Attached please find your copy of  the November 1, 2016 “MHARR WASHINGTON        UPDATE — OCTOBER 2016 MHCC MEETING“ — an exclusive report and analysis addressing:

REPORT AND ANALYSIS

IN THIS REPORT:                                              NOVEMBER 1, 2016

OCTOBER 2016 MHCC MEETING – EXCLUSIVE REPORT & ANALYSIS:

• INTRODUCTION AND MEETING OVERVIEW
• FIFTY-STATE INSTALLATION POWER GRAB BY HUD
• FORMALDEHYDE PROPOSAL WOULD ELIMINATE “WARNING” NOTICE
• MAJOR PROPOSED UPDATE TO ELECTRICAL REFERENCE STANDARD
• OTHER MHCC ACTIONS

MHCC MEETING EXPOSES LOOMING INSTALLATION CRISIS

• INTRODUCTION AND MEETING OVERVIEW:

The Manufactured Housing Consensus Committee (MHCC), at its October 25-27, 2016 meeting in Washington, D.C., addressed a number of consequential matters for the industry and consumers, including the implementation of the composite-wood formaldehyde standards rule developed (and soon to be published) by the Environmental Protection Agency (EPA) and a major update to the principal third-party reference code incorporated within the Part 3280, Subpart I electrical standards for manufactured homes. Both of these issues, however, were overshadowed by a brazen HUD power grab concerning installation regulation (predicted more than a decade ago by MHARR) that — if it goes forward — would: (1) violate existing law; (2) effectively endsovereign state authority over state-law installation standards and programs already approved by HUD; (3) fundamentally distort the nature and balance of installation regulation as designed and mandated by Congress in the Manufactured Housing Improvement Act of 2000; and (4) undermine and ultimately eliminate state participation in the manufactured housing installation regulation system (and, potentially, the program as a whole), while further empowering (and enriching) unaccountable HUD contractors to the profound detriment of consumers, the industry, and states seeking to ensure the availability of affordable, non-subsidized housing for their citizens.

As is detailed below and in the attached October 20, 2016 MHARR communication to HUD in advance of the MHCC meeting, this action — if allowed to stand — would set a devastating precedent for the program as a whole, and particularly for state participation in the HUD program. At the most fundamental level, it represents yet another baseless HUD repudiation of a key policy decisions made by Congress in the 2000 reform law and a further significant regression of the federal program under its current Administrator.  As the outgoing MHCC Chairman observed at the conclusion of the meeting, it entails (along with HUD’s indefensible “on-site construction” rule) a further unnecessary and costly bureaucratization of the federal program that threatens to undermine the affordability and market competitiveness of manufactured homes and could ultimately result in an exodus of stakeholders from an over-regulated manufactured housing market to much higher-cost modular construction. HUD’s attempt to effectively hijack and control installation regulation in all fifty states, therefore, must be aggressivelyresisted by all program stakeholders, not just on a technical basis, or with the objective of “correcting” or “fine-tuning” the HUD proposal, but as a fundamentaland unacceptableviolation of the regulatory structure established by the 2000 reform law, which provides the states with primary regulatory authority over the installation of manufactured homes.

On other regulatory matters addressed at the meeting, HUD presented its “draft” proposed rule to conform existing HUD code formaldehyde standards with the final composite wood products formaldehyde rule recently announced by EPA, as required by the Formaldehyde Standards for Composite Wood Products Act of 2010.  As is detailed below, the revised HUD standards, under the draft proposal presented for MHCC review, would essentially reference and overlap the EPA standards, including certain additional record-keeping requirements and a manufacturer label indicating compliance with the EPA requirements. Most significantly, though, the HUD draft would delete the current HUD Code requirement for a “prominently displayed” “Important Health Notice” on formaldehyde emissions (24 C.F.R. 3280.309), as sought by MHARR in its September 2013 written comments on the original proposed EPA rule.

The MHCC in addition, considered and approved a Technical Systems Subcommittee proposal to update the National Fire Protection Association’s National Electric Code (NFPA-NEC) reference standard as incorporated in the HUD Code Subpart I “Electrical Systems” standards from the current 2005 edition to the 2014 edition.

