BACKGROUND PAPERS FOR TASK FORCE ON
   LBP HAZARD REDUCTION AND FINANCING
                                            •
    1.  Introduction
    2.  Risk Assessment and Inspection
    3.  Financing Options
    4.  Underwriting
    5.  Appraisal
    6.  Liability
    7,  Liability Insurance
    8.  Administrative Compensation
                                ^
    9.  Distressed Housing
    10. Tenant-Based Assistance
These papers do not necessarily reflect the views or policies
of the U.S. Environmental Protection Agency or the U.S.
Department of Housing and Urban Development.  ICF
Incorporated prepared these materials under EPA Contract
Number 68-D2-0064, Work Assignments 1-17 and 2-7.

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               INTRODUCTION TO A SERIES OF BACKGROUND PAPERS
                               FOR THE TASK FORCE ON
              LEAD-BASED PAINT HAZARD REDUCTION AND FINANCING
1.     Introduction

       On October 28, 1992, the Housing and Community Development Act of 1992 (P.L. 102- •
550) was signed into law.  Title X of this Act, the Residential Lead-Based Paint Hazard
Reduction Act of 1992, mandates a comprehensive effort to f >id and reduce lead-based paint
(LBP) hazards in residential housing to prevent childhood lead poisoning.  The requirements of
Title X will focus public attention on LBP hazards in occupied housing units built before 1978,
the year that the federal Consumer Product Safety Commission banned the use of lead in
residential house paint. Title X represents a new federal approach toward the prevention of lead
poisoning. Under Title X, property owners, tenants, lenders, state and local governments, and
other agencies and individuals working with housing and housing markets will have new means to
identify, reduce, and abate LBP hazards before children are poisoned.1

       Section 1015 of Title X authorized the creation of a Task Force on Lead-Based Paint
Hazard Reduction and Financing to recommend to the U.S. Department of Housing and Urban
Development (HUD) and the U.S. Environmental Protection Agency (EPA) methods for
preventing childhood lead poisoning through comprehensive changes in housing standards, market
transactions, and legal responsibilities as they relate to the identification and abatement of LBP
hazards in privately-owned housing. Specifically, Section 1015(c) calls on the Task Force to
address the following areas:

       •       Incorporating the need to  finance LBP hazard reduction into underwriting
              standards;

       •       Developing new loan products and  procedures for financing LBP hazard
              evaluation  and reduction activities;

       •       Adjusting appraisal  guidelines to address lead safety;

       •       Incorporating risk assessments or inspections for LBP as a routine
              procedure  in the origination of new residential mortgages;

       •       Revising guidelines, regulations, and educational pamphlets issued by HUD
              and other federal agencies relating  to LBP poisoning prevention;

       •       Identifying sources of liability for LBP damages in rental housing by
              clarifying the standards of care required of landlords and lenders, and by
              exploring the "safe harbor" concept;

       •       Increasing  the availability of Liability insurance for owners of rental housing
              and certified contractors;

       •       Establishing alternative systems to compensate victims of LBP poisoning;
              and
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       •      Evaluating the utility and appropriateness of requiring risk assessments or
              inspections and notification to prospective lessees of rental  housing.

This paper, and the nine accompanying papers, compose a series of background papers on the
areas in which the Task Force may make recommendations on spurring action toward LBP hazard
reduction in privately-owned housing.

       Types of Housing the Task Force Will Address

       The Task Force will focus on privately-owned housing, including owner-occpied and rental
structures.  Although Title X mandates certain LBP hazard evaluation and reduction activities for
federally supported  housing activities, it does not mandate the same for privately-owned housing.
Yet, privately-owned housing — units not owned, assisted, or financed by HUD, the Department
of Veteran's Affairs, or Fanner's Home Adminsitration — represents the vast majority of this
nation's housing stock.

       The Task Force's mandate does extend to tenant-based assistance programs _(TBA), one
category of housing which some observers might classify as "federally supported". Units in this
category are privately-owned and  managed, but the owners receive payments from the government
that supplement the rent of low-income tenants.  The program works similar to food stamps:
Tenants receive "certificates" (also referred to as vouchers or coupons) to help them pay the rent
of a privately owned unit of their choice. Subject to the terms of their lease, tenants are free to
move from one apartment to another and take their rent subsidy with them. Thus, it is the
tenants, and not the housing that are assisted. (In contrast to TEA, project based assistance
offers subsidies tied to particular projects and units.  Properties receiving project based assistance'
are covered under Title X.)  Th  extent to which owners of units participating in TEA programs
should be required to evaluate   .d reduce LBP  is one focus of the Task Force. These issues are
explored in more detail in the paper in this series, "Lead Based Paint Evaluation and Reduction
in Tenant Based Asistance Programs."

      • Privately-owned housing encompasses many varying characteristics that will affect the
approaches taken to address LBP hazard evaluation and reduction.  These characteristics include:

       •      Size: Privately-owned housing may be single-family (one to four units) or
              multifamily housing.

       •      Tenure: Owners may occupy the property or lease it to renters.

       •      Location: The property may be located in a center city, suburban area, or
              rural area.

       •      Condition: The property may be in  good condition or physically distressed
              (substandard) condition.

       •      Financial Condition: The property may have substantial value and
              generate an ample cash flow or it may be economically distressed with
              relatively little market value.

With this diversity,  interventions for LBP hazard evaluation and reduction might affect one
segment of the housing universe in a comprehensive manner while affecting another segment only
slightly — or worse, have unintended and disastrous effects on the supply of affordable housing.
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(For example, a policy that focuses attention on properties where young children live could have
beneficial results for owner-occupants but could also lead to illegal discrimination on the basis of
family status by owners of multifamily housing.) Thus, the Task Force must consider LBP
reduction strategies that cover many different housing types.

       Organization of this Paper

       This paper is organized in the following manner:

       Section 2:     Summarizes the hazards of lead poisoning, including the effects of
                     lead poisoning, sdurces of lead in the living environment, how
                     children and adults become lead-poisoned, and the social costs of
                     lead poisoning.

       Section 3:     Examines the characteristics of pre-1978 housing, including location
                     and quality measures.

       Section 4:     Describes the residents of pre-1978 housing and the population groups
                     most at risk of lead poisoning from LBP hazards.

       Section S:     Summarizes Title X and the current and planned federal
                     regulations to  address lead-based paint hazards.

       Section 6:     Describes the other papers in this series: the topics that each
                     addresses, the  organization of each, and the criteria that are used
                     for briefly equating the options for intervention that each paper
                     raises.
                                                            X
Appendices I through III contain definitions and data tables used in the following ana! ses.  This
paper also contains a glossary of key  terms used in all ten papers.
2.     Hazards of Lead-Based Paint Poisoning

       Potential Physical Effects of Lead Poisoning

       Lead ingestion is hazardous to all humans.  Various researchers2 have observed effects of
lead poisoning including colic, neurological difficulties and dysfunction, and adverse hematological
effects.  As research and examination techniques have improved, the generally recognized level
for lead toxicity has shifted downward, from over 60 micrograms per deciliter of whole blood
(ug/dL) in the early 1960s to the current threshold of 10 ug/dL, which the Centers for Disease
Control and Prevention (CDC) established in October 1991.3

       The  effects of lead on children can be particularly severe.  The CDC reports that at 10
ug/dL, some children suffer from decreased intelligence, learning disabilities, and impaired
neurobehavioral development. Lead-poisoned children also may have decreased stature or growth
and decreased hearing ability.  Higher blood lead (PbB) levels have been associated with
decreased vitamin D metabolism, anemia, and kidney and brain diseases. Very severe lead
exposure in  children (blood levels i 80 ^g/dL) can cause coma, convulsions, and even death.4
For adults, the primary effects that have been observed include neurological problems such as
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dizziness, fatigue and lethargy, and changes in the cardiovascular, hematological, renal, and
reproductive systems.5

       Children are more vulnerable to lead poisoning because their bodies (in particular, their
nervous systems) are still developing. Perhaps as a result, they also absorb lead into their blood
streams much more easily than adults. "Experiments in adult volunteers showed that the amount
of lead that got into the body from the stomach was only about 6 percent in adults who had just
eaten. In adults who had not eaten for a day, about 60 to 80 percent of the lead from the
stomach got into their blood. On the other hand, 50 percent of the lead swallowed by children
enters the blood and other body parts even if their stomach is full [Emphasis added.]"6

       Despite the large quantity of evidence, studies of the effects of lead on children and adults
do not show uniform responses to elevated blood lead levels, especially lower levels (between
lOug/dL and 30 ug/dL).  For example, no minimum threshold has been established for the effect
of lead on IQ7, and effects on kidneys observed in one study of persons with PbB levels of 18-26
ug/dL were not observed in  another study of persons with higher PbB levels.8 Therefore, there
is no clear association between a certain level and duration of lead exposure and an adverse
effect. Nonetheless, even minor lead ingestion appears to constitute a significant health concern.

       Sources of Lead In pest ion

       Lead enters the living environment through a number of pathways.  Gasoline combustion
and other fuel emissions have released lead particles into the environment (lead was a common
additive to gasoline).9  Lead is found in dust and soil, both from gasoline use and from some
industrial processes.  Lead particles also can be released during work with primary and secondary
lead smelters; lead-acid battery plants; b*  ~s and bronze foundries;  rubber and plastic
manufacturing plants; gas stations; waste .  cinerators; and any area where lead solder is used,
including stained glass workshops as well as more industrial settings.

       Lead also can be found in drinking water and food.  Lead is found in water due to
leaching of lead from lead service lines, brass plumbing fixtures and fittings, and lead solder.  In
1986, an estimated 241,000 children under six years of age had blood lead levels above 15 ng/dL
due to this source.1.0 (Although the 1986 Safe Drinking Water Act Amendments banned the
use of lead solder and banned or limited other lead-containing materials in household plumbing
connected to public water supplies, a 1988 study showed that approximately  20 percent of the
population had unsafe  tap water lead levels. In 1991, EPA established standards for lead in
drinking water to address this problem.) Lead may be found in food from lead solder used in
some cans imported into the United States or from pottery glazes.  (While the Food and Drug
Administration has established voluntary standards for pottery glazes,  this source of contamination
is still a concern.)  Some folk remedies contain lead, as does  cigarette smoke.

       Notwithstanding these  multiple sources of lead, many housing and lead safety experts
argue that one of the most concentrated sources for lead exposure is ingested lead-based  paint
particles from  paint chips and dust.  Lead-based paint, containing up to SO percent lead, was used
widely up through the  1940s. Although the use and manufacture of lead-based interior paints
declined during the 1950s, high amounts of lead could  be found in exterior and some interior
paint until  the 1970s.  In 1978, the Consumer Product Safety Commission banned the
manufacture of paint containing more than 0.06 percent lead by weight for interior and exterior
residential surfaces, toys, and furniture.11
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       Lead-based paints are still available for industrial, military, and marine usage.  In addition,
approximately 79 percent of all privately-owned housing built before 1978 contains lead-based
paint.  Children and adults may ingest flaking or chipping paint or paint dust generated through
impact or friction.  Particularly, children may ingest the lead-contaminated paint, dust, and soil
through normal hand-to-mouth activity and may ingest paint through active peeling and eating of
paint or mouthing  of painted surfaces.  Adults may ingest lead-contaminated paint primarily if
they perform or are exposed to rehabilitation, renovation, and abatement activities without proper
protection.

       Social Costs of Lead-Based Paint Poisoning

       A large body of evidence suggests that, in addition to adverse health effects, lead-poisoned
children also experience  lower educational achievement. For example, a recent long term study
found that, for children exposed to moderate lead levels during preschool years, the probability of
dropping out of high school were seven times higher and the probability of a significant reading
disability were six times higher than for children exposed to lower lead levels. In  addition, these
children had lower class standing, increased absenteeism, and lower vocabulary and grammatical-
reasoning scores.    This study did not  completely control for the childrens' starting academic
performance, nor did examiners find significant associations with the results  of 10 other tests of
neurobehavioral functioning.13  Therefore, these results are suggestive but not definitive.

       The reductions in health and educational attainment attributed to lead poisoning can
result in greater costs for medical care  and remedial education. The CDC, estimating the
probability that a poisoned child will receive medical attention, testing, chelation (a  therapeutic  .
procedure to reduce blood lead levels), and follow-up therapy, calculated the average medical
costs for children with  PbB levels greater th~  25 ug/dL to be $1,300 per child and a maximum
ip'j'vidual cost of over  $12,000.14 The  probai. ; average cost for providing special education is
estimated to be about $3,300 per child  in 1989 dollars, discounted'over three years.  (This figure
assumes .a 20 percent likelihood of requiring special education and that the educational effects
persist for at least  three years, at a cost of about $5,800 per year.)15

       In addition, even if a poisoned  child does not require special education, the  cognitive
impairments caused by lead can still reduce potential earnings later in life.  The CDC developed a
model of the relationship between a 1  tig/dL increase in PbB levels and future earnings through
an analysis of studies linking lead ingestion to IQ and to educational attainment; IQ and
education to wages; and  lead exposure, education, and labor force participation.  Based on its
assumptions, the change  in the expected present value of lifetime earnings from a 1 ug/dL change
in blood levels is $1,147.    Thus, the average cost to society of each child with a  25 Ug/dL
blood level could exceed $33,000 on average in current dollars (calculated as the sum of health
care costs, special  education costs, and  lost earnings per ug/dL), with individual costs possibly
exceeding $58,000.
3.     Characteristics of Pre-1978 Housing

       The Alliance to End Childhood Lead Poisoning and the National Center for Lead-Safe
Housing estimate that, of 93 million occupied housing units in the United States, 72 million
occupied units were built before 1978. (This figure includes 4 million federally-owned or -assisted
units which Title X governs.)17 Their report states that, according to HUD estimates, 57
million of these units contain LBP. Furthermore, 38 percent of the housing units were built
before 1950. Paint manufactured before 1950 contained higher concentrations of lead than paint
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manufactured from 1950 to 1977, consequently, the LBP hazards in pre-1950 housing are
potentially more severe. In all, 10.6 million households containing children under the age of six
years may have been exposed to LBP hazards when the housing survey was performed.

       The  1989 American Housing  Survey (AHS), counting all types of housing units, estimates
that there are over 83 million housing units built before 1978 in existence.19  Nearly 79 million
(95 percent) of these units are homes or apartment units. The remainder are a combination of
transient and non-transient hotels, rooming houses, mobile homes, boats, and recreational
vehicles. The difference between this estimate and the earlier estimate of 72 million is caused
primarily by the inclusion of vacant units in the AHS figures. The following discussion uses the
AHS numbers since these data can be used to estimate the extent of lead contamination in all
occupiable housing.

       Location

       In order to understand the magnitude of the LBP problem, target financial resources, and
develop appropriate hazard reduction strategies, it is important to understand the location of pre-
1978 housing units. There are two ways to examine location:  by metropolitan (urban versus
rural) comparison, or by region of the country.  The urban versus rural location may suggest
different strategies for hazard evaluation and reduction:  for example, housing that is clustered
together in central cities can be targeted more easily during risk assessment programs than
housing located in isolated rural areas.  The breakdown by regions can help guide federal and
state governments to target resources for evaluation, reduction, and educational programs on a
geographic basis.

       According  to the 1989 American Housing " Tvey, the majority of pre-1978 housing units
are located in central cities or urbanized suburbs c Metropolitan Statistical Areas  (MSA.).   .,
total, 75 percent of all housing containing potential LBP hazards -- some 62.1 million unite  - are
located in urbanized areas (see Figures 1). Pre-1978 units compose the majority of the housing

                         Figure 1:  Metropolitan Location of Pre-1978
                                       Housing Units
                                            34%
                32%
                                                           Central  City,  MSA

                                                           Urban Suburb,  MSA

                                                           Rural Suburb.  MSA

                                                           Urban, Non-MSA

                                                           Rural . Non-MSA
                                                 1595
                            10*
              Source: American Housing Survey, 1989.
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stock in each metropolitan location. As Figure 2 shows, pre-1978 housing composes 85 percent of
all housing in central cities and urban, non-metropolitan areas, and significant percentages of
other locations as well. The supply of lead-safe, post-1978 housing is fairly limited.

                     Figure 2:  Pre-1978 Units in Metropolitan Locations
                            in Relationship to All Housing Units
               (000 s)   Percentages represent  pre-1978 units
                          as  a percent of all units

               40 000
                30.000  -
                20,000  -
                10,000  -
                    Central  City,  MSA   Rural Suburb, MSA     Rural,  Non-MSA
                              Urban Suburb, MSA     Urban,  Non-MSA

                                     Metropolitan  Location
                                   Pre-1978 Units
                                                       1978-1- Units
              Source:  American Housing Survey, 1989.
       With regard to census region, Figure 3 shows that the largest share of pre-1978 units are
located in the southern region of the United States, comprising 32 percent of pre-1978 units. As
a percentage of all housing stock in the area, however, the northeast and midwest regions have
the largest numbers of pre-1978 housing stock.  These regions are generally considered to have
the highest incidences of lead poisoning, largely because their housing stock is older and  therefore
more deteriorated.  (In addition, these two regions have large industrial bases that could  have
released lead into soil and dust.) A 1985-86 report of lead poisoning screening programs in 24
states showed Missouri, a midwestern state, with the highest percent of screening participants with
blood lead levels greater than or equal to 30 jig/dL - 11.0 to  16.0 percent compared to a 1.5
percent nationwide average.20 Georgia, however, ranked second with 9.0 percent, which may be
in keeping with the fact that the South has the largest absolute number of pre-1978 units of the
four census regions.

       (Metropolitan and census region definitions are shown in Appendix I.)
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                       Figure 3: Geographic Location of Housing Units
               (000  s)   Percentages represent pre-1978  units
                           as  a percent of  all  units
               50.000
               40,000  -
                          Northeast     Midwest  "     South

                                           Census Region

                                 •  Pre-1978 Units H 1978+ Units
                                                                  West
              Source:  American Housing Survey, 1989.
Housing Quality and LBP Hazards
                                                             x1
       Although a.,y LBP in a home constitutes a potential hazard, the risks of lead poisoning
are magnified when the home is in poor condition.  Peeling paint, damaged walls, and
deteriorated surfaces are important factors in assessing the risk of lead poisoning. Although many
lead sources create risks of lead poisoning, deteriorated paint or wall damage in pre-1978 housing
- both of which can release paint particle and lead-contaminated dust — are two causes for
immediate concern.

       According to a HUD study, 57 million occupied housing units built before 1978 have LBP
on the exterior of the building, the interior, or both.  Of these, nearly one-quarter, or 14 million
units, have non-intact LBP somewhere in the building.21 The presence of LBP leads to a
greater probability of the presence of lead-contaminated dust. (Homes without LBP may still
contain lead-contaminated dust that was brought in from outdoors.)  Where the paint is not
intact, the probability is greater still.  Fourteen percent of homes with intact LBP had dust lead
levels exceeding HUD guidelines; for homes with non-intact paint, the comparable figure was
nearly twice as hi h. At least 20 million homes  contain excessive levels of lead dust or have non-
intact paint, and are therefore immediately at risk for LBP hazards.

       With peeling interior paint or cracked or damaged walls serving as a proxy for potential
LBP hazards, the AHS data show that units located in central cities are in the greatest need of
intervention, followed by units in rural, non-MSA areas.  Figure 4 shows that units in central cities
alone represent 44 percent of all pre-1978 units in hazardous condition. Rural, non-MSA units
constitute another 17 percent. Overall, the distribution of potential LBP hazards is very similar to
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the distribution of pre-1978 units shown in Figure 1 — the primary difference being that central
cities have a larger share of hazards and urban suburbs have a lower share.

                  Figure 4:  Potential LBP Hazards by Metropolitan Location
                   22«
                                                          Central  City, MSA

                                                          Urban Suburb, MSA

                                                          Rural Suburb, MSA

                                                          Urban, Non-USA

                                                          Rural. Non-MSA
                                                 17*
              Source:  American Housing Survey, 1989.
The distribution of hazardous conditions among the census regions is more uniform.  The pre-
1978 units in the West, Northeast, and Midwest that have damaged LBP constitute between 19
and 23 percent of tb" total pre-1978 units for each region, whi1  «*n the South, 35 percent of pre-
1978 units have dam .^ed LBP.  (See Figure 5.) This distributio  suggests that metropolitan
Id ation is a greater indicator of he need for targeting resources'than is geographic location.

