HUD, in the September 8, 2015 edition of the Federal Register, has finally published its long-delayed final rule for the on-site completion of certain manufactured home construction. Under the rule, homes that are “substantially completed” in a manufacturer’s construction facility will be eligible for final completion at the home installation site, in accordance with the Part 3280 Manufactured Home Construction and Safety Standards, without prior HUD approval (the rule, however, does not apply to matters addressed by the Part 3285 Model Manufactured Home Installation Standards).  Under current HUD program procedures, comparable on-site completion activities require prior HUD approval pursuant to the costly and time-consuming Alternate Construction (AC) process.

First addressed by the Manufactured Housing Consensus Committee (MHCC) in 2003, HUD published a proposed on-site completion rule in the Federal Register on June 23, 2010.  MHARR filed extensive written comments on the proposed rule on July 29, 2010, generally supporting its provisions, subject to certain caveats.

Most importantly, MHARR — as it did during the MHCC on-site debates — strenuously objected in its rulemaking comments to any provision in a final rule that would require or permit the inspection of on-site construction work by any state entity other than an approved state IPIA (consistent with the overall structure of the proposed rule mandating IPIA inspections of covered site-completed work).  Such a state or local inspection “option” had been extensively debated by the MHCC, but was ultimately excluded from the Committee’s final recommendations based on concerns raised by MHARR that state or local inspections “in lieu of” IPIA inspections would: (1) defeat the purpose of enhancing cost-efficiency through a new on-site completion process; and (2) erode federal preemption by giving non-IPIA, non-SAA states – acting under state authority and pursuant to state standards – direct enforcement authority over federally-regulated construction work.

While state and local on-site inspections were omitted from the HUD June 23, 2010 proposed on-site rule as recommended by both the MHCC and MHARR, HUD nevertheless indicated in its Federal Register publication that it remained “highly interested” in such a possibility, and would “further consider the appropriateness of its possible inclusion” based on further comments.

In the final rule, however, HUD – consistent with MHARR’s objections — definitively rejects any such state (or local) option, emphasizing that “state or local jurisdictions are often unfamiliar with the requirements of the [federal] standards and are not authorized to conduct these inspections in HUD’s behalf.” HUD, moreover, notes in another section of the final rule that “using state or local jurisdictions to perform … on-site inspections would … create inconsistencies in interpretation, tracking and reporting between those entities and the Department and may result in unnecessary costs for consumers.”  This reasoning and determination should conclusively resolve this issue going forward.

Beyond these issues, MHARR, in its comments, had called for a more flexible on-site inspection system, rather than the 100% IPIA inspection regime set forth in the proposed rule (which again, applies onlyto on-site construction and not to matters covered by – or compliance with — the Part 3285 installation standards). Calling for on-site completion to be treated “effectively, as an extension of the manufacturing facility and production process to the home-site,” MHARR urged HUD, in its final rule, to allow manufacturers to elect between: (1) 100% on-site IPIA inspections instead of in-plant inspections of site-completed homes; or (2) “on-site IPIA inspections of a reasonable percentage of homes completed on-site, subject to an increased frequency of on-site inspections (potentially up to one hundred percent) in the event that systemic non-compliances or defects were shown.”

While agreeing with MHARR that “construction completed on-site is part of the final production necessary to complete the home,” HUD, in its final rule, retains the 100% IPIA inspection mandate, stating: “HUD believes that IPIA inspection of each home completed on-site is required to ensure compliance with its Safety and Construction Standards since on-site construction necessarily involves the completion of a variety of unique design specification and quality control procedures that may be performed by staff or representatives assigned by retailers or manufacturers for which there is no way for HUD to ensure their knowledge or qualifications.” 

Since there would appear to be alternative – and equally-effective — methods to address such concerns without the substantial additional cost of 100% IPIA inspections in widely diverse (and sometimes isolated) locations (specifically excluding the program monitoring contractor, as explained below), MHARRwill continue to address this issue with HUD pending implementation of the final rule, scheduled for March 7, 2016.

One “alternative” that should be clearly excluded, however, as MHARR stressed during the MHCC on-site debates, is any direct role for the program monitoring contractor in the on-site inspection process. Thus, while inspections, under the final rule, can be performed by a “qualified third-party inspector” approved by the IPIA, that inspector cannot and must not be the program monitoring contractor.  Quite simply, any involvement by the monitoring contractor in the on-site inspection process would entail not only a financial conflict of interest, but would also allow the contractor to impose its own “wish list” of costly defacto mandates, requirements, inspections, reports, paperwork and related red tape on that process and then “back-door” those practices into the entire in-plant construction process and, more importantly, the Part 3282 Procedural and Enforcement Regulations.  Consequently, while the final rule does not refer to monitoring or any “monitoring” (or “monitoring contractor”) involvement in the on-site approval process, it will be essential, going forward, to ensure that any such contractor involvement does not evolve from the inspection role of the IPIAs.

Finally, while the new rule will undoubtedly have significant impacts for retailers and communities, such industry members, without a dedicated, independent national association, will need to assess and understand the technical aspects of this rule via other resources.  Suffice it to say, though, that a streamlined, less costly and more time-efficient on-site construction process, combined with full and robust federal preemption — to the full extent of the Manufactured Housing Improvement Act of 2000 (as MHARR has been pressing for years) — and the proper securitization of all types of manufactured home loans, could have a profoundly positive market impact for the industry and the millions of Americans who want and need affordable housing.

MHARR will conduct a full analysis of the final on-site rule and will address this matter in further detail at the Fall 2015 Board of Directors meeting.