current policy contains verbiage contradictory to any HOTMA updates.
• Q21 | Will RD MFH owners/management agents need to update their current rental lease?
  A21 | No, there are no tenant lease updates required for RD MFH properties as a result of HOTMA.