                   Figure 5; Potential LBP Hazards by Geographic Location
                   7.3%
                                                  22%
                                                               Northeast

                                                               Midwest

                                                               South

                                                               West
                                                   1995
                    35%
              Source: American Housing Survey, 1989.
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 4.      Groups at Risk of Lead Poisoning from LBP

        Because lead-based paint was used in virtually all housing prior to 1978, children and
 adults of all races and socioeconomic backgrounds are potentially at risk.  Nonetheless, the racial
 breakdown of the residents is important to this discussion because the data below show that
' minority children have higher incidences of elevated blood lead levels than do White children.
 Since there is no evidence to suggest that different races react to lead differently, it is helpful to
 examine whether certain racial groups are associated with housing that is more likely to contain
 LBP hazards than others. (The following information is taken from the 1989 American Housing
 Survey.)

        In  1989, White households represented 70 percent of the occupants of pre-1978 housing
 and minority households represented 30 percent of such occupants (58 million against 25 million).
 By any measurement, however, minority households disproportionately lived in poorer quality
 housing.

        •     Ninety-three percent of White  households lived in adequate housing, as
              opposed to 76.5 percent of minority households. Stated another way,
              minority households occupied 26 percent of all adequate pre-1978 housing
              and 60 percent of all inadequate pre-1978 housing.

        •     Four percent  of White households (5 percent with children) lived in units
              with peeling paint and 10 percent  of minority households (11 percent with
              children) lived in units with peeling paint.

 Appendix III defines "adequate" and "inadequate" housing.

        Minority households  are at a further < -sadvantage because'they  ave lower incomes than
 White households,  as measured by percentage of  households in poverty.  Minority househo ds
 represented 54 percent of all households in poverty in 1989 (out of 4.5 million households). Such
 households have fewer resources available to reduce or avoid LBP hazards.

        Finally, minority households are overwhelmingly renters rather than owners. With regard
 to tenure:

        •     Although 43 percent of households in total rented their units in 1989, 72
              percent of minority households rented  their units, as opposed to 31 percent
              of White households.

        •     Twenty-eight  percent of minority renters lived in inadequate units as
              opposed to 10 percent of White renters.

        •     Nearly three times as many r jnted units were inadequate as owner-
              occupied units.

        •     Minority households occupied 63.2 percent of the rental units with peeling
              paint.

 These data indicate that minority households, particularly lower-income minority households who
 cannot afford to  own a home, are faced with housing in poorer condition.  It can be argued that
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renters have less control over the condition of their units than homeowners, so it is unlikely that
these households have much ability to reduce LBP hazards in their homes.

       These facts illustrate the different housing characteristics and risks of different racial
groups.  Although they do not establish a direct link between race and housing quality, it is
apparent that the housing conditions of minority households are generally worse than those for
White households.  Therefore, it is not surprising that a higher percentage of minority children
have blood lead levels above 15  jig/dL than White children.  In a 1988 report, the Agency for
Toxic Substances and Disease Registry (ATSDR) analyzed reported cases of elevated blood levels
by income level, race, and meiropolitan location. The ATSI R estimated that 17 percent (2.4
million) of all U.S. children  aged six months to five years anu living in standard metropolitan
statistical  areas (SMSAs) had PbB levels of 15 yg/dL or higher.  For low-income Black children
living in large central cities,  however, this figure was 68 percent. This enormous difference
suggests that the issues of LBP hazard reduction and environmental equity ~ equal protection
from environmental hazards - are strongly linked.

       While race is a clear factor in the estimates of children with elevated blood lead levels,
their results suggest that location and income, more than race, are useful predictors of lead
exposure.  Regardless of race, the percentages of all children with elevated  blood lead levels fall
as households are located further from central cities and as incomes rise. Although all children
are at risk of having elevated blood lead levels, Figure 6  and Figure 7 show that the problem
disproportionately affects lower-income, inner-city, and minority children.23

                   Figure 6: Percent of Children with PbB Level i 15 ug/dL
                                  by Location and Income
                Percent  of  Cnildren  in Area
                60
                30
                20
                       Income < $6,000
                       Outside Central City I
                       lei  than 1U       |
                       Inside Central City  I
                       less than 1M
  Income £6.000-14.999

 Location. Income


     Small  SMS A

     Inside Central City
     1M or  more
                                                            Incone $15.000*
Outside Central City
ly or more
Total
              Source- ATSDR (1988), p. V-13.
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                      Figure 7:  Percent of Children with PbB ;> 15 ug/dL
                                    by Race and Income
                Percent  of Children of  Racial Group
                70
                60
                so
                30
                20
                10
                       locone < $6.000
                                        Income £6,000-14.999

                                          Race , Income

                                       i White    • Black
                                                             locone $15 000+
              Source: ATSDR (1988), p. V-13.


5.     Overview of Current Responses to LBP Hazards

       Existing Federal Rules

       Presently, two major sets of federal regulations directly address lead-based paint hazards:
24 CFR Part 35, Lead-Based Paint Poisoning Prevention in Certain Residential Structures, and 29
CFR 1910.1025, the Occupational Safety and Health Administration (OSHA) guidelines on
worker safety for lead.  24 CFR Part 35 is directed toward federally- owned or assisted properties.
It prohibits the use of lead-based paint in federally-owned or -assisted properties and further
requires that:

       •      Purchasers and tenants of all pre-1978 housing insured by HUD or
              receiving assistance payments from HUD must receive notification that
              their units were built prior to 1978, that they may contain lead-based paint,
              of the hazards, symptoms and treatment of lead poisoning, and of the
              precautions to be taken.

       •      All painted interior and exterior surfaces must be examined for defective
              paint surfaces and, where found, treated to eliminate immediate lead-based
              paint hazards.

       •      Appropriate provisions for inspecting painted surfaces and eliminating
              hazards must be included in all contracts and subcontracts involving HUD-
              associated housing (i.e., housing receiving FHA mortgage insurance or
              receiving housing assistance payments).
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              Any federal agency selling pre-1978 federally-owned property must ensure
              that the property is inspected for lead-based paint hazards and all defective
              paint surfaces are treated prior to residential occupancy.

       The OSHA regulations provide guidelines for workers exposed to airborne lead.  These
regulations include exposure monitoring, use of respiratory devices and protective clothing,
housekeeping, and medical surveillance. These guidelines apply to workers involved in lead-based
paint hazard reduction.

       Title X Programs

       Title X, the Residential Lead-Based Paint Hazard Reduction Act of 1992, is the latest
national legislative response  to the dangers of lead poisoning. Title  X is intended to go beyond
24 CFR Part 35's preventive measures, to focus attention and national resources on lead-based
paint hazards and to evaluate and reduce these hazards before a child is lead poisoned. Under
the Act, lead-based paint is paint containing lead in excess of 1.0 mg/cm2 as measured by an x-
ray fluorescence (XRF) detector or 0.5 percent by weight. A lead-based paint hazard is any
condition that causes exposure to lead in sufficient amounts to cause adverse human health
effects.  Section  1004 of Title X defines six such conditions:

       (1)     "Deteriorated lead-based paint" is any interior or exterior lead-based paint
              that is peeling, chipping, chalking, or cracking, or is located on any surface
              or fixture that is damaged or deteriorated.

       (2)     Lead-based paint on any "friction  surface," defined as an interior or
              exterior surface subject *o abrasion or friction, such as painted flo^   and
              friction surfaces on win.3-jws.

       (3)     Lead-based paint on any "impact surface," defined as an interior or exierior
              surface subject to damage by repeated impacts, such  as parts of door
              frames.

       (4)     Lead-based paint on any "accessible surface," defined as an interior or
              exterior surface accessible for  a young child to mouth or chew, such as a
              window sill.

       (5)     "Lead-contaminated dust" is defined as surface dust in residential dwellings
              that contains an area or mass concentration of lead in excess of the
              standards to be established by the EPA.

       (6)     "Lead-contaminated soil" is defined as bare soil on residential property that
              contains lead in excess of the standards to be established by EPA

       In any home built before 1978, the possibility that one of these conditions exists is high.
Title X calls for  the evaluation  and reduction of hazards in federally owned or assisted housing
(with different requirements depending on the type of assistance provided).  Hazard evaluation
may be accomplished by either a risk assessment  or an inspection.

       •      Risk Assessment:  An on-site inspection to identify LBP hazards that
              present or are likely to present exposures of concern to human health
              through information-gathering, visual inspection, limited wipe sampling or
October 20, 1993                      Introductory Paper                               Page 13

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              other environmental sampling techniques, or other appropriate activity, and
              a report of the findings.

       •      Inspection:  A surface-by-surface inspection of a unit to identify the
              presence of LBP and a report of the findings.

If the evaluation identifies LBP hazards, the property owner can reduce the hazards through
either short-term interim controls or long-term abatement.

       •      Interim Controls:  Measures to temporarily reduce human exposure or
              likely exposure to LBP hazards, including specialized cleaning, repairs,
              maintenance, painting, temporary containment, ongoing monitoring of
              actual or potential LBP hazards, and the establishment and operation of
              management and resident education programs.

       •      Abatement: Measures designed to permanently eliminate LBP hazards
              through the removal of LBP and lead-contaminated dust, the permanent
              containment or encapsulation of LBP, the replacement of lead-painted
              surfaces or fixtures, and the removal or covering of lead-contaminated soil,
              as well as all preparation, cleanup, disposal, and post-abatement clearance
              testing activities associated with abatement.

       In short, Title X intends to ensure a cost-effective approach to  hazard evaluation and
reduction in all housing  receiving  any federal funding by instituting both long-term and interim
risk-based hazard control requirements, encouraging the growth and development of a quality
abatement industry, and creating new mechanisms for  ">ising public awareness over the next 10
years.  Under Title X:

       •      HUD will oversee  a competitive grants program for states and local
              governments that will fund lead-based paint hazard reduction in low-
              income housing.

       •      HUD will develop criteria for conducting hazard evaluations and risk
              assessments in publicly- and privately-owned housing.

       •      State and local units of government completing Comprehensive Housing
              Affordability Strategies (CHAS) must address lead-based paint hazard
              reduction strategies. The requirement was issued by HUD in March 1993.

       •      HUD, in consultation with EPA, OSHA,  and the Centers for Disease
              Control,  will develop guidelines for federally-supported work involving
              lead-based paint hazard risk assessments, inspection,  interim controls, and
              abatement.

       •      HUD will impose specific requirements and deadlines for hazard evaluation
              and elimination in federally owned, insured, and assisted housing to make
              the federal government a model landlord.

       •      HUD and EPA will develop and require a disclosure of lead hazards in all
              target housing being sold, including privately-owned residences.
October 20, 1993                     Introductory Paper                             Page 14

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       •      EPA will issue regulations on laboratory certification and abatement
              training programs. It will also develop model State programs for worker
              training.

       •      OSHA will issue regulations on occupational exposure to lead in the
              construction industry.

       •      The National Institute on Occupational Safety and Health (NIOSH) will
              provide grants for training and educating workers and supervisors engaged
              in LBP  activities.

       •      HUD will provide progress reports to Congress on a regular basis by
              issuing annual reports assessing the progress made in implementing Title X
              programs. The reports will summarize the most recent childhood lead
              poisoning studies, recommend initiatives to combat lead hazards, summarize
              research results, and estimate the amount of federal assistance expended.
              HUD will also provide biennial reports on the effectiveness of LBP hazard
              notifications and inspection and abatement programs, levels of HUD
              expenditures, and estimates and assessments of the infrastructure needed to
              reduce hazards.

       •      The HUD Secretary, in conjunction with the EPA Administrator, has
              established a national Task Force on Lead-Based Paint Hazard Reduction
              and Financing to make policy and technical recommendations to HUD and
              EPA on ways of extending prevention efforts to the universe of private
              housing.24

In addition, Title X strengthens 24 CFR Part 35 by extending federal attention t«.  federally owned
or assisted properties undergoing rehabilitation.

       •      Lead-based paint inspections are required  prior to rehabilitation or
              renovation projects that could disturb paint in pre-1978 federally-assisted
              housing. Abatement is required in all rehabilitation projects in federally
              owned or assisted housing receiving $25,000 or more in federal funds and
              hazard reduction is required in all such rehabilitation projects receiving less
              than $25,000 in federal funds.

       •      Lead-based paint hazard inspection and  abatement are included as  eligible
              uses of federal funds under programs such as HOME Investment
              Partnerships, HOPE 1, 2, and 3, and Community Development Block
              Grant Program.

       •      Lead-based paint hazard evaluation and  reduction are included  ;s eligible
              rehabilitation activities for Home Improvement and  Rehabilitation  loans
              insured  by the Federal Housing Administration (FHA) under Sections 2(a)
              and 203(k) of the National Housing Act.

       A timetable of required actions is shown in Exhibit 1. In addition to these regulatory
activities, HUD will operate a competitive grants program (as mentioned earlier) to award funds
to states and local governments to use for hazard reduction activities. These governments may
use the funds to finance evaluation and reduction activities, family relocation during reduction,
October 20, 1993                      Introductory Paper                              Page 15

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blood lead level monitoring of workers, post-abatement clearance testing, and public education.
Financing may take the form of grants, loans, loan guarantees, interest subsidies, or other
mechanisms.  The work must be conducted by contractors certified and workers trained through a
federally- or state-accredited LBP program pursuant to regulations implementing Section 402 of
the Toxic Substances Control Act (when promulgated).

        In addition, HUD will conduct research, in conjunction with other federal agencies, on
strategies to reduce the risk of lead exposure from non-paint sources; developing new methods of
evaluating and reducing LBP hazards in housing; establishing performance standards for
evaluation and reduction methods; establishing appropriate cleanup standards; and evaluating the
efficacy and performance of interim control and abatement techniques.

        States are expected to develop contractor certification and training programs.  HUD and
EPA both may provide grants to states for such programs.  Furthermore, EPA will provide
guidance through its model program.  EPA also has begun sponsoring public education and
outreach activities.  EPA has established a clearinghouse to collect, evaluate, and disseminate
information on various aspects of lead poisoning.  The clearinghouse maintains a rapid-alert
system  to inform  certified abatement contractors of significant research developments.
                          Exhibit 1: Timeframe for Actions Under Title X
October 1992
April 1993
October 1993
April 1994
President sif  . Title X (Public Law 102-550).

The CHAS must include lead-based paint hazard evaluation and
reduction strategies. (HCDA §1014)

Secretary of Labor (OSHA) issued interim final regulations on
occupational lead exposure in the construction industry. (HCDA
§1031)

EPA develops a National Clearinghouse on Childhood Lead
Poisoning and an information hotline. (TSCA §405(e))

HUD develops guidelines for the conduct of federally-supported work
involving nsk assessments, inspections, interim controls, and
abatement. (HCDA §1017)

EPA issues health-based standards for LBP hazards and for
hazardous levels of lead in dust and soil. (TSCA §403)

EPA issues model "State program" regulations for licensing and
certification of contractors and training facilities. (TSCA §404(d))

EPA issues regulations governing LBP  risk assessment, inspection,
and abatement to ensure that individuals engaging in these activities
are properly trained; that training programs are accredited; and that
contractors are certified.  EPA also issues and disseminates guidelines
for the renovation and remodeling activities where these activities may
create a nsk of exposure to dangerous levels of lead. (TSCA §402)
October 20, 1993
      Introductory Paper
Page 16

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                       Exhibit 1:  Timeframe for Actions Under Title X (cont'd)
October 1994
January 1995

April 1995
October 1995


January 1996


April 1996


October 1996



January 1998-2002
HUD and EPA jointly issue regulations requiring disclosure of known
LBP hazards to purchasers or lessees of target housing (HCDA
§1018(a))

EPA publishes a lead hazard information pamphlet to be used in
connection with HCDA §1018. (TSCA §406(a))

EPA promulgates regulations to require renovation contractors to
provide a lead hazard information pamphlet to owners and occupants
of target housing before commencing work. (TSCA §406(b))

EPA establishes a program to certify laboratories as qualified to  test
substances for lead content and publishes list of laboratories that are
accredited or certified. (TSCA  §405(b))

HUD requirements of October 1993 take effect. (HCDA §1012)

EPA concludes studies on the extent of exposure to LBP hazards
caused by various remodeling activities. (TSCA §402(c)(2))

EPA issues performance standards for products and devices used for
LBP testing and abatement. (TSCA §405(f))

The Department of Health and Human Services submits its report on •
studies of sources of lead exposure in children and, in consultation
with NIOSH, a report on means to reduce hazardous occupational
lead abatement exposure. (T^A  §405(c))
                                   s
HUD/EPA joint regulations of October 1994 take effect. (HCDA
§1018(d))

Initial risk assessments and follow-up interim controls begin for all
federally assisted units built prior to 1960. (HCDA §1012)

EPA issues requirements for contractor licensing in states without
approved programs. (TSCA §404(h))

EPA requires state certification and training for those conducting
remodeling and renovation activities which  cause excessive lead
exposure. (TSCA §402(c)(3))

Initial risk assessments and follow-up interim controls must be
completed for all federally assisted units built between 1960 and 1978.
(HCDA §1013)
October 20, 1993
       Introductory Paper
Page 17

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6. The Background Papers

       The nine other background papers have been written to highlight areas in which federal,
state, and local agencies and other organizations can intervene to reduce the prevalence of LBP
hazards in the country's privately-owned housing stock. Each paper identifies "intervention
points" -- activities or requirements that are triggered either during a real estate transaction or,a
related transaction, or that arise during the period of ownership, that will direct property owners,
tenants, and other housing professionals to respond to and abate lead-based paint hazards.  These
papers will be organized around the following issues:

       Real Estate Transactions

       .(1)    Property appraisal: How the presence of lead paint currently affects an
              appraiser's valuation of a home, and how appraisal  standards can be
              focused toward the identification of potential LBP hazards.

       (2)    Risk assessment and inspections: How Title X defines LBP risk
              assessments and inspections, the major players involved in these
              evaluations, current approaches for promoting risk assessments and
              inspections in public and private housing, and policy options for increasing
              the number of evaluations conducted in private housing.

       (3)    Underwriting standards:  How LBP hazards are taken into consideration
              during the underwriting process and how changes that affect the
              underwriting industry could promote LBP hazard reduction.

       (4)    Tenant-based assist  a.: Why the use of tenant-based assistance presents
              particular problems .or applying lead-based paint hazard inspection and
              abatement requirements, and how HUD, Public Housing Authorities (or
              other program administrators), and landlords can cooperate in reducing .
              lead-based paint hazards.

       Abatement Activities

       (5)    Financing mechanisms:  What groups are not served by the existing private
              lending system, and how public programs can be structured to effectively
              meet  the need for LBP hazard reduction financing for these groups.

       (6)    Distressed housing:  What challenges are inherent in addressing LBP hazards
              among housing in economic distress, as opposed to economically viable, housing.
              Distressed housing often operates outside the traditional housing market, have
              marginally positive investment value, and do not respond to the same financial
              incentives as other properties. Therefore, subsidies may be necessary to reduce
              lead hazards in these properties.

       Damages  and Compensation

       (7)    Liability law: How federal and state governments could revise liability  and
              related judicial standards for lead poisoning damages affecting landlords
              and abatement contractors to reduce LBP hazards.
October 20,  1993                     Introductory Paper                              Page 18

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       (8)     Liability insurance:  What is the role of liability insurance in providing
              incentives for reducing LBP hazards, and how can the supply, demand, or
              terms for lead-related liability insurance coverage be modified to encourage
              the reduction of LBP hazards by landlords and abatement contractors.

       (9)     Administrative compensation systems:  What mechanisms could be
              established to compensate individuals for lead-based paint damages outside
              of the insurance or legal liability systems, what types of damages might they
              cover for whom, and how would the system be funded.

       The nine papers are organized in the same manner. After an introduction, each paper
presents background material explaining the paper's topic and its relevance to the housing market
and to LBP issues.  The material introduces the individuals and organizations involved in this
particular area, and the key laws, regulations, and practices governing this topic.  The paper then
highlights the current and evolving approaches being taken to address lead-based paint hazards in
this area. Any precedents or analogies, such as measures  to address asbestos hazards, are
discussed. Finally, the papers present options for the Task Force to consider, which will be
assessed through the following five criteria:

       (1)     Effectiveness:  The extent to which the option will reduce and/or abate
              lead-based paint hazards and, in  the case of the liability and administrative
              compensation papers, will increase this availability of compensation for
              LBP damages.

       (2)     Cost: The magnitude of the costs of the option and who will bear them.

       (3)     Equity:  Whether the costs  and benefits  are shared-<<• long parties in
              relation to their involvement and/or responsibility, and whether they accrue
              to any one affected group (e.g., low-income households) more than to
              another.

       (4)     Political feasibility:  Whether the political constituencies affected by the
              option, such as tenants, landlords, homeowners, banks, insurers, etc., are
              likely to support the option. This criterion also addresses the fora in which
              the options must be adopted (e.g., states, Congress),  It does not, however,
              address partisan politics.