• HUD SEEKS TO DICTATE INSTALLATION STANDARDS IN ALL STATES

As early as 2004, MHARR (alone within the industry) warned against – and urged direct action to prevent — the possibility of a federal takeover of installation regulation in all fifty states. In a comprehensive published White Paper, MHARR stated:

“The Manufactured Housing Improvement Act of 2000 was designed to give the individual states the ‘first option’ to regulate the installation of manufactured homes.  Congress structured the Act this way based on the common-sense notion that local soil, weather and siting conditions will inevitably vary, and that state governments are in a better position to evaluate and respond to such conditions, as contrasted with federal authorities. [C]ongress also chose this structure – placing federal authorities in charge of production and state authorities in charge of [post-production] issues – in order to promote and strengthen the Federal-State partnership … established by the original 1974 manufactured housing Act….  If, and only if, a state did not adopt a [state-law installation] program, did Congress empower HUD to impose a default federal installation standard and federal installation program….  While Congress wanted the states to be preeminent in the area of installation regulation, this has not stopped HUD from taking various steps that could be interpreted as moving toward a much broader federal involvement in installation or even, in a worst-case scenario, the substitution of federal regulation for state-based regulation. *** [I]t is essential that HUD be compelled to recognize the default nature of the federal rule. *** Otherwise the program could attempt to impose the federal standard and program on all states. This, in turn, could result in the imposition of prescriptive federal criteria in a ‘one size fits all’ approach….  It is thus essential that the industry work to ensure that state pre-eminence and state discretion in [installation] regulation are preserved and maintained.”

(Emphasis added).

Consequently, when HUD issued a two-page “Interim Guidance” memorandum on April 11, 2016 concerning the use of “Frost-Free Foundations or Frost Protected Shallow Foundations” which appeared to dictate compliance with a specific HUD interpretation of 24 C.F.R. 3285.312 (Footings) even in states with HUD-approved state-law installation standards and programs, MHARR immediatelyobjected. In an April 14, 2016 communication to the HUD program Administrator (see, copy attached), MHARR stated, among other things: “The memorandum violates the primacy of state authority with respect to the interpretation and construction of installation standards adopted pursuant to state law and enforced by state officials under authority conferred by state law in states with complying manufactured home installation programs as provided by the 2000 Act…. While the Part 3285 standards are model standards that provide a baseline for state standards to provide “protection that equals or exceeds” the model federal provisions, the Act provides no mechanism or basisfor the imposition of unilateral HUD interpretations of the model federal standards on state officials enforcing state standards under color and authority of state law.” (Emphasis added). MHARR, therefore, stated that the “interim guidance” memorandum violated the 2000 reform law but, at a minimum, should have been brought to the MHCC, prior to publication, as an “interpretation” of the federal standards.

Subsequently, after publishing a “Tentative Agenda” for the October 2016 MHCC meeting (on September 27, 2016), indicating that HUD would present the Committee with “HUD recommended guidelines on foundation system requirements in freezing climates,” the Department posted – at its internet website — a 51-page report entitled “An Assessment of Design and Installation PracticesFor Manufactured Homes in Climates with Seasonally Frozen Ground,” prepared by its federal installation contractor, SEBA Professional Services, L.L.C. (SEBA).  This Report – based on the apparent conclusions of just one engineering consultant – goes far beyond the two-page April 11, 2016 HUD “Interim Guidance” memorandum in seeking to impose new elements and new mandates within the 24 C.F.R. 3285.312(b) standard for installations in freezing climates, that – if adopted — would substantively and significantly alter the original standard. MHARR, accordingly, on October 20, 2016, again filed an immediate and strenuous objection with HUD (see, copy attached) stating, among other things, that the SEBA Report constituted a change to the standard, rather than a mere “interpretation” and that the Department had to comply with allapplicable requirements of the 2000 law, including objective proof of the need for such a change, as well as its cost-impact on consumers – neither of which was provided by the SEBA Report.

At the October 26, 2016 session of the MHCC meeting, HUD, under direct questioning by MHARR as to what exactly the SEBA Report constituted and whether the unilateral changes to the 3285.312(b) “Footings” standard contained in that Report would be applicable in all states, stated that: (1) the SEBA Report (itself) was being presented to the MHCC as an “Interpretative Bulletin” under the 2000 reform law, with a 120-day window for MHCC review and comment; and (2) that the mandates contained in the SEBA Report, effectively changing the 3285.312(b) federal standard, would be applied to – and required to be enforced – in all states, including current HUD-approved states with state-law installation standards and programs.