       (5)     Administrative ease: The speed with which the proposed measure can be
              implemented, the ability of the individuals  and organizations involved to
              implement the option with  the resources available, and the degree to which
              compliance with the measure can be enforced.
October 20, 1993                      Introductory Paper                              Page 19

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APPENDIX I

       The American Housing Survey uses the following metropolitan location definitions:

       •      Metropolitan Statistical Area fMSAV. MSAs are counties or groups of
              counties of 50,000 inhabitants or more, or "twin cities" with a combined
              population of at least 50,000.  Contiguous counties are included within an
              MSA if, according to certain AHS criteria, they are socially and
              economically integrated with the central city. Within New England, MSAs
              consist of towns and cities rather than counties, but otherwise the rules are
              similar.

       •      Urbanized Areas: A central city and its surrounding settled urban suburbs
              which together have a population of 50,000 or more and a density of
              usually at least 1,000 people per square mile or 1.6 persons per acre.
              "Other urban" means places outside an urbanized area that have more than
              2,500 inhabitants. In this paper, the urban suburb definition includes the
              "other urban" areas.

       •      Rural Areas: Settled areas not classified as urbanized or other urban.

       •      Central Cities: Central cities in MSAs are cities in SMSAs in which the
              population of the city and the population of the balance of the SMSA each
              exceed 250,000 inhabitants.

       The American Ho  'ng Survey uses the Census Bureau's regional designations, as follows:

       •      Northeast:  Connecticut, Maine, Massachusetts, New Hampshire, New
              Jersey, New York, Pennsylvania, Rhode Island, and Vermont

       •      Midwest:  Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri,
              Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin

       •      South: Alabama, Arkansas, Delaware, District of Columbia, Florida,
              Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina,
              Oklahoma, South Carolina, Tennessee, Texas,  Virginia, and West Virginia

       •      West:  Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana,
              New Mexico, Nevada,  Oregon, Washington,  and Wyoming
October 20, 1993                      Introductory Paper                              Page 20

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APPENDIX II
                                     TABLE 1
                  METROPOLITAN LOCATION OF PRE-1978 UNITS, 1989
Metro Area
Central City of MSA
Urbanized Suburb of MSA
Rural Suburb of MSA
Urban Area, non-MSA
Rural Area, non-MSA
Total
Number of Units
28,532,541
26,341,354
8,648,372
7,305,108
12,320,292
83,147,667
Percent
34.3%
31.7%
10.4%
8.8%
14.8%
100.0%
                                     TABLE 2
                     CENSUS LOCATION OF PRE-1978 UNITS, 1989
Census Region
Northeast
Midwest
South
West
Total
Number of Units
18,949,616
21,355,259
26,903,236
15,942,556
83,147,667
Percent
22.8%
25.7%
32.4%
19.2%
100.0%
                                    TABLE 2A
       CENSUS LOCATION OF PRE-1978 UNITS AS A PERCENTAGE OF ALL UNITS, 1989
                Census Region
       Number of Pre-1978
             Units
Percent of All
    Units
         Northeast
         Midwest
         South
         West

         Total
                 18,949,616
                 21,355,259
                 26,903,236
                 15,942,556

                 83,147,667
       88.0%
       84.7%
       73.0%
       75.7%

       79.5%
October 20, 1993
Introductory Paper
               Page 21

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                                      TABLES
         METROPOLITAN LOCATION OF PRE-1978 UNITS WITH PEELING PAINT, 1989
         Metro Area
      Number of Units with
    Peeling Paint (% of total)
                           With no children present  With children present
                   Total
                   Units
    Central City of MSA
    Urban Suburb of MSA
    Rural Suburb of MSA
    Urban Area, non-MSA
    Rural Area, non-MSA

    Total
1,273,504 (61.3%)
 593,887 (63.5%)
 239,172 (60.1%)
 272,792 (63.4%)
 648,060 (74.1%)

3,027,415 (64.2%)
 804,989 (38.7%)  2,078,493
 341,119(36.5%)    935,006
 158,943 (39.9%)    398,115
 157,499 (36.6%)    430,291
 226,996 (25.9%)    875,056

1,689,546 (35.8%)  4,716,961
                                     TABLE 3A
         METROPOLITAN LOCATION OF PRE-1978 UNITS WITH PEELING PAINT, 1989
                Metro Area
   Number of Units with
       Peeling Paint
   % of Pre-1978 Total
         Centra   "«y of MSA
         Urban  aburb of MSA
         Rural Suburb of MSA
         Urban Area, non-MSA
         Rural Area, non-MSA

         Total
      2,078,493
        935,006
        398,115
        430,291
        875,056

       4,716,961
         7.3%
         3.6%
         4.6%
         5.9%
         7.1%

         5.7%
October 20, 1993
 Introductory Paper
                       Page 22

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CENSUS LOCATION

Census Region
With
Northeast
Midwest
South
West
Total
TABLE 4

OF PRE-1978 UNITS WITH PEELING PAINT, 1989
Number of Units with
Peeling Paint (% total)
no children present With children present
761,465 (69.5%) 333,543 (30.5%)
685,810 (59.8%) 460,188 (40.2%)
1,091,910 (64.7%) 596,054 (35.3%)
488,229 (62.0%) 299,761 (38.0%)
3,027,414 (64.2%) 1,689,546 (35.8%)

Total
units"
1,095,008
1,145,998
1,687,964
787,990
4,716,960
                                      TABLE 4A
            CENSUS LOCATION OF PRE-1978 UNITS WITH PEELING PAINT, 1989
               Census Region
             Northeast
             Midwest
             South
             West

             Total
 Number of Units
with Peeling Paint
% of Pre-1978 Total
 1,095,008
 1,145,998
 1,687,964
   787,990

 4,716,960
      5.8%
      5.4%
      6.3%
      4.9%

      5.7%
October 20, 1993
Introductory Paper
                         Page 23

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                                       TABLES
          NUMBERS OF CHILDREN, 6 MONTHS TO 5 YEARS OLD, LIVING IN SMSAs,
                       ESTIMATED TO EXCEED 15 yo/oL PBB, 1984
                (See following tables A, B, and C for breakdown of numbers)
Family Income
and Race
< $6,000
Whijte
Black
Total
$6,000-14,999
White
Black
Total
*S15,i J
Whue
Black
Total
National
Total t
Baseline
Population
of Children
1,039,600
698,300
1,737,900
2,666,300
793,300
3,459,600
7,643,900
991,800
8,635,700
13,840,000
Number of
children w/
elevated
PbB levels
285,200
429,800
715,000
421,600
366,300
787,900
569,800
307,900
877,700
2,380,600
Location of Children
Inside Central City Outside Central City
<1M
33,600
78,900
112,500
43,700
57,100
100,800
46,000
41,800
87,800
301,100
*1M
93,400
234,900
328,300
113,000
184,900
297,900
124,600
151,000
275,600
901,800
<1M
27,400
14,800
42,200
46,700
17,500
64,200
61,100
14,400
75,500
181,900
*1M
71,100
44,600
115,700
120,400
49,900
170,300
241,200
64,400
305,600
591,600
Small
SMSAs*
59,700
56,600
116,30a
97,800
56,900
154,700
96,900
'36,300
133,200
404,200
•SMSAs with population less than 1 million and no central city.

flncludes 6,800 children from small SMSAs who could not be stratified by family income.
October 20, 1993
Introductory Paper
Page 24

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                                       TABLE 5A
          NUMBERS OF CHILDREN, 6 MONTHS TO 5 YEARS OLD, LIVING IN SMSAs,
                  ESTIMATED TO EXCEED 15 JIG/DL PBB BY INCOME, 1984
Family Income
$6,000:
$6,000-14,999
*$15,000
National Total t
Baseline
Population of
Children
1,737,900
3,459,600
8,635,700
13,840,000
Children with
elevated PbB
(% of Baseline)
715,000
(41.1%)
787,900
(22.8%)
877,700
(10.2%)
2,380,600
(17.2%)
•(•Includes 6,800 children from small SMSAs who could not be stratified by family income
                                        TABLE 5B
             NUMBERS OF CHILDREN, 6 MONTHS TO 5 YEARS OLD, LIVING IN SMSAs,
                ESTIMATED TO EXCEED 15 JJG/DL PsB, BY SMSA LOCATION, 1984

              Children with    Inside Central Citv    Outside Central City    Sm 11
              elevated PbB                                            SMSAs*
2,380,600

% of Children
in that Area
with EBL

% of Baseline
Population
(13,840,000)
                              301,100    901,800    181,900    591,600    411,000
                               20.0%     31.2%
                8.9%     13.6%     13.2%
                                2.2%
      6.5%
1.3%
4.3%
2.9%
'SMSAs with population less than 1 million and no central city
October 20, 1993
Introductory Paper
                              Page 25

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                                        TABLE 5C
              NUMBERS OF CHILDREN, 6 MONTHS TO 5 YEARS OLD, LIVING IN SMSAs
                      ESTIMATED TO EXCEED 15 nc/oL PsB, BY RACE, 1984
Race
White
Black
Total ft
Baseline
Population of
Children
11349,800
2,483,400
13,833,200
Children with
elevated PbB
1,276,600 -
(11.2%)
1,084,000
(43.6%)
2,360,600
(17.1%)
tfDoes not include 6,800 children from small SMSAs who were not stratified by family income.
October 20, 1993                     Introductory Paper                             Page 26

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APPENDIX III

       According to the American Housing Survey, a housing unit is "severly inadequate" if it has
any of the following five problems:

       •      Plumbing: Lacking hot piped water or a flush toilet, or lacking both  .
              bathtub and shower, all for the exclusive use of the unit.

       •      Heating: Having been uncomfortably cold last winter, for 24 hours or
              more, because the heating equipment broke down, and it brol'e down at
              least three times last winter, for at least six hours each time.

       •      Upkeep: Having any five of the following six maintenance problems:  leaks
              from outdoors, leaks from indoors, holds in the floor, holes or open cracks
              in the walls or ceiling, more than a square foot of peeling paint or plaster,
              or rats in the last ninety days.

       •      Hallways:  Having all of the following four problems in public areas:  no
              working light fixtures, loose or missing steps, loose or missing railings, and
              no elevator.

       •      Electric:  Having no electricity, or all of the following three electrical
              problems: exposed wiring, a room with no working wall outlet,  and three
              blown fuses in the last 90 days.

A housing unit is considered "moderately inadequate" if it has any of the  following five problems,
but none of the severe problems:

       •      Plumbing: Having toilets all break down at once, at least  th se times in
              the last three months, for at least six hours each time.

       •      Heating: Having unvented gas,  oil, or kerosene  heaters as the main source
              of heat.

       •      Upkeep: Having any three of the six upkeep problems mentioned under
              "severely inadequate."

       •      Hallways:  Having any three of the four upkeep  problems mentioned under
              "severely inadequate."

       •      Kitchen: Lacking a sink, range, or refrigerator, all for the exclusive use of
              the unit.

An "adequate" unit meets neither of the above criteria.
October 20, 1993                      Introductory Paper                              Page 27

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End notes

1. This section borrows from "Understanding Title X:  A Practical Guide to the Residential Lead-
Based Paint Hazard Reduction Act of 1992," produced by the Alliance to End Childhood Lead
Poisoning, Washington, DC, January 1993.

2. Cited in U.S. Department of Health and Human Services, Public Health Service, Agencu for
Toxic Substances and Diseases Registry, Toxicological Profile for Lead," February 1993, pp. 12 to
18.

3. Although blood lead levels of lOug/dL to 14 ug/dL are considered cause for concern,
appropriate medical and environmental interventions for children with these blood levels have not
yet  been identified and evaluated. There are also too many children with these blood lead levels
to allow effective case management. Consequently, 15 ug/dL is the current minimum standard at
which the CDC recommends case management.  Centers for Disease Control, "Preventing Lead
Poisoning in Young Children," October 1991, p. 2.

4. Centers for Disease Control, pp. 7 to 9.

5. ATSDR  (1993), pp. 12 to 18.

6. ATSDR  (1993), p. 5.

7. Centers for Disease Control, p. 11.

8. Studies by Batumen et al. (1981, 1983), Buchet et al. (1980), and Huang (1988), cited in
ATSDR (1993), P, 14,

9. There has been a significant decline in the amount of lead in the air from fuels since the use of
leaded gasoline has been reduced.

10.  U.S. Department of Health and Human Services, Public Health Service, Agency for Toxic
Substances and Diseases Registry, The Nature and Extent of Lead Poisoning in Children in the
United States:  A Report to Congress, July 1988, p. VI-44.

11.  Center  for Disease Control, p. 18.

12.  "The long-term effects of exposure to low doses of lead in childhood:  an 11-year follow up
report," New England Journal of Medicine 1990:332, pp. 83 to 88. Cited in "Strategic Plan for the
Elimination of Childhood Lead Poisoning," Centers for Disease Control, February 1991, Appendix
I, page 6.  This source does not define "moderate lead levels."

13.  ATSDR (1993), p. 43.
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14. The maximum medical cost could exceed $12,400, as follows:

       All children receive testing:             $148    100.0% likelihood
       Additional testing for heightened
              EP* levels and follow-up      $1,184     70.0% likelihood
       Chelation therapy                   $3,700      5.0% likelihood
       Second chelation therapy            $3,700      2.5% likelihood
       Third chelation therapy              $3.700      1.25% likelihood

       Total Medical Cost                 $12,432
       Average Medical Cost               $1,300

*EP:  Erythrocyte Protoporphyrin is a chemical in blood which is used to synthesize heme, a
component of hemoglobin. Lead inhibits the synthesis of EP into heme.

15. Centers for Disease Control, Appendix II, pp. 1-9.

16. Centers for Disease Control, Appendix II, pp. 1-9.

17.  Federally-owned housing is a residential dwelling owned by a federal agency or for which a
federal agency is trustee or conservator. Federally-assisted housing is a  privately-owned
residential dwelling which received federal assistance during construction (such as below-market
interest rate loans, grants, interest subsidies) or which currently receives housing assistance
payments. Also see Section 1004 of Title X.

1 ° Alliance to End Childhood Lead Poisoning and the National Center for Lead-Safe Housing,
V Framework for Action to Make Private Housing Lead-Safe," Jyne 1993, pp. ii, 8.
                                                          ' s
19. The American Housing Survey is a survey conducted by the Census  Bureau for HUD.  This
survey collects data every other year on  the Nation's people and housing stock. It asks detailed
questions on 500 items including unit size and value, quality, location, and year built, housing
costs, household  composition, and household income.

20. ATSDR (1988),  pp. V-24 to V-26.

21. U.S. Department of Housing and Urban Development, "Comprehensive and Workable Plan
for the Abatement of Lead-Based Paint in Privately Owned Housing," December 1990, p. 3-11.

22. U.S. HUD, pp. 3-16 through 3-18.

23. Note that the decreased use of lead  in gasoline was estimated to bring about a reduction in
blood lead levels to below 15 ug/dL for 8.1 million children nationwide  between 1985 and 1990.
Therefore,  all percentages of children with elevated blood lead levels should be lower in 1993
than they were in 1984.  Barbara Berney, "Round and Round  It Goes:  The Epidemiology of
Childhood Lead  Poisoning, 1950-1990,"  The Milbank Quarterly, 1993, p. 32.

24. Alliance to End  Childhood Lead Poisoning, pp. 2 to  7.
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                                       GLOSSARY

Abatement:  Measures designed to permanently eliminate L8P hazards through the removal of
       LBP and lead-contaminated dust, the permanent containment or encapsulation of LBP,
       the replacement of lead-painted surfaces or fixtures, and the removal or covering of lead-
       contaminated soil, as well as all preparation, cleanup, disposal, and post-abatement
       clearance testing activities associated with abatement.

Admitted insurers:  An insurance company licensed to do business in a state.

Alternative dispute resolution (ADR) mechanisms: Methods of resolving disputes that  bypass
       the public courts and substitute less expensive and time consuming procedures. Examples
       include mediation and arbitration.

Appraisal: A procedure used to establish the market or replacement value of a property for use
       in purchasing, financing, or insuring the property. Appraisals estimate market value by
       examining the sales prices of comparable properties or by measuring the net present value
       of the income produced by the property.  Appraisals estimate replacement value by pricing.
       the components of the property.

Block grants: Federal  funds distributed to state and/or local governments to support certain types
       of activities or programs. Grants are made to jurisdictions that meet specific eligibility
       criteria.  Recipient jurisdictions, such as state and local governments, are usually given
       discretion to design programs that meet broad statutory objectives and guidelines.  See
       Community Development Block Grant CCDBG) program.

Captr   insurer:  An insurance company set up by a company or,group of companies  to insure
       their own risks or risks common to the group.

Chewable surface: Protruding paint surfaces up to five feet from the floor or ground that are
       readily accessible to children under seven years of age (e.g. protruding corners, windowsills
       and frames, doors and frames, and other protruding woodwork).

Class action: A lawsuit brought by one or more plaintiffs on behalf of themselves and all other
       persons having  an identical interest in the alleged wrong.

Commercial general liability (CGL) insurance: A type of insurance designed to cover all types
       of third-party damages (i.e., an "all hazards" scope of protection), subject to certain
       exclusions and conditions specified in the policy form. Most standard CGL policies issued
       since the early 1970s have excluded coverage for damages caused by release of a pollutant
       that  is not "sudden and accidental." More recent CGL policies exclude all damages caused
       by pollution, whether sudden or nonsudden.

Common law: The body of law in the United States (except Louisiana), Great Britain, and other
       countries developed from judicial decisions based on custom and precedents, rather than
       on statutes or written codes.
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Community Development Block Grant (CDBG) Program:  An entitlement program operated by
       the U.S. Department of Housing and Urban Development that provides funds to states,
       urban counties, and local governments for use in community, economic, and housing
       development programs. Funds are provided to grantees by formula. Local governments
       have discretion in allocating the funds, but the funds must be used to beneGt low- and
       moderate-income persons.  See CFR Part 570.

Comparative fault:  A principle of liability law in some states providing that the liability of a
       defendant is proportional to the defendant's negligence relative to the plaintiffs
       negligence. For example, if both the defendant and plaintiff are negligent and the
       defendant is 80 percent responsible for the damages and the plaintiff is 20 percent
       responsible, the defendant must pay only 80 percent of the damages.

Contributory negligence: A defense to liability under which a plaintiffs negligence that
       contributed to her damages bars her recovery.

Economically distressed housing:  Private housing units where the property owner cannot afford
       to correct physical conditions that pose health or safety threats to the occupants.
       Economically distressed units are not necessarily experiencing financial distress.  Owners
       of many economically distressed units are able to meet their existing financial obligations,
       they simply cannot afford to make needed repairs. Economic distress is more likely to
       affect units serving households with low or modest incomes than middle- or upper-income
       households.

Economically viable housing: Private housing units where the property owner has  sufficient  •
       as:  ? and/or income  to afford to correct physical conditions that pose health or safety
       thrc .ts to the occupants. These owners are directly affected by and respond to traditional
       lending and insurance markets and mechanisms.

Elevated blood level:  Blood  containing more than 10-15 micrograms of lead per deciliter (ug/dL)
       of whole blood.

Environmental impairment liability (EIL) insurance: A type of insurance developed in the
       1970s specifically to cover third-party damages caused by pollution.

Environmental equity: The  equitable distribution of environmental damages across groups in
       society, in particular income and racial groups. The damages from lead-based paint tend
       to be inequitably distributed; low-income and minority groups are disproportionately
       affected.

Excess or surplus lines insurers:  Insurance companies that are not licensed or "admitted" to
       transact business in a state. States often control the ability of these companies to transact
       business by regulating brokers and agents. Some states maintain lists of eligible excess or
       surplus lines insurers with which brokers may place business.

Fair market rent (FMR):  The cost of housing, including utilities, at the 45th percentile of rents
       paid by all recent movers to standard housing. It is used to determine maximum rents that
       can be supported under many government housing assistance programs, including the
       Section 8 Existing Housing Program.
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Federally-assisted housing:  Residential dwellings receiving project-based assistance such as
       below-market interest rate loans or rent subsidies from HUD or the Farmers Home
       Administration.

Federally-owned housing: Residential dwellings owned or managed by a federal agency or for
       which a federal agency is trustee or conservator.

Federally regulated financial institutions: For the purposes of FTRREA Title XI, institutions
       required to obtain the services of certified or licensed appraisers for real estate
       transactions involving properties of a certain dollar value.

Financially distressed housing:  Housing where the owner cannot meet a property's existing
       financial obligations.

Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA):  As it relates
       to appraisals, Title XI of FIRREA provides standards for the conduct of appraisals in
       connection with real estate transactions involving federally regulated financial institutions.

First mortgage: A loan secured by a property for which the lender has the first right to recover
       its costs through the sale of the project's assets.

First-party insurance:  Insurance coverage for the insured's personal and real property and/or the
       insured's own person.  Contrast with third-party liability insurance.

Hazard evaluation: Measures to identify LBP hazards through inspections or risk assessments.

Hazard reductt • j:  Measures to remove LBP hazards by abatement or interim controls.
                                                            ^
HOME Investment Partnerships Program (HOME):  A formula federal grant program operated
       by the U.S. Department of Housing and Urban Development that provides funds to state
       and local governments for use in affordable housing development for low-income
       households. Participating Jurisdictions (PDs) have discretion in allocating the funds
       among eligible activities including new construction, acquisition, rehabilitation, tenant-
       based assistance, and related costs. See 24 CFR Part 92.

Homeownership Opportunities for People Everywhere (HOPE):  A series of programs operated
       by the U.S. Department of Housing and Urban Development that provides funds to local
       governments, resident groups, and nonprofit groups to purchase and rehabilitate publicly-
       owned properties for use as affordable housing.  See 24 CFR Subtitle A.

Housing cost burden:  Housing costs that exceed 30 percent of a household's  gross income
       constitute a cost burden. When housing costs exceed this threshold, the family is assumed
       to lack sufficient income to meet other basic needs. This standard is a better indicator of
       ability to pay among low- and moderate-income households than it is for middle- and
       upper-income households.

Housing costs:  The amount a household pays each month for housing related expenses. For
       owners, these costs typically include principal, interest, taxes, insurance, and utilities.  For
       tenants, housing costs include the contract rent and utilities.
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Housing Quality Standards (HQS): A minimum standard for housing health and safety that must
       be met in order to approve a unit for assistance under many federally-supported housing
       assistance programs. See 24 CFR 882.109.

HUD-associated housing:  Any residential structure that is the subject of an application for
       mortgage insurance or is to receive housing assistance payments under any HUD
       programs.  This housing includes properties acquired and sold by HUD.

Implied warranty of habitability:  An implied term of a rental contract under which the landlord
       is obliged to supply and maintain the rental property in a condition that is safe and
       reasonably comfortable for the purposes for which it was rented (i.e., habitable).

Inspection:  A surface-by-surface inspection of a housing unit to identify the presence of LBP and
       a report of the findings.

Interim controls:  Measures to temporarily reduce human exposure or likely exposure to LBP
       hazards, including specialized cleaning, repairs, maintenance, painting, temporary
       containment, ongoing monitoring of actual or potential LBP hazards, and the
       establishment and operation of management and resident education programs.

Joint and  several liability: A legal concept that makes each contributor to an injury fully
       responsible for the total amount of damages.  It generally applies where liability for the
       damages is indivisible among the contributors to the damages.  For example, if two cars
       are racing down a street and one of them hits a pedestrian, both drivers may be held liable
       for all of the damages. The plaintiff may elected to recover all damages from any one or
       combinatio > .if the responsible parties.
                                                            s
Lead-based paint  (LB)  <: Paint containing lead in excess of 1.0 mg/cm2 as measured by an x-ray
       fluorescence (XRF) detector or 0.5 percent by weight.

Lead-based paint hazard:  Any condition that causes exposure to lead in amounts sufficient to
       cause adverse human health effects.

Low-income households:  Families or individuals whose household income does not exceed 80
       percent of the median income for the area with adjustments for household size. HUD
       establishes the low-income thresholds for local areas and may adjust the threshold for
       areas with unusually high or low incomes.

Mass consolidation: A method to unite claims by several parties into a single trial and
       judgment.  Trial courts use this procedure for lawsuits covering the same parties,
       pending in the same court, and involving substantially the same subject-matter,
       issues, and defenses.

Misrepresentation:  An statement of fact that, under the specific circumstances, amounts to a
       false assertion.

Negligence:  Failure to act with the legally required degree of care for others, resulting in harm to
       them. The standard of care is based on the degree of reasonable care that a person of
       ordinary prudence would exercise under the circumstances.
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Negligence per se:  Negligence based on the violation of a statute, ordinance, or other public duty
       without argument or proof regarding the particular circumstances.

Offshore or alien insurers: Insurance companies domiciled outside the United States.

Owner-occupied unit: A housing unit where the owner is the principal occupant.

Parental Immunity:  A doctrine law that precludes minor children from suing their parents to
       recover damages for injuries caused by the parents.

PbB:  Blood lead level.  (Pb is the symbol for lead, plumbum in Latin.)

Physically distressed housing: The presence of substandard physical conditions in a housing unit.
       Units that do not meet U.S. Department of Housing and Urban Development's Housing
       Quality Standards for decent, safe,  and sanitary housing are considered physically
       distressed units.  Physically distressed units are often economically and financially
       distressed as well.

Pollution exclusion:  A standard provision in Comprehensive General Liability (CGL) insurance
       policies that excludes coverage of damages caused by "sudden and accidental" and/or
       "nonsudden accidental" release of pollutants. Insurance companies developed the
       pollution exclusion in the early 1970s to exclude coverage for intentional pollution.

Primary mortgage  market: The market in which mortgages are originated, that is, the market in
       which lenders make loans to borrowers.

Project-based assistance  Subsidies tied to specific rental units that make the units more
       affordable to low-income households. In order to receive the benefit of a low  rent,
    -   tenants must occupy a unit in a specific project.

Public housing:  Federally-supported housing units  for low- and very low-income families that are
       owned and  operated by Public Housing Authorities.  Rental payments for these units are
       based on resident income.

Public Housing Authorities (PHAs): Any State, county, municipality, other governmental entity,
       or public body which is authorized  to engage in or assist in the development or operation
       of housing  for lower income families.

Rental unit:  A housing unit where the owner leases the unit to a tenant in exchange for rent
       payments.

Residential structure:  Any house, apartment, or structure intended for human habitation
       including any non-dwelling -.acility operated  by the owner  and commonly used by children
       under seven years of age, such as a child care center.

Risk retention group:  A captive insurance company jointly formed by an association of firms with
       similar risks that pay premiums based on the expected value of their individual losses.

Risk assessment:  An on-site inspection to identify LBP hazards that present or are likely to
       present exposures of concern to human health through information-gathering, visual
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       inspection, limited wipe sampling, other environmental sampling techniques, or other
       appropriate activity, and a report of the findings.

Safe harbor defense: A defense against liability established by meeting a set of pre-detennined
       conditions.

Secondary mortgage market:  The market in which existing mortgages are sold by the lending   .
       institutions that originated the mortgages and are purchased by investors. The Federal
       National .Mortgage Association (Fannie Mas) and the Federal Home Loan Mortgage
       Corporation (Freddie Mac) are two of the krgest purchasers of mortgages in the
       secondary mortgage market.

Statute of limitations:  The time period after which a claim for damages cannot be maintained.  •
       Limits are set by individual states and usually range from one to seven years.

Strict or no fault liability:  A form of liability where a person who causes an injury is responsible
       for damages associated with that injury, regardless of his fault or negligence.

Subordinate Financing: A loan secured by a property for which the lender can recover its
       investment by selling the project's assets only after the entity holding the first mortgage
       recovers its investment.

Target housing: Any housing constructed prior to 1978,  except housing that is not designed for
       occupancy by, and is not expected to be occupied by, children under six years of age.

Tenant-Based Assistance (1_. >): Subsidies provided on behalf of low-income households that can
       be used to make any qualifying unit more affordable.  The'subsidy is tied to the household
       rather th in to the unit, thereby allowing fi r tenant mobility.

Third-party liability insurance: Insurance liability purchased by the insured (first party) from an
       insurance company (second party) for protection  against possible suits brought by another
       (third party).

Title X:  The common name of the "Residential Lead-Based Paint Hazard Reduction Act of
       1992," which is the tenth title of the Housing and Community Development Act of 1992
       (Public Law 102-550). It mandates a  comprehensive effort to find and reduce lead-based
       paint hazards in residential housing to prevent childhood lead poisoning.

Underwriting:  The process of examining and accepting or rejecting the risk involved in making a ,
       loan or other financial transaction.

Very low-income households:  Families or individuals whose household income does not exceed
       50 percent of the median income for the area with adjustments for household size.  HUD
       establishes the very low-income thresholds for local areas and may adjust the  threshold for
       areas with unusually high or low incomes.

X-ray fluorescence (XRF)  analyzer. An instrument used to detect and measure the
       concentration of lead-based paint.  It emits radiation onto a  painted surface, which
       causing  lead in the paint, if present, to emit characteristic frequencies of radiation,
       the intensity of which is  measured by the detector and related  to the amount  of
       lead in the paint.
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               LEAD-BASED PAINT RISK ASSESSMENT AND INSPECTION
1.
       Introduction
       The Residential Lead-Based Paint
Hazard Reduction Act of 1992 (Title X of
the Housing and Community Development
Act of 1992) departs from previous lead-
based paint (LBP) legislation by focusing on
LBP hazards, rather than simply on the
presence of LBP in a residential unit.  As
described in the background paper, Section
1004 of Title X defines an LBP hazard as
any condition causing exposure to lead
sufficient to cause  adverse human health
effects. Title X identifies several such
conditions: deteriorated LBP, LBP on
friction surfaces, impact surfaces, or
chewable surfaces  accessible to children, and
lead-contaminated dust or bare soil.
                                                                Key Issues
                                                   What are LBP risk assessments and
                                                   inspections (hazard evaluations)?

                                                   How will Title X affect the market for risk
                                                   assessments and inspections in private
                                                   housing?

                                                   Who is involved in LBP hazard evaluation?

                                                   What are the barriers to increasing hazard
                                                   evaluations in private housing?

                                                   What would be the impact of requiring risk
                                                   assessments or inspections and
                                                   notification?
                                                   How else might hazard evaluations in
                                                   private housing be increased?
       Section 1004 of Title X also defines
procedures for identifying LBP hazards. It
defines an "inspect!'    as a surface-by-
surface investigation  * a residential unit to
determine whethe LBP is present.  In
addition, Section  1004 defines a "risk
assessment" as an on-site investigation to determine the nature, severity, and location of potential
LBP hazards and a report explaining the results of the investigation.  "Hazard evaluation" is a
term that includes either inspections or risk assessments, or both.  These procedures are described
in detail  below.

       The purpose of this paper is to present background information on hazard evaluation in
private housing. The paper is closely related to several other papers in this series.  The appraisal
and underwriting papers discuss incorporating LBP hazard evaluation into these processes.  The
financing paper discusses options for funding hazard evaluation (as well as abatement).  Hazard
evaluation is  discussed in the liability paper as evidence of due care, possibly providing a defense
to liability.  It may also be required  as a condition of insurance, as discussed in the paper on that -
topic.

       The remainder of this paper is orgaiuzed as follows:

       Section 2:     Provides background on housing inspections in general and LBP
                     hazard evaluation in particular in privately-owned housing. Also
                     discusses the major players involved in LBP hazard evaluation.
October 20, 1993
                               Risk Assessment and Inspection
Page]

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       Section 3:     Describes current and evolving approaches to promoting hazard
                     evaluation, including the roles of the Department of Housing and
                     Urban Development (HUD) and the Environmental Protection
                     Agency (EPA), requirements for public and federally-assisted
                     housing, and potential effects of new Title X disclosure
                     requirements for private housing.

       Section 4:     Presents policy options for hazard eva'uation in private housing,
                     such as extension of requirements for public housing to private
                     housing, non-regulatory approaches, and options implemented at
                     the local level.
2.      Background

       This section begins with a description of several kinds of inspections that are now
routinely conducted in privately-owned rental and owner-occupied housing units. It then
describes inspections and risk assessments for LBP in detail, including the information available
on the numbers of evaluations being conducted in private homes, the numbers of risk assessors
and inspectors, and the costs of the procedures.

       Housing Inspections in General

       Privately-owned housing units are routinely inspected for a variety of reasons.  Several o"
these inspections are brh _•_ described below.

       •      Code inspections of rental units:  Some mu  icipalities routinely inspect
              rental housing for compliance with housing or livability codes and building
              codes. Some inspect when occupancy changes.  Others inspect each unit
              systematically on a several-year cycle.  Some inspect on a complaint basis,
              or if violations are visible from outside the unit.

       •      Inspections of privately owned housing receiving Tenant-Based Assistance.
              Some tenants receive help from the government each month to pay the
              rent for privately-owned units. These payments make up the difference
              between what a tenant can afford to pay for rent and the market rent for a
              modestly priced unit. (See the paper on tenant-based assistance for  more
              details.)  This program is called the Section 8 Existing Housing Program.
              Approximately  1,275,000 units participate in this program. Of these, 77
              percent are occupied by households with children. Rental housing units
              participating in this program must meet a i inimum housing standard,
              called the Section 8 Housing Quality  Standard (HQS).1 All Section 8
              existing housing units are inspected when they are first rented  and then
              annually to ensure that they meet the HQS standards. Currently, HQS
              inspectors ensure that:

                     All painted surfaces are free of peeling, chipping, or scaling
                     paint; and
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                     An X-ray fluorescence (XRF) test or other HUD-approved
                     analysis of chewable surfaces is conducted if a unit is
                     occupied by a child with an elevated blood lead level. If
                     LBP is found, the paint surface must be covered or
                     removed. Alternatively, paint on chewable surfaces may be
                     covered or  removed without testing for LBP.

       •      Inspections of owner-occupied units at point of sale: When an owner-
              occupied unit is sold, voluntary inspections are generally ordered by the
              seller or the buyer. Purchasers typically request termite inspections, and
              often pay for more general, structural inspections. Although structural
              inspections may include environmental tests for such things as radon,
              asbestos, and LBP, these are not yet widely demanded by consumers.

       •      Inspections during rehabilitation:  Most local  governments require a
              building permit to conduct major renovations.  An on-site visit is generally
              not required to receive the permit and begin work. At several points in
              the construction process, however, inspections are routinely conducted
              (e.g., to check  the foundation, wiring, and plumbing). In addition, a final
              inspection is usually conducted after work is complete.

       Any of these inspections may provide an opportunity to identify LBP hazards. For
example, municipalities could  define LBP hazards as a violation of building or housing codes and
includ^ LBP risk assessment in code inspections.  HUD's Housing Quality Standards applicable to
private '-lousing receiving tenaM based assistance could be revised to require testing for LBP in aU
units, not only units where a poisoned child has been found.  Owners co ^ld  be encouraged or
required to conduct hazard evaluations at the point of sale for owner-oc  jpied units.2  Finally,
local governments could require an initial inspection, including LBP hazard evaluation, before
issuing a building permit for rehabilitation.  Some of these options are addressed in Section 4.

       LBP Hazard Evaluation3

       As stated above, an inspection for LBP is defined as a surface-by-surface investigation of a
housing unit to detect the presence of LBP.  Inspections most often use XRF analyzers to
measure the concentration of lead in paint.  These results may be confirmed by laboratory analysis
of paint samples.  Inspectors may also collect dust or soil samples for clearance purposes  after
interim controls have been implemented or abatement measures completed. An inspection
includes a report explaining its results.

       A risk assessment is an evaluation of immediate hazards posed by LBP to occupants of a
housing unit. It includes three steps:

       (1)    Identification of hazards through an on-site investigation of a unit,
              including a visual inspection, some limited wipe sampling or other
              environmental sampling, and determination of the age and history of the
              unit and the occupancy by young children;
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       (2)    Identification of current management and maintenance practices that may
              require modification to control LBP hazards; and

       (3)    If hazards are identified in the unit, determination of options for hazard
              control, including interim controls and abatement.

       Inspections and risk assessments for LBP are not now routinely conducted for private
housing.  The number of evaluations that can be conducted is constrained by the number of
qualified inspectors or assessors. In 1990, HUD estimated that the capacity of inspection firms
and laboratories then available was enough  to test between 350,000 and 500,000 units per year.
In comparison,  HUD estimated that 57 million U.S. housing units contained LBP.  (See
Introductory paper for further details on the affected housing stock.)

       Current estimates of the total numbers of inspectors and assessors and  the numbers of risk
assessments being conducted in private housing are not available, but both capacity and demand
appear to have  been increasing in recent years.  EPA, through the National University Continuing
Education Association (NUCEA), coordinates a network of six university-based training programs,
encompassing 36 consortium members, for inspectors and contractor supervisors. EPA is also
developing training courses, which these centers will offer, covering the various disciplines
involved  in LBP activities. In the past year, the centers have trained about 1,300 inspectors
nationwide. There are also a large number  of for-profit and non-profit training organizations.
One of these, based in Maryland, trains about 250 inspectors annually from several nearby states.
These training organizations are subject to requirements that EPA is developing under Title IV
(Sections 401-412) of the Toxic Substances  Control Act (TSCA). (Title X Section 1021 created
TSCA Title IV.) These requirerr.  -'s will include minimum standards for training cur >V- 'a,
training hours, hands-on training, t. Jnee competency, and program quality control.

       According to one trainer, demand for inspections is currently much greater than the
demand for risk assessments because the public is more aware of the inspection option than the
risk assessment option. Some contractors are also more reluctant to conduct risk assessments
than to conduct inspections. Because risk assessments require judgment about hazards, rather
than simply measurements of lead levels, they present a greater liability risk for contractors. Only
two of NUCEA's six centers now offer instruction in  risk assessment, and it is generally a one-day
addition  to their inspections courses.

       The costs of risk assessments and inspections vary.  In 1990, HUD estimated testing costs
of about $375 per unit.  Current estimates of the costs of risk assessments and inspections  in
single-family homes range from about $200  to $400 for each procedure.  For large, multi-unit
buildings, HUD's draft revised guidelines for evaluations4 recommend testing in a sample of units
rather than each unit.  Average cost  per unit for these buildings could be lower than for single-
family units; however, depending on  the number of units sampled, total costs could  till be quite
high. Though hazard evaluation costs are not enormous, they are significant enough to be a
disincentive to hazard evaluation. For economically distressed housing, any additional operating
cost may be impossible for the owners to absorb, so these evaluation costs may deter owners from
acting.  (See the paper on economically distressed housing.)
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3.
Current and Evolving Approaches to Hazard Evaluation
       This section first summarizes the major players involved in hazard evaluation and the roles
that they play. It then describes the roles of two federal agencies, EPA and HUD, in greater
detail. The two agencies' approaches to promoting hazard evaluation and reduction differ, and
these differences will need to be resolved in developing new initiatives.  Next, the section reviews-
Title X requirements for both private and public or federally-supported units, and discusses the
potential effects of Title X requirements on private housing.  It then desc^'bes an innovative
state-level  program addressing LBP. Finally, the section summarizes the barriers to increasing
LBP hazard evaluation in private homes.

       Major Players  ajid Their Roles

       The table below  shows the major players involved in hazard evaluation in private homes, -
including federal agencies, state and local governments, and private citizens and  groups, and the
roles that they play. These roles fall into  three major categories.  Some players  set standards for
hazard evaluation and/or for the organizations that train risk assessors and  inspectors to conduct
hazard evaluations.  Others take some action that causes evaluations to occur, either through
regulation  or by providing incentives for voluntary action.  Finally, some players actually conduct
the hazard evaluations.
        PLAYERS
                       HAZARD EVALUATION IN PRIVATE HOUSING:
                           MAJOR PLAYERS AND THEIR ROLES
                                                        ROLES
                     Set Standards for
                  Training and Evaluation
Cause Hazard Evaluation
       to Occur
Conduct Hazard
  Evaluation
 HUD
                  Title X requires HUD to
                  develop technical
                  guidelines for conducting
                  hazard evaluations (see
                  below).
Title X authorizes HUD
funding to help state and
local governments conduct
evaluations in low-income
housing.  Authorized to
disburse $125 million in
fiscal year (FY) 1993 and
$250 million in FY 1994.