It is crucial for all affected program stakeholders – including consumers, states, retailers, communities, manufacturers, installers and others – to understand what this action, if it were to go forward to final implementation, would mean.  This action, in itself, would not automatically divest state authority over manufactured home installations and would not necessarily, in the short term, end state installation programs. HUD’s action, however, would establish a horrendous precedent that would allow HUD – contrary to the 2000 reform law – to dictate the specificcontent and specificrequirements of state-law installation standards and programs, thereby over-riding state law and decisions made by state authorities acting under state law, by the simple expedient of unilaterally changing its “interpretation” of the federal “model” installation standards. HUD would thus have the power to unilaterally impose new and additional mandates on the states that ultimately would either bankrupt state programs or force state programs out of the installation regulation structure through financial and budget pressures that state governments would simply be unwilling to accept. And for every state that drops a state-law installation program, more power, authority, and revenue would be diverted to unaccountable program contractors – as has been the ambition of those contractors for decades, and which HUD and its contractors have consistently sought to impose in the realm of production regulation.

This HUD attack on the primacy of state-based installation regulation, as MHARR predicted more than a decade ago, would – if allowed to go forward – would undermine the federal-state partnership mandated by Congress, while imposing high-cost, prescriptive, one-size-fits all installation mandates with no showing of need, necessity or cost-effectiveness, in violation of the 2000 reform law.  Indeed, neither HUD nor SEBA could point to any systemic foundation failures based on the current standards (which have been in effect for nine years), and while HUD cited requests from “states” and others for “guidance” on frost-free foundations, it could only point to onestate – currently undergoing significant program and personnel disruptions – as having sought any such “guidance.”(A similar tactic was used by HUD to “justify” major substantive changes to Subpart I, without notice and comment procedures, through Interpretative Bulletin (IB) I-1-94.  While HUD maintained that the IB had been sought by various “states,” subsequent information showed that only one state – Pennsylvania – had requested any such “guidance”).  Nor is it the case, as some HUD apologists have maintained, that the changes incorporated in the SEBA Report correspond with recommendations of the Government Accountability Office (GAO) in its July 2014 report on the HUD program and its implementation of the 2000 reform law. Although GAO, in that report, recommended that HUD assess the feasibility of user fees within the installation program, it said nothing about steps that would fundamentally alter and displace the legitimate and proper role of the states and state regulators in the installation regulation structure established by Congress.

While this unacceptable power grab by HUD would have some direct impacts on manufacturers, its mostdevastating effects would be felt by consumers, by the industry’s post-production sector and particularly by the 37 states which have devoted substantial resources to developing, implementing and maintaining HUD-approved state-law installation standards and programs.  All of those stakeholders, therefore — and the groups that represent them, including the state associations which represent the industry in the installation-compliant states – should aggressively resist this baseless, unwarranted and unlawful action by the HUD program and its revenue-driven contractors, and put an end to this effort to fundamentally distort and undermine the installation-regulation system established by Congress. This effort must necessarily begin with aggressive opposition within the MHCC to the approval of the SEBA Report / HUD Interpretive Bulletin in any form or guise.

Beyond that, MHARR has already filed a comprehensive Freedom of Information Act (FOIA) request with HUD on this matter (see, copy attached) to determine financial and other arrangements between HUD, its installation contractor and “consultants” involved in the development of the SEBA Report. Based on its findings and conclusions, MHARR will develop and aggressively pursue options to address this attempted federalization of installation, including, but not limited to, congressional oversight and potential legal action.

For now, the SEBA Report – as a proposed HUD Interpretive Bulletin – has been referred to the MHCC’s Regulatory and Enforcement Subcommittee, which is tentatively scheduled to meet by telephone conference call on November 28, 2016 to begin review and debate of the HUD proposal.  The full MHCC, in turn, is currently scheduled to meet by conference call on December 12, 2016 to consider any recommendation put forward by that Subcommittee.

MHARR will continue to keep you apprised regarding this critical matter as further developments unfold.