Disseminates information
to the  public on LBP
hazards and hazard
evaluation (see Option 4
below).
  EPA
                  Title X requires EPA to
                  develop performance
                  standards for LBP
                  activities; requirements for
                  training, accreditation, and
                  certification for risk
                  assessors and inspectors;
                  and a state LBP program
                  (see below).
Disseminates mformatio.,
to the public on LBP
hazards and hazard
evaluation (see Option 4
below).
October 20, 1993
                         Risk Assessment and Inspection
                                        PageS

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                        HAZARD EVALUATION IN PRIVATE HOUSING:
                             MAJOR PLAYERS AND THEIR ROLES
                                                           ROLES
        PLAYERS
    Set Standards for
 Training and Evaluation
Cause Hazard Evaluation
       to Occur
Conduct Hazard
  Evaluation
 State and Local
 Governments
Establish programs for risk
assessor and inspector
certification and licensing,
subject to EPA approval.
States must have these
programs to receive HUD
LBP abatement grants.
 Landlords and
 Homeowners
                         Hire assessors or
                         inspectors to evaluate LBP
                         hazards in rental and
                         owner-occupied housing.
                         Currently voluntary for
                         private housing, though
                         results must be disclosed
                         to prospective tenants or
                         buyers (see below).
 Risk Assessors and
 Inspectors
                                                  Inspectors identify
                                                  presence of LBP in a unit.
                                                  F    ssessors identify
                                                  L  ' hazards in a unit and
                                                  advise owners on hazard
                                                  control (see Section 2
                                                  above)
 Trainers
Ensure that risk assessors
and inspectors know
correct techniques for
hazard evaluation
Conduct courses on LBP
activities. Test for
competency and
proficiency.
 Insurers
Could set standards higher
than regulatory tmnimums.
Could require evaluation
as a condition of coverage
for LBP damages (see
insurance paper).
        Federal Agencies' Role

        Title X assigns important responsibilities to both HUD and EPA.  HUD has promulgated
interim guidelines for identifying and abating LBP in public and Indian housing.   These "Interim
Guidelines" present technical protocols for testing for the presence of LBP in these housing units.
They apply primarily to  multifamily structures.  The guidelines specify XRF analysis as the
preferred method for identifying the presence of LBP in most cases. They describe selection of
October 20, 1993
        Risk Assessment and Inspection
                                          Page 6

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units and locations within units to test, interpretation of the results, sources of error, and proper
documentation and reporting.

       Section 1017 of Title X requires HUD to establish, by October 1993, new, far-reaching
guidelines for LBP hazard evaluation and reduction activities in all "federally-supported" projects
(i.e., LBP activities in federally-owned units and units receiving project-based subsidies, as well as
other work funded by HUD, FmHA, and the VA). These guidelines will guide EPA in
developing further regulations, described below.  In addition, Section 1011 of Title X authorizes
HUD to fund a grant program for state or local governments to reduce LBP hazards in low-
income privately-owned  housing units.

       HUD has prepared a draft of the new guidelines required by Section 1017 of Title X. .
The September 1993 draft of these guidelines shows several changes from the "Interim
Guidelines", reflecting the expanded requirements and focus of Title X. For example:

       •      The new guidelines cover a broad range of housing units, types of
              construction, and categories of ownership, not just public and Indian
              housing.

       •      The guidelines address the full range of activities involved in evaluating and
              controlling LBP hazards, including inspections, risk assessments, interim
              controls,  and abatement.

       •      The guidelines incorporate best practices and approaches that have
              emerged  ,ioce the preparation cr . e Interim Guidelines.
                                                             s
       •      The draft guidelines recognize the differences between units based on
              housing type and tenure.  They therefore present separate
              recommendations for risk assessments for:

                     Homeowners;
                     Small landlords with less than ten units;
                     Landlords with ten or more similar multi-family housing units; and
                     Landlords with ten or more different housing units.

       Title X also contains requirements for EPA through its amendments to TSCA. By April
1994, EPA must promulgate regulations that:

       •      Identify LBP hazards and dangerous levels of lead in dust and soil (TSCA
              Section 403).

       •      Govern LBP activities, including hazard evaluation (TSCA Section 402).
              These regulations must ensure that individuals  performing LBP activities
              are properly trained and certified and that training programs for
              contractors are accredited and meet certain minimum standards.  The
              regulations will also contain standards for performing LBP activities, taking
              into account reliability, effectiveness, and safety.
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       •      Establish a model for state certification and training programs for risk
              assessors and inspectors (TSCA Section 404).  States are expected to
              establish such programs, subject to EPA approval: EPA is required to
              administer and enforce program requirements in states that have not
              established programs by April 1996.  EPA is also authorized to make grants
              to states to develop and implement authorized state programs.

       Title X Requirements for Public and Federally-Supported Housing

       Title X requires the Section 1015 Task Force to "make recommendations on expanding
resources and efforts to evaluate and reduce lead-based paint hazards in private housing."6
Current requirements for LBP hazard reduction focus on federally-supported units.  This section
discusses these requirements as background for the Task Force as it considers expanding
requirements to private units.

       Title X requirements address four categories of federally-supported  housing units.  The
first is public housing, primarily low-income housing that is financed by the  federal government
and owned and administered by quasi-governmental public housing authorities (PHAs). Title X
retains the requirements for public housing established in  the 1988 amendments to the Lead-
Based Paint Poisoning Prevention Act. The Act requires that all public housing units be
inspected by December 1994, and all LBP be abated during modernization projects or if a child
occupying the unit is identified with an elevated blood-lead level.

       The second kind of housing, addressed under Section 1013 ~f Title X, is federally-owned
housing units sold to the pubhc. Examples  are hous.  units  owne ' j, the  Resolution Trust
Corporation (RTC) or the military or housing finance^ under a fet rally-insured mortgage on
which the owner defaults.  Units constructed before 1960 must be inspected and  LBP hazards
abated.  Units constructed between 1960 and 1978 must be inspected for LBP and LBP hazards,
and the results disclosed to potential buyers. Requirements take effect on January 1, 1995;
however, except  for housing owned by the Department of Defense (DoD),  implementation of the
requirements is limited by Congressional appropriations.

       The third category of federally-supported housing includes properties receiving project-
based federal assistance. These units are in privately-owned projects that receive federal subsidies
which remain associated with the units.  These subsidies help maintain a project owner's cash flow
by paying a portion of the tenant's rent or by subsidizing the  owner's cash flow. For rental
projects built before 1978 receiving project-based federal assistance of more than $5,000,
Section 1012 of Title X requires a  LBP risk.assessment. For pre-1960 units, the  risk assessment
must be conducted by January 1, 1996. For units constructed between 1960 and  1978, it must be
conducted  on a specified schedule  between 1998 and 2002. This compliance schedule allows time
for the infrastructure of trained risk assessors, inspectors, workers, and abatement contractors to
grow  as the number of units that must be evaluated and abated increases. It is important to note
that the statute does not require full abatement; instead, it calls for interim controls.  In addition,
tenants and purchasers must receive lead hazard information  and notices related  to risk
assessment, inspection, and hazard reduction activities, if any are planned or undertaken.

       A fourth category is federally-funded remodeling and rehabilitation  projects. These
projects are privately owned, but receive federal funds for rehabilitation and remodeling.  (Some
October 20, 1993               Risk Assessment and Inspection                         Page 8

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projects receiving project-based federal assistance may also fall into this category if they receive
federal funds for rehabilitation in addition to their other subsidies.)  This category includes, but is
not limited to, projects receiving HOME, CDBG, Homeless Housing, and HOPE program
financial assistance.  Section 1012 of Title X requires that these units be inspected for the
presence of lead paint if the repair work is likely to disturb painted surfaces. Further, lead based
paint hazards must be abated if the project receives more than $25,000 per unit of federal funds...
Projects receiving less than $25,000 per unit in federal funds are held to a different standard:
they are required to reduce lead-based paint hazards.
housing.
       The table below summarizes Title X requirements for each type of federally-supported
FOR PUBLIC
Type of Project
Public Housing
Federally-Owned
Units: Pre-1960
Federally-Owned
Units: 1960-1978
Project-Based
Federal Assistance:
Pre-1960
Project-Based
Federal Assistance:
1960-1978
Federal
Rehabilitation
Funds: > $25,000
per unit
Federal
Rehabilitation
Funds: < $25,000
per unit
Risk
Assessment
Optional,
HUD
funding
available
N/A
N/A
Yes
Yes
Not
Required
Not
Required
TITLE X REQUIREMENTS
AND FEDERALLY-SUPPORTED HOUSING
Inspection
Yes
Yes
Yes
N/A
N/A
Yes, if work is
likely to disturb
painted surfaces
Yes, if work is
likely to disturb
painted surfaces
Interim
Controls
Optional;
HUD
funding
available
N/A
N/A
Required
Required
N/A
N/A
Abatement
Yes
Yes
No:
disclosure
only
Not
Required
Not
Required
Full
Abatement
Reduction of
hazards
Comments

For non-DoD units,
subject to availability of
appropriated funds.
For non-DoD units,
subject to availability of
appropnated funds
Risk assessments must be
completed by 1996.
Risk assessments phased
in based on schedule set
in law.
Regulations are likely to
require full abatement
from all surfaces.
Regulations are likely to
require abatement from.
deteriorated, friction, —
impact, and chewable
surfaces, but not from
non-accessible or intact
surfaces.
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       Title X Requirements for Private Housing Units

       While Title X is far-reaching with respect to federally-owned or supported housing, it
imposes fewer requirements on strictly private units. Section 1018 of Title X contains the only
major LBP requirement for purely private pre-1978 housing, receiving no public subsidies of any
kind.8  The requirement applies to both rental and owner-occupied units.

       •      Before purchase or rental of such a unit, the prospective buyer or renter
              must receive an EPA pamphlet describing the hazards of LBP in general
              and any available information on the presence of LBP or LBP hazards in
              the specific  unit.  (If no inspection or risk assessment has been conducted,
              Title X does not require that one be done.)

       •      Prospective  buyers must be given  10 days to conduct a hazard evaluation,
              at their option and expense.

       •      The sales contract must include a Lead Warning Statement and a
              statement signed by the buyer certifying that the requirements described
              here have been met.

       •      Sellers or landlords  who violate these requirements are subject to fines and
              liable for damages; TSCA enforcement provisions also apply.

HUD and EPA must  issue  regulations implementing the requirements by October 28, 1994.
These regulations will become effective by October 28, 19 J f-

       Potential Effects of Title X Requirements for Private Housing

       The Title X disclosure requirements for private housing should increase the information
available to the public on the hazards of lead-based paint, both in general and in the specific
housing units they occupy.  The disclosures should in turn encourage the public to  conduct hazard
evaluations and abatement. Information, however, may not always lead directly to  action. Even if
property owners know about LBP hazards and would like to address them, many may not be able
to afford the costs, either out of pocket or through loans. In general, owners of viable properties,
both rental and owner-occupied, are likely to be able to pay for hazard evaluation,  while owners
of economically distressed housing  may not be able to  do so. (The financing and distressed
housing papers discuss these issues in greater detail.)

       Other requirements of Title X will have indirect effects on hazard evaluation in private
housing. For example, requirements for hazard evaluation and reduction in  public  and federally-
supported housing will increase the demand for the services of risk assessors and inspectors,
leading to an increase in the supply of these services.  HUD's guidelines and EPA's regulations
for LBP activities, EPA accreditation and certification programs for trainers, risk assessors,
inspectors, workers, and abatement contractors, and Title X's requirement that only certified
individuals conduct LBP activities will all increase the quality of the services offered. Grant funds
that Title X establishes for authorized state certification programs will also increase the numbers
of qualified LBP inspectors and other personnel.
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       Innovative State and Local Programs

       Many states have specific programs for LBP hazard evaluation that go beyond the federal
requirements.  Massachusetts is a frequently-cited example. Massachusetts enacted the Childhood
Lead Poisoning Prevention Act in 1971 (amended in 1988). The law has two principal objectives:

       (1)     To identify and  treat lead-poisoned children; and
       (2)     To promote primary prevention of further lead exposure.

It applies to all rental and owner-occupied residential property housing children under six,
regardless of their blood lead levels. The law does not require housing units to be lead-free, but
does require the following to be abated:

       •      Loose, peeling,  or chipping paint;

       •     . Friction or impact surfaces on windows, regardless of the condition of the
              paint; and

       •      Any chewable surfaces, even if intact.

       The law defines three acceptable abatement methods:  physically removing the paint,
replacing painted components such as windows, and covering  the paint (e.g., putting siding over
exterior paint). Compliance is  ensured in several ways.  First, property owners are strictly liable
for damages if a lead-poisoned  child is found, and so have a legal incentive to comply.  Second,
Massachusetts' Department of  Public Hea'tl^ has some authority  '  ^nsure compliance through
code enforcement; the State sanitary code ,h'js requirements for let  -based paint. In addition,
Massachusetts 'as trained local housing inspectors to do limited spot testing for lead-based paint
during routine inspections of any housing unit with a child under six. If violations are found (e.g.,
loose, peeling  paint), the inspectors can order a full private inspection for LBP hazards conducted
by one of Massachusetts'  300 to 400 currently licensed inspectors or assessors.  The State also has
a system of compliance letters,  legal documents certifying compliance with the State lead laws.

       The Department of Public Health has collected some  information on the impact of the
lead law. Since the program began, the screening rate of children has increased and the incidence
of elevated blood lead levels (EBL) has continued to drop. Close to 75 percent of children under
six have been screened, and the incidence of EBL is less than three cases per 1,000 children.
Along with other measures such as the elimination of lead in  gasoline, the lead law's LBP
requirements have certainly contributed to the decline in blood lead levels.  Few data are
available on the numbers of inspections and abatements conducted; however, estimates based on
contractor notification forms suggest that about 7,500 abatements and at least as many inspections
are occurring annually in  the State.

       Summary of Barriers Faced by  LBP Hazard Evaluation Programs

       One barrier to LBP hazard evaluation in private homes has been a lack of awareness of
LBP hazards.  In its 1990 report to Congress, HUD attributed the low levels of private abatement
in part to a lack of public awareness of recent findings on  the effects of low-level lead exposure
and the link between LBP and exposure.  For those people who  are aware of the hazards of LBP,
October 20, 1993                Risk Assessment and Inspection                        Page 11

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some do not act because of the costs of hazard evaluation (and the anticipated costs of
abatement). The costs of hazard evaluation itself may be more than some owners can afford.
Owners of economically distressed housing, for example, may have many more immediate claims
on the limited funds they have available to maintain their buildings.  Even if owners can afford
these costs, they may not be able to afford the much more significant costs of abatement. They.
may see little purpose to evaluating hazards  that they will not be able to address, or they may
conduct a hazard evaluation but not act on the results.

       Other owners do not conduct hazard evaluations for other reasons; some who aie aware
of the problem of LBP may not believe that it is a problem for them specifically.  For instance,
owners of housing units in higher-income areas may be aware of the LBP issue but  assume that it
is a problem primarily in lower-income units. Finally, for those who do decide to act, there are a
limited number of qualified contractors available to perform LBP hazard evaluations. Though this
situation is expected to improve as  Title X's requirements take effect, there are now still many
fewer inspectors and risk assessors available  than will be required to test all housing units that
need evaluation.                                                        - ~
4.     Policy Options for Private Housing

       This section discusses potential options for increasing LBP hazard evaluation in private
housing.  Each option is evaluated against several criteria: effectiveness in promoting hazard
reduction, cost, equity, political feasibility, and administrative ease.  All of these options will also
need to be evaluated in the context of forthcoming piles from HUD and EPA, which will alter
the baseline situation r?r hazard evaluation. The  -  ;ons are grouped into several categories:
The options are not rr.usually exclusive; a progran, J promote hazard evaluation in private
housing could combine several options.
                    RISK ASSESSMENT AND INSPECTION OPTIONS

             Extending Hazard Evaluation Requirements to Private Housing

                Option 1: Prioritized Evaluation in All Units

             Non-regulatory Options

                Option 2: Lead-Safe Certification

                Option 3: Grant Programs or Tax Credits

                Option 4: Expanded Public Information Campaign

             Promoting Hazard Evaluation at the Local Level

                Option 5: Modified Building or Housing Codes
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Extending Hazard Evaluation Requirements to Private Housing

       As discussed above, Title X currently requires only disclosure of existing information on
LBP hazards during real estate transactions and the opportunity for potential buyers to conduct a
hazard evaluation.  In contrast, a hazard evaluation is required for various public and federally-
supported housing units. These hazard evaluation requirements could be extended to private
housing.
                                                        1. Prioritized Evaluation in All Units

                                                     Effectiveness

                                                     Cost
                                                     Equity


                                                     Political
                                                     Feasibility

                                                     Administrative
                                                     Ease
                                   Effectively identifies hazards
                                   Costly to landlords, tenants,
                                   and owner-occupants
                                   Could focus first on low-
                                   income units
                                   Required  legislation politically
                                   difficult
                                   Requires extensive monitoring
                                   and enforcement
       Option 1:  One option is to require
hazard evaluation for all  pre-1978 units, both
rental and owner-occupied.  Evaluation could be
required only for units turning over, or it could
be required for all units.  This requirement could
be phased in over time, with higher-risk units
(e.g., older units or units with young children)
addressed first. Low-income units could also be
addressed earlier.  The results of evaluations
could be made available to tenants for rental
units. If the hazard evaluation finds no lead-
based paint in the unit, the requirement could be
waived for that unit in the future.  If lead paint
is found during the initial evaluation, unless it is
abated the unit should be reinspected
periodically to ensure that it does not constitute a hazard.  Combining this option with the
certification option described below would facilitate this process.

       This option would provide comprc icnsive coverage of all units. Addressing high-risk units
first would make the option initially cost-effective by focusing resources where they would be
most likely to yield  benefits." The option would be effective in identifying LBP hazards and
informing landlords, tenants, and owner-occupants of the risks.  Gradual implementation would
give the hazard evaluation industry time to develop as the  new requirements become effective.  If
the option made evaluating  low-income units a priority, it could address the issue of
environmental equity.  Many environmental hazards differentially affect low-income and minority
groups.  For instance, hazardous waste incinerators and other waste management facilities are
more likely to be located in low-income neighborhoods.10  Though all groups are affected by
lead paint, low-income and minority groups are most affected.  This option could help redress that
inequity.

       The option  would impose significant costs on landlords, tenants if landlords pass some of
the costs on through higher rents, and owner-occupants. The requirement to ultimately evaluate  .
all units may impose unnecessary costs cm low-risk units. An alternative might be to require
hazard evaluation only if occupants have children, but for rental units this could  lead to
discrimination against tenants with children.  Unless subsidies are provided, making hazard
evaluation  mandatory would impose additional costs on owners of economically distressed housing.
The option could lead to non-compliance or possibly disinvestment in economically distressed
housing and a decline in  the low-income housing stock. In addition, the costs of abatement may
prevent owners of economically distressed as well as other housing from acting on the results of
evaluations.  These effects would fall disproportionately on low-income and minority groups.
October 20, 1993
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       The option requires new federal or state legislation, which could be politically difficult
because of the opposition of landlords and homeowners and the need for implementation funding.
The option would also require a new administrative structure to monitor compliance and enforce
the requirements, and the associated administrative costs.

       Non-Regulatory Options

       The option discussed above relies on a regulator}' approach, with legislation mandating
hazard evaluation and regulations to implement that legi lation.  An alternative approach would
be to provide incentives for or otherwise encourage voluntary action.
                                                             2.  Lead-Safe Certification
                                                     Effectiveness
                                                     Cost


                                                     Equity


                                                     Political
                                                     Feasibility
                                                     Administrative
                                                     Ease
                                   Would encourage hazard
                                   evaluations, but not clear
                                  'how much
                                   Significant costs to local
                                   governments
                                   Ineffective for low-income
                                   units

                                   Voluntary program less
                                   controversial than a
                                   regulatory program, but
                                   appropriations politically
                                   difficult
                                   Significant ei.ort to
                                   administer certification
                                   program
       Option 2:  One option that could
encourage LBP hazard evaluation is a "lead-safe"
certification program.11  This program would
document the results of hazard evaluations, both
those conducted to initially evaluate a unit's
hazards and evaluations conducted after hazard
control measures to determine the effectiveness
of those measures. A lead-safe certificate would
be valid for different durations:

       •       If an initial evaluation
               found no LBP hazard, or
               if all LBP had been
               removed, the certificate
               would be permanent.

       •       If an initial evaluation identified
               LBP hazards  and these hazards       ^
               were addressed through interim
               controls, the certificate would be
               valid for a specified period, depending on the intervention.

       Lead-safe certificates could be used by appraisers, the courts, and insurers as evidence of
actions taken to address LBP (see discussions in appraisal, liability, and insurance papers).  This
option could be combined effectively with other options. For example, for Option 1 above, a
lead-safe certificate would document the results of initial evaluations and any necessary hazard
controls and could specify whether future evaluations would be required.

       Because certificates would give proof of actions taken to address LBP hazards, including
hazard evaluations, the benefit to property owners wl •> took the measures would be greater and
owners would be more likely to take them.  For example, if certificates were admissible in court,
landlords could use them as  evidence of due care  in lawsuits for damages caused by lead.  If
insurers were to require hazard evaluations as a condition of coverage, certificates could be used
to demonstrate compliance.  This option would be likely to generate few new private costs in
comparison with the regulatory options described  above. Since participation in the program
would be voluntary, it would be less controversial  and politically more feasible than  a regulatory
option.
 October 20, 1993
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       The degree to which certification would increase hazard evaluation and reduction is
uncertain.  As discussed above, certification would provide an additional incentive to owners for
voluntary hazard evaluation, but would not increase the numbers of evaluations conducted as
much as would regulations requiring evaluations.  The option would be effective in increasing
voluntary hazard evaluations only for owners who can afford them.  Without some form of public
subsidy, this option could have a serious negative effect on economically distressed housing.
Owners would not be able to pay for the costs of hazard assessment and reduction and would
therefore be unable to secure certificates. This could lead to further Disinvestment in the low-
income housing supply and sanction lender reluctance to make loans in some low-income areas.
The option will impose significant administrative requirements and associated costs on local *
governments (e.g., to establish a standard format for certificates, perhaps to maintain centralized
records of certificates for units tested). Appropriating additional funds for the affected agencies
may be politically difficult, as would instituting a user fee to cover the costs of the program.
       Option 3:  Another non-regulatory
option is to establish grant programs or tax
credits for hazard evaluation or to expand
existing grant programs to fund these activities.
For example, Section 1012 of Title X makes
LBP hazard evaluation eligible for funding under
HUD's Community Development Block Grant,
HOME grant, and other programs.  Use of these
funds for LBP hazard evaluation could be
encouraged.  Grants could be targeted  to high-
risk units (e.g., units with young children). Tax
credits would be more difficult to target to
housing units with specific characteristics.  (See
the financing paper for further discussion of
subsidy programs.)
                         3. Grant Programs or Tax Credits
                     Effectiveness
                     Cost
                     Equity


                     Political
                     FeasiH.iry

                     Administrative
                     Ease
Addresses cost barrier to
evaluation
May encourage evaluation in
low-risk units where costs not
justified

Allows low-income owners to
evaluate
Requires new ai'''-inty and
appropriations
New grant programs require
administration
       This option would address the disincentive to LBP hazard evaluation that results from its
cost through grants.  It could enhance equity by allowing owners of economically distressed
housing who could not afford to evaluate hazards on their own to do so. Unless grants are also
provided for abatement, however, this alone will not be effective in reducing hazards.

       The option places the cost burden on the government, rather than the owner; it could
potentially encourage hazard evaluation in low-risk units in which the benefit would not justify the
cost.  Establishing new grant programs or tax credits would require new legislation. The
appropriations process necessary to fund the program or to offset the revenue losses of the tax
credit will add to the political difficulty of implementation.  New grant programs would require
additional administrative oversight to evaluate grant applications, d  .burse funds, and perform  ,.
other necessary functions.

       Option 4:  Another option is to  expand public information campaigns to communicate the
health risks of LBP to tenants and homeowners and encourage them to voluntarily conduct
hazard evaluations.  Some public information programs are already in place. The National Lead
Information Center,  sponsored by EPA, HUD, DoD, and the Centers for Disease Control and
operated by the  National Safety Council, maintains the Lead Hotline (1-800-LEAD-FYI)  and the
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                                                     4.  Expanded Public Information Campaigns
                                                    Effectiveness
                                                    Cost


                                                    Equity


                                                    Political
                                                    Feasibility

                                                    Administrative
                                                    Ease
                                  May take tune to change
                                  behavior; potentially effective
                                  in the long run
                                  Seeks to focus expenditures
                                  on high-risk housing
                                  Would not address ability to
                                  pay
                                  Voluntary program less
                                  controversial than regulatory
                                  Significant effort to develop
                                  campaign
Clearinghouse (1-800-424-LEAD) to provide
information on lead to the public. The Hotline
provides a package of materials to callers that
includes recommendations on testing.  It has
been publicized through public service
announcements.  EPA is also preparing an
information pamphlet on LBP hazards, as
required by TSCA Section 406, to be given to
prospective tenants and homebvyers.  The
pamphlet will also be given to owners and
renters of units being renovated and to
renovators.

        According to EPA's risk communication
research,-a public information campaign should
include specific prescriptions for action, in
addition to a description of the LBP problem, and should focus on concern for the welfare of
family members.  The campaign could  identify different categories of housing that have different
risk levels (e.g., housing built before 1978, before 1960). It could specifically encourage
evaluation during real estate  transactions, as has EPA's radon program.

        Appeals to concern for family members' welfare should be effective for lead paint, where
the dangers are to young children and  the health effects are serious and irreversible. Focusing on
real estate  transactions  could aho be effective, since they present a natural and convenient time
to investigate such issues.  Pro   .. g information on risk levels in different kinds of housi   would
particularly encourage evaluatii  . of high-risk units, focusing expenditures where they yiek. the
greatest benefits. An information campaign would no. require additional authoril or legislation.
It would be less controversial than regulation, because it would promote voluntary action rather
than mandating measures owners must take on their own property.

        Given the experience with other public information campaigns, this option would probably
take a long time  to significantly increase numbers of hazard evaluations.  A campaign focusing on
concern for one's family would be more effective for owner-occupied housing, than for  rental
units.  The option would not address property owners' ability to pay for LBP hazard evaluation
and would  have little effect for economically distressed housing except to make the tenants of
such housing more aware of  the problem. Developing an effective information campaign would
require significant administrative effort.

        Promoting Hazard Evaluation at the Local Level

        Option 5: Existing building or housing codes could be modified to address LBP.
Presence of LBP hazards could be defined as  a violation of housing codes, and code inspections
could incorporate LBP  hazard evaluation.  Current municipal inspections generally assess the
condition of the  paint to meet state and local  housing code requirements. These inspections
could be expanded to include identifying LBP. Municipalities could train  local  health or housing
agency staff in  hazard evaluation, or could hire private contractors to conduct them.
October 20, 1993
Risk Assessment and Inspection
                                                                                     Page 16

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                                                        5. Modified Building or Housing Codes
                                                     Effectiveness



                                                     Cost


                                                     Equity
                                                     Political
                                                     Feasibility

                                                     Administrative
                                                     Ease
                                   Limited impact because
                                   inspections not conducted in
                                   every location or unit
                                   Significant costs to local
                                   governments
                                   May be more likely to
                                   address low-income units
                                   than other units, but may not
                                   benefit occupants

                                   Uncertain

                                   Increases responsibilities of
                                   inspections staff
       The option may be able to use existing
local government authority and build on existing
activities, minimizing public costs of evaluation.
In some cases, however, new ordinances or state
statutes may be required to authorize the
changes.  Expanding the scope of current
activities, rather than creating a new program for
hazard evaluations, may reduce the political
opposition to  the option. Unless there is a fe^
for inspections, the option would not add to
private costs, and would be equally effective in
promoting hazard  evaluation in economically
distressed housing.

       Municipalities may be more likely to
conduct code  inspections in low-income housing.
As discussed above,  some inspect each unit
systematically, on a cycle or when occupancy
changes.  Others, however, inspect on a complaint or visible-violation basis; since low-income
housing is more likely to be deteriorated, these inspections would be more likely to occur in low-
income  units.  Where this is the case, an option incorporating LBP evaluation into code
inspections would  particularly address low-income units. However, if owners are not able to act
on the results of inspections and abate, the option may not benefit occupants. It could ever* hurt
occupants if it leads to disinvestment in low-income housing or increases in rent to pay for repairs.

       This option may have limited impact.  Code inspections are not Conducted in every
municipality or every unit.  Requiring hazard evaluation would sign ificantly increase the
complexity of inspections and reduce the numbers that could be conducted by existing staff. It
would impose a major additional cost burden on municipalities.  Increasing the budgets of the
relevant agencies would be politically difficult,  as would raising additional revenues through
taxation or funding inspections through user fees. LBP hazard evaluations would also disclose
violations that owners would be required to repair; this could increase political opposition and
could lead to abandonment of economically distressed housing.

       The exhibit on the following page summarizes the evaluation of the five risk assessment
and inspection options.
October 20, 1993
Risk Assessment and Inspection
                                                                                      Page 17

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COMPARISON OF RISK ASSESSMENT AND INSPECTION OPTIONS
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
Option 1:
Prioritized Evaluation
in All Units
Effectively identifies
hazards
Costly to landlords,
tenants, and owner-
occupants
Could focus first on
low-income units
Required legislation
politically difficult
Requires extensive
monitoring and
enforcement
Option 2:
Lead-Safe
Certification
Would encourage
hazard evaluations, but
not clear how much
Significant costs to
local governments
Ineffective for low-
income units
Voluntary program ,
less controversial than
a regulatory program,
but appropriations
politically difficult
Significant effort to
administer certification
program
Option 3:
Grant Programs
or Tax Credits
Addresses cost
barrier to
evaluation
May encourage
evaluation in low-
risk units where
costs not justified
Allows low-
income owners to
evaluate
Requires new
authority and
appropriations
New grant
programs require
administration
Option 4:
Expanded Public
Information Campaigns
May take time to
change behavior;
potentially effective in
the long run
Seeks to focus
expenditures on high-
risk housing
Would not address
ability to pay
Voluntary program less
controversial than
regulatory programs
Significant effort to
develop campaign
Option 5:
Modified Building
or Housing Codes
Limited impact
because inspections
not conducted in
every location or
unit
Significant costs to
local governments
May be more likely
to address low-
income units than
other units, but may
not benefit
occupants
Uncertain
Increases
responsibilities of
inspections staff
20, 1993
Risk Assessrn^^ .id Inspection

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Endnotes

1. HQS regulations were initially promulgated under the Section 8 tenant-based assistance
program (see 24 CFR 882.109).  HUD has since extended the regulations to its other housing
programs.

2. Section  1018 of Title X currently requires that buyers be given an opportunity to conduct an
evaluation, but does not require buyers or sellers to conduct one.

3. Descriptions of inspections and risk assessments are drawn from Section 1004 of Title X and
from HUD's Guidelines for the Evaluation and Control of Lead-Based Paint Hazards in Housing:
Peer Review Draft. September 1993.

4. U.S. Department of Housing and Urban Development, Guidelines for the Evaluation and
Control of Lead-Based Paint Hazards in Housing: Peer Review Draft, September 1, 1993.

5. Department of Housing and Urban Development, Office of Public and Indian Housing, Lead- -
Based Paint: Interim Guidelines for Hazard Identification and Abatement in Public and Indian
Housing, revised May 1991.

6. Title X, Section 1015.

7. Excludes units with tenant-based subsidies such as Section 8 vouchers.  Section 1004 of Title X
defines these units as private.

8. Other Title X requirements affect private housing as  well, though they do nc' .specifically target
it.  TSCA  Section  402, as amended by Title X Section 1021, contains the requirements desc  ibed
above for accrediting and certifying LBP trainers, assessors, and other contractors. TSCA Lection
403 as amended requires EPA to identify LBP hazards and dangerous levels of lead in soil and •
dust. Section 406b requires EPA to promulgate regulations requiring renovators of pre-1978
housing to give occupants an LBP  hazard information pamphlet  before beginning work. All these
requirements will affect LBP activities in private housing as well as in other types of housing.

9. Section  406 of TSCA, as amended by Title X Section 1021, requires EPA to develop a  lead
hazard information pamphlet.  As of December 1, 1992, home buyers using Federal Housing
Administration funds to finance pre-1978 houses are already required to receive information on
the hazards of LBP.

10.  See for example: U.S. Environmental Protection Agency, Environmental Equity: Reducing
Risk for All Communities. June 1992.

11.  Proposed by the Alliance to End Childhood Lead Poisoning  in A Framework for Acti< n to
Make Private Housing Lead-Safe, pp. 27 to 28.
October 20, 1993                  Risk Assessment and Inspection                          Page 19

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1.
       FINANCING LEAD-BASED PAINT HAZARD EVALUATION AND REDUCTION
Introduction
       From a public health perspective, lead-
based paint (LBP) poisoning must be prevented.
To those who must pay for LBP hazard
reduction, the costs will be high. For some
segments of the population the costs of
abatement will be an inconvenience.  For others
— particularly low-income owners of low-value
properties ~ the costs will be prohibitive.
Unfortunately, this portion of the nation's
housing stock - the older, more dilapidated, and
therefore more affordable units — has the most
significant LBP problem.  For these reasons, any
strategy to address LBP poisoning must consider
mechanisms to finance or subsidize
improvements for those most at risk, yet least
able to afford the needed improvements.
                                                           Key Issues
                                               What financing mechanisms are available to
                                               help owners pay for LBP evaluation and
                                               reduction?

                                               What groups are not adequately served by
                                               existing financial products?

                                               What types of subsidized financing
                                               mechanisms are currently available?

                                               What revenue sources are being used to
                                               finance LBP hazard reduction efforts?
       Any assessment of financing mechanisms should take into account the varying physical and
financial conditions of properties with LBP, as well as the differences between owner-occupied
and rental properties. Clearly, the approaches considered to assist a first-time buyer of a home in
good condition with intact LBP are likely to differ from the approaches considered tr- Assist an
owner of a physically and financially distressed multifamily rental property. Nonethek  <,, owners
in both situations may require financial assistance to make their properties lead-safe.

      •This paper examines the importance of financing to  identifying and reducing hazards from
LBP, and presents information about the ways in which innovative programs have begun to
address  this problem.  The issues discussed here are closely  connected with those elaborated in
other papers, particularly the underwriting and distressed housing papers. These linkages will be
explored in more depth throughout this discussion. The remaining sections of this paper are
structured as  follows:

       Section 2:     Provides background information  about the existing private
                     financing system and the owners that are not served.

       Section 3:     Discusses current and possible approaches to financing treatment of
                     LBP hazards.

       Section: 4     Evaluates six options for increasing the availability of financing for
                     LBP-related activities.
2.     Background

       This section begins by reviewing the costs of LBP evaluation and reduction and some of
the reasons that borrowers may have difficulty obtaining financing.  It then describes the standard
private financing mechanisms available. It concludes by discussing the types of borrowers that the
October 20, 1993
                              Financing Options
Page 1

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existing private system is unable to serve. The underwriting paper provides information that may
help clarify some of the information presented here.

       Costs of  LBP Evaluation and Reduction

       LBP evaluation and reduction can be expensive.  As described in the risk assessment and
inspection paper, an evaluation is the first step for those who are unsure what hazards their
properties may contain. Whether that evaluation takes the form of a risk assessment or an
inspection, current industry costs are in the $200 to $400 range per unit.

       Once the evaluation is complete, the owner will know what, if any, LBP hazards need to
be addressed. A variety of strategies can be considered, and costs vary depending on whether
permanent encapsulation, other interim controls, or complete abatement measures are taken.
Costs for abatement or permanent encapsulation generally range from $6,000 to $12,000 per \  •
unit,1 but can be as high as $30,000 to $40,000, depending on the type of unit, its  size, the
number of windows, and other factors.  Other interim controls can cost substantially less, but must
be monitored and repeated as necessary on an ongoing basis. Given the magnitude of the costs
of LBP hazard reduction, most owners will need financing to address the problem.

       Standard Financing Mechanisms

       Standard financing mechanisms  available on the private lending market can meet the
needs of some owners. Private lenders generally provide financing through variations on a few
basic lending techniques, including:

       •      First mortgages;
       •      Subordinate financing;
       •      Refinancing; and
       •      Unsecured loans.

For any of these tools, details such as the interest rate charged or the loan repayment period may
differ.  Products may also differ for owner-occupied and rental  properties.  In all cases, however,
the lender's goal is -to provide financing at rates and terms that exceed the cost  of funds to the
lender (i.e., at a profit), while minimizing the risk of loan default.

       First Mortgages

       In order to purchase either an owner-occupied or rental property, a borrower typically
seeks a first mortgage. The property serves as collateral to  protect the lender in case of a default.
The lender will  issue a loan for only a portion  of the value of the property to ensure that if
foreclosure and  resale are necessary, the proceeds from the sale will generally cover the lender's
costs.  In case of a default, the lender holding  the first mortgage has first claim  to the proceeds
from the sale of the property.

       Adding the amount needed to make the LBP repairs onto the first mortgage  might seem a
simple solution to the problem of financing LBP work. Because units become vacant at turnover,
abatement work is easier and safer.  In addition, the borrower is already arranging financing for
the purchase. Three issues, however, make it difficult for lenders to "roll in" the costs of LBP
work when making a first mortgage:
        (1)     Loan-to-value and debt coverage ratios,
 October 20, 1993                      Financing Options                               Page 2

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       (2)    After rehabilitation values, and
       (3)    Rehabilitation management.

       Loan-to-Value (LTV) Ratios. LTV
ratios are an underwriting tool used in assessing
the risk involved in making a loan. Because the
lender must be able to recoup losses on a bad
loan, mortgages can be made only if  the LTV
ratio is such that the loan amount can be
secured by the property.  In cases where the
borrower does not have large amo'ints of equity
the value of the property usually will not be
sufficient to support additional lending for LBP
efforts.
       Debt Ratios. Debt ratios are used in
underwriting to assure the lender that a
borrower's income is sufficient to meet
the monthly mortgage costs.  For owner-
occupants, debt-to-income ratios are
calculated based on the household's
income, the cost of the mortgage, and all
other debt.  For rental property owners,
a debt coverage ratio is used to assess
whether the income generated by the
property to be mortgaged is sufficient to
cover all of its expenses, including
making monthly mortgage payments and
payments on any loans for rehabilitating
the property, including LBP hazard
reduction.
                                                   LTV Ratio:
                                                               Loan-to-Value Ratio
                                                                Amount of loan
                                                                Appraised value
                                                   Maximum LTV Ratios:

                                                   Conventional Single Family        8»%
                                                   Privately Insured Single Family:     95%
                                                   FHA Insured Owner-Occupied-     97%
                                                   Rental Property                 75%
                                                CONVENTIONAL DEBT-TO-INCOME RATIOS*

                                             OWNER-OCCUPIED

                                                   Front-End Ratio:

                                                   Housing Costs
                                                   Total Income    Typical maximum = 28%

                                                   Back-End Ratio:

                                                   Total Debt   '
                                                   Total Incon      Typical maximum = 36%
                                             RENTAL
                                                   Debt Coverage Ratio (DCR):

                                                           Net Operating Income
                                                        (Total Income-Total Expenses)
                                                              Debt Service

                                                   Typical acceptable range = 1.1 to 1 3
                                              * Acceptable ratios vary by lender and loan product.
       After-Rehabilitation Values.  In
some cases additional funds can be
obtained for rehabilitation, either as a
separate loan or as part of the first
mortgage.  Rehabilitation funds could be
used for improvements such as
remodeling a kitchen or bathroom that,
once completed, are expected to increase
the value of the property sufficiently to      	
secure the full amount of the loan.
Lenders are often reluctant to lend
money based on the anticipated after-rehabilitation value of the property, even wl en "value
added" improvements are made, since the value of the property rarely rises by the full amount
spent on construction. LBP hazard reduction appears to add little value to properties in most
markets, which makes it particularly difficult to obtain a rehabilitation loan or to roll LBP
financing into a first mortgage.

       Rehabilitation Management.  Finally, lenders are often  reluctant to fund rehabilitation
projects, whether separately or as part of an acquisition and rehabilitation package.  Lender
October 20, 1993
                                      Financing Options
Page3

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reservations stem in part from the risks involved in rehabilitation.  Factors that contribute to
riskiness in this process include the difficulties of assuring the quality, timeliness, and
completeness of the rehabilitation work, managing the rehabilitation process, and avoiding
contractor disputes. In addition, lenders often lack experience with acquisition and rehabilitation
deals, and are therefore uncomfortable with them.

       Subordinate Financing

       Subordinate financing, often known as a second mortgage, can be obtained when a first
mortgage already exists and the value of the property exceeds the remaining balance of the first
mortgage (e.g., an owner-occupant has been paying off a first mortgage  for years, and the home
has appreciated in value). A lender issuing a  second mortgage will base its decision on LTV
ratios and other credit standards similar to those used in determining whether to issue a first
mortgage.  The holder of a second mortgage,  however, will be reimbursed only after the holder of
the first mortgage has been paid in full.

       Second mortgages on owner-occupied properties are most often made as home equity loans.
Home equity loan funds can have fixed or variable interest rates and can be made available either
as a fixed amount or as a line of credit that can be drawn down.  The funds can be used for a
variety of purposes, including vacations, college educations, or repairs or improvements to the
property, including LBP evaluation and reduction.

       An alternative to a home equity loan is a home improvement loan.  Home improvement
loan terms are generally shorter and at higher interest rates than first mortgages because lenders
concern themselves with  additional factors such as after-rehabilitation market value and
satisfactory completion of the work.  FHA insurance programs are available to reduce the risk and
costs of these loans.