• DRAFT HUD FORMALDEHYDE PROPOSAL

     WOULD ELIMINATE RED “WARNING” LABEL

As previously reported by MHARR (see, July 28, 2016 MHARR Memorandum entitled “EPA Set to Publish Final Composite Wood Formaldehyde Rule”), EPA has issued a pre-publication version of its final rule adopting federal standards and a federal enforcement structure to address formaldehyde emissions from composite wood products, as mandated by Congress in the Formaldehyde Standards for Composite Wood Products Act of 2010. The standards adopted by EPA include formaldehyde emission limits as prescribed by Congress for certain legislatively-defined composite wood products and a testing and labelling protocol for producers of those composite wood products.  Under the final rule, compliant composite wood products will need to be used by all “fabricators” of “finished goods” – including producers of HUD Code manufactured housing — beginning one year after the date of publication of the final rule in the Federal Register.  Those “fabricators,” in turn, are not subject to testing requirements, but will be required to maintain records (i.e.,  bills of lading, invoices, or comparable documents) showing the purchase of EPA-compliant materials for three years and to label their “finished goods” (i.e., the home itself in the case of manufactured housing) as being compliant with the EPA standards. (MHARR would note, as it did at the MHCC meeting, that after site-builders were included as “fabricators” in the initial EPA proposed rule published on June 10, 2013, they were specifically excluded from the pre-publication final rule based on EPA’s determination that “Congressional intent with respect to the regulation of finished goods … was to regulate goods that move freely through commerce and that are produced through a manufacturing process at a manufacturing facility, not objects like buildings or other structures that are constructed on site and become a permanent addition to real property.” Pressed by MHARR for a specific expression of congressional intent on this point, EPA could offer none, other than the structure and evolution of the statute, while offering no explanation as to why site-built homes wereincludedin EPA’s initial proposed rule, despite this “clear” congressional intent).

Included within the Formaldehyde Standards for Composite Wood Products Act of 2010 is a directive that HUD, within 180 days of the promulgation of the EPA final formaldehyde standards, update its own manufactured housing formaldehyde standards to “ensure that [they] reflec[t] the [formaldehyde] standards established” by EPA.  Based on this mandate to HUD to harmonize the HUD Code formaldehyde standards with the standards ultimately adopted by EPA, MHARR, in its September 2013 administrative comments to EPA in connection with its initial proposed formaldehyde rule, stressed that given the universal applicability of the EPA standards to all congressionally-defined composite wood products, both the industry and manufactured housing consumers deserved relief in the form of the repeal of the existing HUD Code requirement for the red formaldehyde warning notice that has been a sore point with the industry for decades.  MHARR thus maintained that if all composite wood products supplied to the home-building industry in the future will necessarily comply with the stricter EPA formaldehyde standards, there is no need – and likely no legal authority — for HUD to continue the discriminatory formaldehyde “health” notice.

Consistent with this statutory mandate, HUD presented a “draft” proposed rule to modify the existing HUD formaldehyde standards for consideration by the Committee. That “draft,” consistent with MHARR’s earlier comments, would delete the current requirement in 24 C.F.R. 3280.309 for the formaldehyde “health notice.”  At the same time, the draft HUD proposal would simply cite the impending EPA standards for formaldehyde emission levels and the certification of incorporated composite wood products, while requiring a conforming “finished good certification” for each home, with a brief script indicating compliance with the EPA standards.

The MHCC, following an extensive debate, ultimately voted to accept the HUD proposal as presented, while recommending that the EPA compliance language be incorporated within the HUD-required home data plate, rather than as a separate label.  The Committee also voted to reject a proposal that specific HUD testing standards be retained for products treated after EPA certification with certain formaldehyde-emitting materials, including paint and/or varnish, among others.  MHARR urged the Committee to reject this proposal on a number of grounds, including: (1) the tendency of existing HUD regulations to grow and expand over time, presenting the possibility that any remaining testing requirement could ultimately become more expansive and costly; (2) the likelihood that any such requirements – which would not “reflect the standards established” by EPA as required by the 2010 law — would be outside of HUD’s remaining authority; and (3) the fact that such tests could be conducted on a voluntary basis in any event to address any legal concerns.  HUD, however, with the agreement of the Committee, indicated that it will publish specific questions on this matter in the preamble of its proposed rule, in order to receive and consider additional comment from interested parties.