       Subordinate financing can also be arranged for rental properties,  althoi gh it is more
difficult to obtain than for an owner-occupied property.  This type of financing is most often
available through a credit corporation that is willing to take somewhat higher risks than a
traditional lender. In general, first mortgages for  rental properties stipulate that the first
mortgage lender must approve any proposed subordinate financing.  As in first mortgage lending,
lenders that agree to provide subordinate financing generally oversee the rehabilitation process
closely to ensure that the funds borrowed actually improve the property. Both the first and
second lenders may wish to review work specifications and inspect completed work before
agreeing to release loan funds.

       Refinancing

       Refinancing is another tool that can be used if an owner has accumulated equity or if
better loan terms (e.g., lower prevailing interest rates) are available.  It can be used for either
owner-occupied or rental property.  It is most effective as a tool for  funding rehabilitation if the
old mortgage  has been paid down and/or the  property has appreciated in value since the original
loan was made.

       In a refinancing, the owner seeks a  new mortgage based on the current value of the
property, and the old first mortgage is paid off with funds from the new mortgage. Some lenders
will provide refinancing based on the full value of the property, and  some will only renegotiate
the terms of the loan based on the outstanding loan balance.  If the  lender will provide financing
based on the full value of the property, the difference between the new and the old  mortgage
October 20,  1993                      Financing Options                               Page 4

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amounts may be available to the owner for any purpose, including repairs or improvements to the
property.

       Like subordinate financing, refinancing can generally meet the need for LBP evaluation
and reduction financing for borrowers with equity in their properties.  Refinancing is not an
option for owners whose properties have not accumulated sufficient equity. It is also unlikely to
be a viable option if interest rates are significantly higher than they were at the time the old
mortgage was made, since monthly payments could increase substantially.

       Unsecured Loans

       Unsecured loans, or consumer lines of credit, function essentially like credit cards.  No
specific property is available as collateral.  The lender makes  the loan based on knowledge of the
borrower's ability to repay the loan and good credit record. Because of the risk involved in
making an  unsecured loan, they are often repaid at  a higher interest rate and under a shorter
term than other loans, and are thus more expensive for the borrower. Given the  high costs of
LBP hazard reduction and high interest rates of unsecured loans, this is an unlikely source of
financing for LBP activities.

       Lender Decisions

       Lenders have established underwriting criteria designed to guide their decisions about
whether a potential loan is too risky.  These criteria include:

       •   '   Ability to Pay. Whether the owner has the ability to repay the debt of
              principal, interest, taxes, and insurance, or PITI.
                                                            'V
       •      Credit. Whether the borrower is creditworthy based on factors such as
              past record of paying debts and past defaults or bankruptcies.

     '  •      Value. If the borrower does default on the loan, whether the lender can
              foreclose on the property,  resell it, and recover the money  the borrower
              failed to pay.

While lenders examine the borrower's position differently for owner-occupied and rental
properties, the factors examined remain essentially the same.

       Lenders' underwriting decisions are based in part on whether they intend to hold the
mortgages in portfolio or sell them.  If they intend to sell the mortgages, the underwriting
standards of those positioned to buy them privately or in the  secondary mortgage market, will
influence their choices. For more information on underwriting and the role of the secondary
market, see the paper on underwriting.

       In some situations lenders apply more flexible underwriting criteria. Under the
Community Reinvestment Act (CRA), lenders must assist the disadvantaged communities they
serve.  Many lending institutions have active CRA lending programs that provide financial
assistance to borrowers that might otherwise have been unassisted. For example, a lender might
make a loan with less collateral available than normal in order to meet the objectives of
community reinvestment. Housing rehabilitation loans are valid products to consider under CRA,
but lenders have not yet indicated that they view LBP hazard reduction as an important CRA
activity.
October 20, 1993                      Financing Options                               Page 5

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       A troublesome area of decision making for lenders involves race and ethnicity. While
these factors should not affect lending decisions, minority borrowers face more difficulties in
obtaining financing than white borrowers do. While the reasons for discrepancies in lending rates
are not always clear, numerous studies have demonstrated that it is more difficult for minority
households to obtain loans.2  To the extent that there is racial bias in lending, some minority
property owners may have more difficulty obtaining financing for LBP activities than non-
minorities.

       Barriers to Financing for Rental Properties

       Lenders consider a range of other issues when deciding whether to provide financing to
rental properties.  These include:

       '•      The economic viability of the property, based on factors such as project
              income, expenses, and vacancy rates. Lenders must consider whether the
              property will be able to generate the funds needed to repay the loan.

       •      Whether to require recourse to the other assets of the ownership entity or
              other parties involved. Adding additional property as collateral makes the
              loan safer for the lender, but, from the borrower's point of view, it ties up
              the equity in other property.

       •      Liability for damages to tenants and other potential claimants. Lenders
              usually require assessment of environmental hazards in rental properties
              and correction of any hazards found.3  In addition, lenders require liability
              insurance because, without it, even an owner with an  otherwise stellar
              repayment record might  be  forced into bankruptcy-and default on the loan.
              Moreover, the assets of the property could be awarded to other parties,
              rather than returned to the  lender who was counting on the property as
              collateral.

       •      The potential for lender liability after foreclosure on a property with LBP.
              Lending institutions are not generally structured to function as efficient
              property owners. Once they take possession of a property, they become
              responsible for its ongoing maintenance, for serving as a landlord if the
              property has tenants, and for the costs of advertising the property and
              locating an appropriate buyer.  In addition, the lender becomes responsible
              for LBP damages to tenants.  This may discourage lenders from foreclosing
              on properties with LBP hazards, even though the borrowers are in default.     _ ,

       Classification of Owners Seeking LBP Hazard Reduction Financing

       Those owners that may need funds  to reduce LBP hazards, whether owner-occupants or
owners of rental properties, can be classified into three groups:

       (1)    High ability to pay. Those that can pay for LBP reduction with cash or
              that have access to financing through the existing system.

       (2)    Moderate ability to pay.  Those that could  afford loan payments, but that
              are unable to qualify for a loan.
October 20, 1993                      Financing Options                                Page 6

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       (3)     Low ability to pay. Those that cannot afford the costs of LBP hazard
              reduction even with a loan.

       As outlined above, more affluent Americans have access to financing for LBP hazard
evaluation and reduction activities. Owners may have a high ability to pay due to equity in their
properties, substantial personal resources, or in the case of a rental property, tenants willing to
pay rent increases that cover the costs of LBP reduction Examples of such owners include a
middle-aged couple with teenaged children and substantial built up equity in their home, and a  -
limited partnership that owns a property that has substantially appreciated in value.  For owners
in this group, a range of credit options is possible.  If these owners fail to reduce LBP hazards.
the problem is one of information, motivation, or competing investments, not absolute iuck of
resources.

       Some owners with  a moderate ability to pay are almost — but not quite — within reach of
the private lending system. Examples of this type of owner would be a couple with young
children earning good salaries, but with no substantial equity in their home, or the owner of a
rental property with sufficient cash flow to cover a small additional amount of debt, but without -
sufficient equity to arrange the needed financing.  Those in this group would be able to make
regular monthly payments, but may be unable to obtain a loan due to high LTV ratios, high levels
of debt, inadequate or faulty credit records, or lender unwillingness to make loans for
rehabilitation.

       For owners with a  low ability to pay, private market loans are not workable.  These owners
need direct subsidies to meet their LBP needs. Unlike those able to pay but unable to obtain a
loan, members of this group do not have the means to repay a market-rate  loan.  Examples of this
type of owner are a limited partnership that owns a low-cost housing development in a community
•vhere further rent increases are not feasible and rent collections barely cover  costs, or a single
parent who owns a home,  but whose monthly income is barely etiough  to pay the bills. The only
way that those with a low ability to pay will be able to reduce LBP hazards is with a government
subsidy. This group includes owners of  "economically distressed" properties, as discussed in more
detail in the paper on economically distressed housing.

       Exhibit  1 illustrates the situations of three borrowers with different  abilities to pay that are
seeking $10,000 of LBP hazard reduction financing.  (This example uses owner-occupants for
simplicity, but the same principles hold for owners of rental property.)  Families A and B have
identical abilities to repay  a loan through their discretionary monthly incomes, and are seeking
identical financing.  Because of differences in the amounts of equity they have in their homes,
however, Family A is able to obtain financing, while Family B is not. Family C is unable  to make
payments, and therefore must seek a public subsidy to accomplish the needed  work. Note that
because Family B is unable to obtain a loan from the private market, despite an ability to pay, the
family will require other financing assistance if LBP hazard reduction is to be undertaken.
October 20, 1993                      Financing Options                               Page 7

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                                         Exhibit 1
              COMPARISON OF HOUSEHOLDS SEEKING LBP FINANCING
Owner's Ability to
Pay for LBP Hazard
Reduction
Family A: High
Family B:
Moderate
Family C: Low
Discretionary
Monthly
Income
$375
$375
$25
Equity
High
Low
Low
Financing
$10,000 Loan;
10% interest rate
10 year term
Monthly payment: $132
$10,000 Loan;
10% interest rate
10 year term
Monthly payment: $132
$10,000 Grant
Monthly payment:
None
Qualified for a
Private Market
Loan?
YES
NO; does not
meet acceptable ,
LTV ratios
NO; insufficient
income to repay
loan
       The distinction between the types of assistance needed by those with high, moderate, and
low abilities to pay is important in formulating public policies for LBP financing.  The private
market can meet the needs of those with a high ability to pay. If funded, public subsidies can
address the needs of those with a low ability to pay.  For those with moderate ability to pay, but
without access to private financing, there is  a gap in the avilable financing mechanisms.  While'
this middle group can take advantage of the subsidy programs required for those with low a) •"''•»
to pay, this approach is not an efficient use  of public resources. Mortgage insurance, which
reduces a private lender's risk, could stimulate additional financing for moderate income
households.

       Exhibit 2 illustrates the types of LBP financing mechanisms available to owners with
differing abilities to pay off a loan. The V" marks note the most efficient way to provide
financing for each group, given scarce government resources. The shaded boxes indicate the
financing mechanisms that are currently available for use by each group.  This illustration points
out the gap in available funding mechanisms for use by those with a moderate ability to pay.
Section 3 provides details about the types of financing mechanisms currently available for those in
each group.
October 20,  1993
Financing Options
PageS

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                                        Exhibit 2
     EFFICIENT USE OF RESOURCES FOR FINANCING LBP HAZARD REDUCTION
Owner Ability to Pay
High: can pay for LBP activities
with cash, use existing loan
products if they have significant
equity, or obtain an unsecured
loan
Moderate: can afford monthly
payments, but cannot access
existing loan products for LBP
activities
Low: cannot afford to pay for LBP
abatement or to incur additional
debt
Mechanisms for Obtaining LBP Financing
Existing
Financing
Mechanisms
-' ' "*-, /-' '/
; * f- / " -<
'/'- '?--i ' , ;7<~ *-':
'- , "-A ,'^f '*<>
w**4jr .- -.I- ,
* ?«v'/ ''-,
:...->.*: *rr-r '-',


Insured LBP
Hazard
Reduction Loans
(to be designed)

/

Direct
Subsidies
, •• , „'?.*.,,>
*>V '"&'*'"
^ '' s? £• *££• , V S
^4 .ffSs X*'Sw?»I**MfW /*
&? -,'f Sf "vv •• •• f *
$*: :'">£••„*&&&
%," \> %£"s '", ZA*, t'^
& *c j,&f₯
> •.
fl - ';/$- \;\^''/'';~
\s ftfSff tf$ f f V? fft v ^
%v' v" J, ,%&•.>£'
^/f'^-^y^j"
',' '' " ' ', *
''" :/>,'!-
* if :'/-;-
-, J^
. -, ^v^ ^ ^ S
' :- - <
Check 'narks indicate the most efficient mechanism for financing LBP hazard reduction.
Shaded areas indicate types of financing that are currently available to each group.
3.     Current and Evolving Approaches to Financing LBP Hazard Evaluation and Reduction

       A variety of federal, state, and local programs that provide financing for LBP hazard
reduction are currently being tested in a number of communities across the country. Some are
funded through federal grants, others through dedicated state and local funding sources. For
some, the trigger for assistance is the presence of a child with an elevated blood-lead level (EBL),
for others it is concern on the  part of the owner.  Some programs are available for owner-
occupants only, others are available to owners of rental properties. Finally, some restrict
assistance to those  that lack the financial means to do the repairs. Others provide it to any owner
willing to make needed improvements.

       This section describes the various types of LBP evaluation and reduction financing
mechanisms that have been employed in various communities.  It then explores briefly the kinds
of new approaches  that may be developed. It concludes by listing several revenue sources that
can be used to fund LBP hazard reduction.

       A wide array of different types of mechanisms is potentially available to provide financing
to owners that cannot pay for LBP work without assistance. Conceptually, the programs fall into
three main  categories, as illustrated in Exhibit 3:
October 20, 1993
Financing Options
Page 9

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       (1)    Mortgage insurance;
       (2)    Direct public financing; and
       (3)    Public financing through tax benefits.

These mechanisms are discussed below.

       Mortgage Insurance

       Some borrowers are close to being able to take advantage of the products offered by the
private market, but fall just short of qualifying for a loan. With help of incentives from the public
sector, the private market is able to provide financing through loans that they would not
otherwise be willing to make.  This strategy makes use of the capital available to the private
market by bringing in a relatively small amount of public resources as credit enhancements. The
most common mechanism used to enable private lenders to make loans to these potential
borrowers is mortgage insurance.

       Mortgage insurance addresses lender concerns  about borrower creditworthiness by
promising to pay off the mortgage if a borrower defaults. With this insurance, lenders will make
somewhat riskier loans, for example to borrowers with marginal LTV ratios or credit histories.
This mortgage insurance strategy is used in programs such as Federal Housing Authority (FHA)
financing.  With FHA insurance, borrowers purchasing lower-cost homes can obtain loans at LTV
ratios higher than  the 80 percent ratio preferred by private lenders. Such programs operate best
when structured to ensure that the lender retains some risk, in order to guarantee that the
underwriting process, though adjusted to accommodate the looser restrictions desired by the
public agency, will still be done carefully to guard against losses.

       Several federal programs, including  FHA's Title I program for rehabilitation   1 Section
203(k) program for acquisition and rehabilitation, provide mortgage insurance foi r.  abilitation
programs that could  be used for LBP hazard reduction.  These programs, however, are not w'dely
used. It appears that lenders' general reluctance to make rehabilitation loans, the amount of
paperwork required for relatively small loan amounts, and the lack of secondary market players
willing to purchase rehabilitation loans combine to keep these programs relatively small.

       Public Subsidies

       Private lenders can meet some financing needs if the public sector provides insurance, but
the needs of other owners cannot  be met without government subsidies.  These may be owners
who have low income or limited cash flow, with poor credit histories, or properties that are a high
risk. For this  group, public financing will be required. While public financing strategies can be
combined in a wide variety of ways, four major techniques are widely used, including:
        (1)     Low-interest amortizing loans;
        (2)     Deferred payment loans (repayable);
        (3)     Deferred payment loans (forgivable); and
        (4)     Grants.
 October 20, 1993                      Financing Options                              Page 10

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                            Mechanisms for Financing Public Assistance
          Mortgage
          Insurance
                                         Public Assistance
       Public
     Subsidies
                                  Loans
                          Low-Interest
                           Amortized
                            Loans
Deferred
Payment
 Loans
                    Grants
Forgivable
  Loans
Direct
Grants
                                  Tax
                                Benefits
Income
 Tax
Credits
 Property
   Tax
Abatements
October 20, 1993
       Financing Options
                                                 Page 11

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       Low-Interest Amortizing Loans

       If a potential borrower is very close to being able to qualify for a loan but the monthly
payments are too high, the public sector can help increase the borrower's ability to pay by
providing a subsidy so that the monthly payment will be within reach.

       Public agencies that make low-interest loans directly have wider discretion to make loans
with flexible underwriting criteria than a private lender is allowed. By making loans directly,
public agencies can serve owners that otherwise would not receive a loan, but it does not leverage
private sector capital. In addition, a direct loan program requires the public agency to operate as
a lender and loan servicer or to contract for those services, which is costly. Such a program also
would be expected to face losses from higher-than-average default rates.

       Government funds can also be used to reduce the costs of a private loan. Private lenders
originate and service the loans, but public funds are used to reduce costs to the borrower:

       •      By prepaying a portion of the interest on a loan. The lender then makes
              the loan at a below market interest rate, which lowers the monthly
              repayment amount for the borrower.

       •      By directly reducing the principal borrowed by providing a grant to the
              borrower, thus bringing payments within reach.

In~either case, the lender collects the loan payments and takes on any remaining risk of default.

       One low-inte est LBP hazard reduction loan program is available i' ough the
Massachusetts Housi ,g Finance Agency (MHFA). Funds can be used for *J3P abatement in one
to four family owner-occupied residences. Borrowers apply through local rehabilitation  agencies
and receive below market interest rate loans through participating lenders. The program requires
inspection, reduction, and reinspection of the unit, and a certificate of compliance is issued when
the property is certified lead-safe.  The program  is financed primarily through the sale of tax-
exempt bonds by the MHFA, and a total of $11 million in loans is expected to benefit 1,000
households. As the loans are repaid the funds can be reused for additional LBP financing.
Income limits are used to restrict the program to low-income borrowers.

       Deferred Payment Loans (Repayable)

       In some cases, a  lower interest rate and less stringent underwriting criteria are not
sufficient to make a loan feasible for an owner.  For example, an investor-owner may operate a  -
property with rents as high as the market will bear, yet still have a cash  flow that barely covers the
costs of operation.  This owner would be unable to make monthly payments on any additional
'debt, regardless of how low the interest rate. One financing mechanism that  addresses this
situation is a deferred loan, for which no repayment is required until the property is  sold or the
mortgage is paid in full.  The repayable deferred payment loan is then repaid in full (often
without interest), assuming that there are sufficient assets at the time of sale.

       This mechanism requires little estimation of the borrower's creditworthiness or ability to
repay on a monthly basis because the loan is repaid from the proceeds of the sale of the property.

                                                                                            I
October 20, 1993                     Financing Options                              Page 12

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In this way, the immediate LBP hazard reduction needs of owners unable to shoulder additional
debt will be met, while still requiring the owner to repay the public funds. In a case where the
property cannot be sold for enough  to repay the LBP loan, the debt is generally forgiven.
Deferred loans require ongoing monitoring to ensure that loans are repaid at the time of sale,
even many years in the future. This program works best for properties that are expected to retain
or accrue enough value so that funds will be available at sale to repay the loan. For  highly
distressed properties that decline in value,  the loan is not likely to be repaid.  However, a
deferred loan is useful for ensuring that if  an owner is able to make a profit at sale, the public
debt is repaid.  Thus, this mechanism may  be preferred to outright grants.

       The Rhode Island Housing Mortgage Finance Corporation is establishing a $3.9 million
program of deferred and forgivable LBP hazard reduction loans financed largely with tax-exempt
bonds. All children in Rhode Island under the age of seven must now be tested for LBP
poisoning. When the Department of Health locates a child with an EBL, an inspector will test
the child's housing unit and depending on  the results of the test and the condition of the unit, will
recommend one of four treatment options  of various degrees of intensity, as well as the cost of
treatment. The first $5,000 is financed as a five year forgivable loan (see below).  If  the owner
requires more than $5,000, additional amounts are provided in the form of a deferred loan, up to
a maximum of $15,000 per unit and  $140,000 per property. Of this $15,000, up to $5,000 per unit
may be used for exterior work.  Loan amounts in excess of $5,000 are repaid at the time of sale
or transfer of the property. Although  the  program has not yet begun, approximately 150 people
have applied to participate.

       Deferred Payment Loans (Forgivable)

       In some cases, local governments encourage neighborhood stability by issuing deferred
payment loans that are forgiven b - a certain percentage each year.  If the borrower does not  sell
the property during a stipulated time frame, the loa;i is forgiven entirely. In general, no inlerest
is Charged, even if some portion of the loan must be repaid.  The portion to be repaid in case of
an early sale is expected to come from the proceeds of the sale, but is generally forgiven if the
sale generates insufficient funds. For example, if the forgivable loan agreement is for five years
and the owner sells the property after  three years, two-fifths of the loan amount would need to  be
repaid, but without any interest.  If the sale at the end of three years did not generate sufficient
funds to repay two-fifths of the loan, that too  would be forgiven.  If the owner did not sell the
property until five years had elapsed, the loan would be completely forgiven.

       In essence, a forgivable loan program is a grant program with built in protection against
an owner quickly selling the property and achieving a windfall profit  A forgivable deferred
payment loan also can be used to ensure that  owners comply with program guidelines (e.g.,
maintain the units as affordable or offer lead-safe units to families with children that have EBLs).
Under this strategy, program administration is eased  by only tracking borrowers through the
stipulated period  until the loan is forgiven, rather »han until the sale of the property  in the distant
future.  This mechanism can work well for distressed properties, although if the owner selb before
the loan is completely forgiven, the likelihood of recovering the remaining portion of the loan at
sale is small.