After a letter ballot by the MHCC, HUD is expected to publish a proposed rule on this matter.  MHARR will then file written comments expressing its strong objection to the imposition of record-retention and EPA labeling requirements on HUD Code manufacturers, particularly when site-builders have been exempted from those requirements (under the EPA final rule) with no valid, legitimate or even plausible basis.

• MHCC RECOMMENDS UPDATE TO 2014 NATIONAL

ELECTRICAL CODE AS HUD REFERENCE STANDARD

After extended debate and review, the MHCC has recommended that the primary third-party reference standard for the HUD Part 3280, Subpart I electrical standards for manufactured homes (24 C.F.R 3280.801) be updated from the 2005 version of the NFPA National Electrical Code to the 2014 edition of that code, subject to certain exceptions, primarily related to the use of arc-fault interrupters in kitchen areas and additional receptacles for certain small deck areas (less than 20 square feet).

In performing its review, the MHCC did receive and consider manufacturer-level cost estimates for the implementation of the 2014 NEC, ranging from $300.00 to nearly $700.00 per home. While this would translate into consumer-level cost increases well in excess of $1,000.00 in many cases, the Committee ultimately concluded that many requirements of the 2014 NEC have already been implemented by the industry and that the continued use of a nearly ten-year-old electrical reference code could not be justified.

As MHARR noted, however – and has advised the Committee on multiple occasions – such increased costs for legitimate life-safety mandates underscore the waste and hardship for consumers that will result from ill-conceived and unnecessary regulatory mandates such as the “energy conservation” rules recently proposed by the U.S. Department of Energy (DOE), which could cost consumers $6,000.00 or more per home with a recovery period so long that many – if not most – consumers will never realize any benefit.

• OTHER MHCC MATTERS

In addition to the foregoing regulatory matters, HUD announced that seven current MHCC members will be departing the Committee at the end of 2016.  These members include three from the “user” group, two members from the “producer” group, and two members from the “general interest” group, including the longtime Chairman of the Committee. New appointees to fill these slots, based on past HUD practice, will be named either shortly before or after the beginning of the new year.

This new round of MHCC appointments will pose a crucial litmus test for HUD and for the current program Administrator, as recent HUD appointments to the MHCC have improperly and unlawfully skewed the balance of the Committee away from the proper representation of HUD Code manufacturers – who bear the vast majority of the regulatory burdens imposed by the federal program – and particularly smaller manufacturers (and smaller industry businesses generally) which are disproportionatelyimpacted and harmed by excessive regulation, as proven by multiple studies, including analyses produced by the U.S. Small Business Administration.  By eliminating the collective MHCC representation of smaller industry manufacturers (which had been established by HUD as a precedent for yearsafter the formation of the MHCC) – while maintaining such representation for other groups, such as consumers – HUD has effectively denied those smaller businesses the full benefit of the institutional memory, knowledge, know-how and expertise that their collective representation has developed over the course of decades in Washington, D.C.  At the same time, HUD must restore the valid and legitimate representation of smaller industry manufacturers on the Committee, which has been illegitimately undermined by its recent appointments.

MHARR has already begun to address this extremely important issue on a legal basis with HUD and is prepared to take further steps, as necessary, to pursue a fair, reasonable and proper balance of interests on the MHCC as mandated by the 2000 reform law.

• CONCLUSION 

Events at the October 2016 MHCC meeting – including, most particularly, HUD’s attempted federalization of installation regulation – show a continuing regression of the HUD program under its current management in ways that, if not fully and aggressively resisted, will needlessly increase consumer and regulatory compliance costs, and will needlessly impose new, highly-prescriptive and overly-costly mandates on industry businesses, while skirting the most basic procedural safeguards of the 2000 reform law.  This overly bureaucratized and overly-contractor dependent system – if allowed to advance further – would jeopardize the market competitiveness of HUD Code manufactured housing and the fundamental character of the program as a federal-state partnership. All stakeholders, therefore, have a direct interest in opposing this distortion of the HUD program as established by Congress. MHARR, for its part, has already begun to develop and pursue legal options, while continuing to engage Congress to seek full accountability for the program’s misuse and abuse of label fee revenues hiked by the current Administrator by a factor of 156%.  It will take a broader effort, though, by the industry, consumers and all other stakeholders to put an end to the current downward spiral of the program.