       The Maryland Community Development Agency has a forgivable loan program for LBP
hazard reduction  that has been in operation since 1986.  The program has assisted about 500 units
October 20, 1993                      Financing Options                              Page 13

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with $4 million since then, but this year alone its volume is expected to be between 400 and 500
units. The program is open to both owner-occupants and owners of rental property, either of
which can borrow up to 100 percent of the value of the property or $15,000 per unit, whichever is
less. Rental property owners that accept loans must agree to advertise the availability of lead-safe
units to families with children with EBLs, and must rent to families with incomes at 50 percent or
less of the state median income. For rental properties, the loan is forgiven proportionately over
15 years.  The principal must be repaid if the property is sold before the end of that period, and a
covenant runs with the land for the full 15 years, requiring that the unit continue to serve low-
income families. For owner-occupied units the U an is forgiven over a 5 year period.  Eligible
owners include any family with an income under 50 percent of the area median, or between 50
and  80 percent of median with an affected child or pregnant woman. Whenever possible LBP
loans are undertaken in conjunction with other efforts to have the greatest possible long-term
economic impact.

       Grants

       Administratively, the simplest program for public agencies is a grant program.  In some
communities grants are provided to owners of properties with lead-poisoned children,  regardless
of income, and program administration is straightforward because there are no other eligibility
requirements.  In other cases, grants are provided only to owners that meet particular income or
other eligibility requirements.  Once the LBP work is done, the administrative obligation of a
grant program ends.  Grants are sometimes conditioned on a matching contribution from the
recipient.  They are often the only realistic financing mechanism to help owners of distressed
properties deal with LBP hazards.

       In 1992 the City of Milwaukee began operating a matchir  gi int program for owners of
properties with lead-poisoned children.  Childn  
-------
                                                                                   vet
the tax system can be tapped for LBP support are through federal or state income tax credits and
local property tax abatements.                                                        ,   (
                                                                                   ila'
       Tax benefits provide an incentive for households that have sufficient cash reserves "oj:
credit to undertake LBP hazard reduction.  Unfortunately, they cannot be used as a direct source
of financing if an owner lacks the means to pay the up-front costs, and they do not benefit5ow-
income households that lack sufficient tax liability.  In addition, nonprofit groups, as tax exgmpt
organizations, cannot generally benefit from either tax credits or property tax abatements. pr)
(Nonprofit1:  are often active participants in the affordable hom.ing arena and wo- k with mariy
properties that have  LBP problems.)                                                  ^
                                                                                   ;sit
       Massachusetts provides an example of a tax credit program designed to help compensate
owner-occupants and rental property owners that evaluate and reduce LBP hazards.  Under this
program, property owners can receive a tax credit of up to $1,000 per unit for LBP-related
activities that are conducted and inspected by licensed LBP professionals.  The credit is available
for anyone, regardless of income, and can be spread over several years.  Use of the program,has
been growing, and in 1991 almost 2,000 people took advantage of it. A similar program for^
financing weatherization improvements, authorized by the federal government in 1978,  proved a
15 percent credit on  up to $2,000 of energy improvements. Limiting the credit to a portiontpf the
expenses reduces the incentive effects.                                                o^
                                                                                   uti
       Another  tax mechanism that local governments might use to help defray the costs o.£ LBP
activities is a property tax reduction.  Under such a system, local governments promote lead-safe
housing by forgiving  a portion of the property taxes due for households that reduce LBP hazards.
This tax reduction could be offered fr>r one year or multiple years. Alternatively,  the government
might use  a means test  and provide such a credit only to lower-income home owners or to those
that invest in low-income housing.  While such programs could result in substa, tial revenufyjosses,
they could be targeted  to neighborhoods with high a incidence of LBP poisonLig to help reduce
public health costs.  Another counterbalance to the potential loss of revenue is that proper,^ tax
abatement for rehabilitation can  sometimes be counted  as a matching contribution for federal
housing programs such  as HOME.  A small number of communities currently have property tax
relief strategies in place to stimulate low-income housing rehabilitation. None of these programs
is specifically designed  to address the LBP issue.                                       (j|r
                                                                                   cu
       Innovative Private Financing                                                  ,OI
                                                                                   m-
       While private lenders have not yet developed a "Lead-Based Paint Loan,"  the lendjn^
industry is often  capable of finding surprising ways to provide needed financing to those abjg to
pay. For example, refinancing is now possible for borrowers with bad credit histories but good
records  of repaying their present mortgages. The interest rates charged are somewhat higher than
conventional lending rates, but are still low enough to be attractive to owners. Similarly, a few
aggressive Wall Street lenders are providing refinancing to good customers w'-jose homes have lost
value and  therefore require financing at high loan to value ratios. Similar solutions may be^
possible for  LBP hazard reduction financing. Unfortunately, developing new financing   r
mechanisms for LBP activities promises to be especially difficult because lenders have tradu^jpnally
shied away from  loans involving rehabilitation.                                         )cj.
October 20, 1993                      Financing Options                              Page 15

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       Adapting existing programs to meet LBP hazard financing needs is another possible
approach to filling the financing gap for those able to pay, but unable to obtain financing.
Government-funded mortgage insurance is a well-known example of government  intervention that
allows the private market to serve borrowers otherwise unable to qualify for a loan.  Government-
insured Title I rehabilitation loans and Section 203(k) acquisition and rehabilitation loans are two
options currently available but little used for financing LBP hazard reduction.  With some
revision, these programs might help fill  a financing void.

       Revenue Sources

       Several state and local LBP programs are currently funded through grants from the
federal government.  In addition, states and local governments have tapped a broad array of
revenue sources to ensure regular income for  LBP hazard reduction programs. Some of the
sources described below have already proven effective for LBP hazard reduction  financing.
Others have been tried as revenue sources for other housing rehabilitation programs, but show
promise as potential LBP hazard reduction revenue sources.

       •      Industry Fees.  In 1991 the State of California passed a law that generates
              funds for screening and case management activities for children with LBP
              poisoning through fees charged to industries responsible for present and
              former contributions to environmental lead contamination,  in particular the
              petroleum and paint industries. The fund was initially authorized  to collect
              up to $16 million per year in the form of fees charged for the issuance or
              renewal of permits,  licenses, and registrations of firms in industries
              responsible for environmental lead contr   . ition.  The California law is
              currently facing a court challenge.

       •      Sales Taxes.  A somewhat different approach to charging industry fees,  as
              described above, might be taxing sales of products associated with the
              nation's lead problem, such as sales of paint, petroleum, and other sources
              of lead in the environment. Governments could also levy direct taxes on
              lead'manufacturers and importers.

       •      Property Tax Assessment Zones. A surcharge can be added to real estate
              property taxes for residents in particular geographic areas designated as
              assessment zones.  This approach is being used in Alameda County,
              California. The charge can be minimal - for example in Alameda County
              it is $10 per household - but are still an important source of funding.
              Under the Alameda County program, cities commit to participating for
              three years but may renew their participation if the program is successful
              and a need remains. This program has the advantage of requiring a small
              contribution from a large number of households in order to fund
              abatement of hazards in homes with children who have EBLs.

       •      Real Estate Transfer Tax. Many states levy a real estate transfer  tax and
              some, most notably Florida, have used that income to develop a dedicated
              source of funding for affordable housing. Transfer taxes can be levied on
              all transactions, or could be targeted, for example to properties that are not
October 20, 1993                     Financing Options                             Page 16

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                                                    certified lead-safe, or away from properties that have recently
                                                    LBP hazard reduction activities.
fr- • r G c c ©,
  C • O C GQ <
1C  3<  •€ CC
  c«oc c c <
1C  90 •€ CC
  e • o c c c i
ic  ec^cec
  c • c? e e c«
4.     Options for Financing Mechanisms

       The demand for lead-safe housing on the part of homebuyers, renter
increases drives the demand for financing mechanisms to address LBP probh
awareness of the problem and demand for remedies continues to grow,  the i
become increasingly crucial to the effort to eliminate LBP hazards. For owr
existing private lending system, government intervention is not needed.  If tr
obtain financing are to have an opportunity to make their housing lead-safe,
financing mechanisms must be created.

       This section presents a range of options that could enhance the avai1
reduction financing for owners currently unable to afford such actions.  The

       •       For owners with a moderate ability to pay, options  for stimul
               private market to provide needed financing;

       •       For owners with a low ability to pay, public subsidies; and

       •       A set  of options dealing with ways to enhance the value of e
               programs through cooperation and  information sharing.

Exhibit 4 summarizes the possible options.  Note, however, that tfiis li-t is n
options discussed are not mutually exclusive.
                                                                                Exhibit 4
                                                                           FINANCING OPTIONS

                                                Options for Owners With a Moderate Ability to Pay

                                                   1.   Insure LBP hazard reduction loans.

                                                   2   Enhance or develop private-sector financing mechanisms.

                                                   3   Develop nonprofit capacity to oversee LBP hazard reduction.

                                                Options for Owners With a Low Ability to Pay

                                                   4.   Sponsor government subsidy programs for hazard reduction. (See ec
                                                       distressed housing , -aper for specific suggestions.)

                                                Options for Enhancing Value of Existing Programs

                                                   5.   Coordinate efforts with other rehabilitation programs.

                                                   6.   Promote sharing information about financing mechanisms and reveni
                                     October 20, 1993
                                       Financing Options

-------
       Options for Owners With a Moderate Ability to Pay

       The capital available in the private market is not currently being captured effectively to
meet the needs of owners that could afford to pay for LBP efforts, but are unable to obtain
financing.  The following three options would encourage the private sector to provide'LBP loans
to such owners.
                                                           1. Insure LBP reduction loans
                                                     Effectiveness
                                                     Cost
                                                     Equity
                                                     Political
                                                     Feasibility
                                                     Administrative
                                                     Ease
                              Potential for high impact
                              for owners able to repay
                              loans.
                              Fairly high, but substantially
                              less than equivalent
                              numbers of grants. Will
                              vary with riskiness of
                              eligibility criteria.
                              Addresses only households
                              with moderate ability to pay
                              for LBP reduction.
                              Potentially acceptable
                              because of precedents.
                              Large losses would decrease
                              popularity.
                              Moderately difficult to
                              administer
       Option 1:  Insure LBP hazard reduction
loans. If the private sector cannot devise ways
to serve owners able and willing to pay, but
unable to qualify for a loan, governments could
provide loan insurance.  Such insurance could be
provided for separate LBP hazard reduction
loans, or as part of an expanded first mortgage
with both acquisition and rehabilitation
components.

       This option would require two major
steps.  The first is establishing a loan insurance
fund to ensure that lenders who use the program
will be repaid  if loans go bad. The second is
determining the eligibility criteria that  should be
used and issuing insurance.

       Loan insurance has  proven effective ir
other programs.  For example, FHA insurance
permits borrowers to purchase properties at
much higher LTV ratios than conventional
lenders would approve without insurance.  This  experience suggests that a program designed to
meet the needs of this segment of the population could be quite effective. In fact, existing
federal rehabilitation loan insurance programs, such as Section 203(k) and Title I, can be used for
LBP hazard abatement.  Expanding the availability of these vehicles could meet the needs of
those able  to pay for a LBP hazard reduction loan, but unable to qualify for one.

       The cost of a loan insurance program would be far less than the cost of subsidized direct
loans or grants to the same number of borrowers.  The actual cost would depend on the number
of loans insured and the level of risk allowed by the underwriting criteria. The riskier the
underwriting criteria,  the higher the default rate is likely to be.  At the  same time, the riskier the
criteria, the larger the pool of those that could access the system.

       Similar insurance programs have been established by the federal government, which
indicates the political feasibility of such an approach. The riskier the criteria selected  and the
higher the expected losses, however, the less popular the proposal is likely to be.
Administratively, the program would be moderately complex to manage, but other loan insurance
programs would provide useful models for management and implementation.

       Option 2: Enhance or develop new private-sector financing mechanisms.   The LBP
hazard reduction financing market is not likely to be a highly lucrative business. The loans are
October 20, 1993
Financing Options
                                                                                      Page 18

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                                                      2. Enhance or develop new private-sector
                                                              financing mechanisms
                                                    Effectiveness
                                                    Cost
                                                    Equity
                                                    Political
                                                    Feasibility


                                                    Administrative
                                                    Ease
                            Unknown Could yield
                            nothing, or could reduce
                            financing problems for owners
                            able to repay a loan.
                            Inexpensive.
                            Does not address needs of
                            households with low ability to
                            pay
                            Enhances private market
                            mechanisms - politically
                            popular.
                            Easy, but requires careful
                            structunng to work  effectively
                            with lenders.
relatively small, the overhead costs are high, and
the work involves rehabilitation, which lenders
typically choose to avoid.  Thus, without some
type of government encouragement, the private
sector is unlikely to spend the time and
resources needed to develop innovative
solutions.

       Yet, private lenders  are in the best
position to develop financing innovations to
meet the needs of owners able to make monthly
payments, but unable to qualify for a loan. The
government could  stimulate  the product design
process by convening a panel of lending experts
to brainstorm about how such financing could be
developed.

       Under this approach the government
would serve as a catalyst for the development of
new financing mechanisms.  The mechanisms
would be devised by experts from the financial industry, who have the best understanding of what
works and what the private market is willing and able to make available. This format would
provide a creative  forum for problem solving.  A private-sector solution would have the advantage
of providing financing for owners with  an  ability to pa" for LBP hazard reduction without any cost
to the government.

       The lending industry has demonstrated its ability to dev,se creative solutions to similar
problems in the past.  For example, the industry now provides refinancing, albeit at high interest
rates, for borrowers with sufficient means  to make regular payments, but with credit histories that
do not meet typical underwriting standards.  An owner in need of financing for LBP hazard
abatement and with the means to make regular payments, but unable to meet the  lender's
underwriting criteria is in a similar situation.  It is possible that lender creativity will devise
financing mechanisms that work for this situation.
                               0
       The costs of this  process would be relatively low. It would require funds to network with
lenders and to convene and  staff round table discussions.  The actual costs of implementing any
private sector solutions would fall to the lending institutions themselves, or might involve limited
government assistance.  Administratively, it would  be relatively easy to implement, although it
would require careful thought to find ways to work effectively with lenders.  Any solutions devised
through this process would be available only to owners with the means to repay a private loan.  If
successful, however, it could allow government agencies to tat get subsidies to those unable to
make such payments.

       Option 3:  Develop nonprofit capacity. One of the major reasons that  lenders are
reluctant to make  rehabilitation loans is the risk that the work will not be completed satisfactorily.
This problem could be decreased in the LBP arena by promoting the development of a nonprofit
sector capable of providing high-quality oversight of  LBP activities. Developing such a sector
could make it easier for private lenders to develop workable LBP loan products.
October 20, 1993
Financing Options
                                                                                      Page 19

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                                                        Develop nonprofit capacity to oversee LBP
                                                                hazard reduction
       While this option does not directly
reduce LBP hazards, it provides a component of
the infrastructure that may make LBP lending
more feasible.  It helps build the capacity of
nonprofit housing organizations to undertake
this work itself, or to oversee the work of private
construction firms. Once a nonprofit group has
established a reputation  for ensuring competent
completion of rehabilitation work, lenders can be
more comfortable about making a rehabilitation
loan. Similarly, owners who hesitate to hire a
contractor on their own  might be willing to do
so with the support of a  nonprofit organization
to provide oversight and quality assurance.

       The costs for this option involve
strengthening the capacity of nonprofit housing
organizations in the area of LBP reduction
techniques.  This cost could be larger or smaller,
depending on the extent of the training received.
If it  succeeds in convincing lenders to make
more LBP rehabilitation loans, it could be worth the cost.  Even if it does not have the desired
effect directly on lenders, the increased ability of the nonprofit sector to manage LBP reduction
effectively will  benefit  the affordable \ Busing infrastructure.
                                                     Effectiveness
                                                     Cost

                                                     Equity
                                                     Political
                                                     Feasibility

                                                     Administrative
                                                     Ease
Uncertain impact on lender
willingness to make loans for
LBP repairs
Low to modest.
Intended to serve households
with moderate ability to pay
directly, but can also benefit
those with low ability to pay.
Politically popular to
strengthen nonprofit capacity.
The training task is
manageable; convincing
lenders to take advantage of
nonprofit capacity could be
harder
       This option is designed to assl. owners with a
reductions.  It has the potential, however, to increase
the long run because of the increased capacity of the
communities to deal effectively with LBP hazards.  A
capacity is not evenly spread around the country, and
in some locations. The areas with the best-developed
with the most identified LBP problems, areas such  as
                                                    moderate ability to pi ' for LBP hazard
                                                   the stock of lead-safe  ffordable housing in
                                                   housing nonprofits that serve low-income
                                                   drawback to this strategy is that nonprofit
                                                   it could be difficult to get nonprofits trained
                                                    nonprofit capacity, however, are often areas
                                                   the Northeast and Midwest.
       This option is consistent with the current trend toward building nonprofit capacity.  While
it would require a major commitment of time and resources to train the nonprofit groups in the
areas of LBP hazard reduction and contractor oversight, the task is clearly defined and
manageable.  The difficult aspects of the program will be convincing lenders to take advantage of
the newly-developed capacity and to make rehabilitation loans for LBP hazard reduction to
borrowers with a moderate ability to pay.

       Options for Owners With a Low Ability to Pay

       While some owners have the means to repay a loan for LBP hazard reduction but do not
qualify for one, others do not have sufficient resources to repay a loan. Only direct subsidies will
permit these owners to reduce LBP hazards.  This category of "economically distressed" housing
must be the target of substantial government assistance if its LBP hazards are to be reduced.
Specific options for addressing the needs of these properties are discussed in the paper on
October 20, 1993
                                      Financing Options
                    Page 20

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economically distressed housing. Option 4 summarize the general types of interventions that
might be considered for these units.
       Option 4:  Sponsor government subsidy
programs for hazard reduction. Owners with a
low ability to pay for LBP hazard reduction can
benefit from assistance through federal, state, or
local programs.  Such subsidies could come in a
variety of forms, including public or private low-
interest loans, deferred loans, or grants. Direct
subsidy programs can also be tailored to
maximize their effects on low-income households
with children. This can be accomplished through
a variety of targeting mechanisms, including
limiting assistance to properties that serve this
population and requiring that recipients of
assistance provide housing to these populations
after the LBP reduction is complete.
                4. Sponsor government subsidy programs
                         for hazard reduction
                Effectiveness


                Cost

                Equity


                Political
                Feasibility

                Administrative
                Ease
Targets funds to properties
most in need of assistance.
Expensive.
Addresses households with
low ability to pay.
Cost politically unpopular.

Complex, depending on
program.
       This option provides direct financial assistance to owners with a low ability to pay for LBP
hazard reduction.  If recipients are limited  to those that would be unable to make needed LBP
hazard reductions without assistance, the funds will be going to abatement efforts that would not
otherwise take place.

       The cost of direct subsidies will be  high, which will be a political detriment.  Subsidy
expenditures are more politically acceptable if a convincing arguraent can be made that they will
save costs in the long run.  A question for  further exploration is whether the cost savings lealized
in terms of health  care, special education, and other services outweigh the cost of the subsidy.
Administratively, direct subsidy programs can range from relatively complicated to extremely
difficult, depending upon the specific option selected. In  particular, programs with targeting will
involve assessing eligibility criteria and may require ongoing monitoring to  ensure compliance with
agreed-upon conditions for assistance.

       Options for Enhancing Value of Existing Programs

       Several LBP programs are already underway at the state and local  level.  Some are
designed as pilot projects and  are geared to collecting data to assess various methods of
addressing LBP problems.  Others are ongoing efforts to address LBP hazards, without a specific
research agenda.  Some LBP efforts are closely connected with other property improvement
programs, while others  are operated quite independently.  The options in this section would
enhance the value of existing LBP programs through improved inter-program communication.

       Option 5:  Coordinate with other programs.  Many properties that are potential targets
for subsidies under a  LBP hazard reduction program also  are eligible to receive assistance through
other housing rehabilitation programs. Public and private resources can be stretched further if
LBP efforts are coordinated with other rehabilitation programs to maximize the effectiveness of
both programs.
October 20, 1993
Financing Options
                   Page 21

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       Coordination can help reduce LBP
hazards that would otherwise have gone
unaddressed.  For example, a local LBP hazard
reduction agency might coordinate with the local
utility companies that are involved in
weatherization to make sure that whenever
practical, window frames with LBP are replaced,
rather than repaired. This outcome can be
achieved by subsidizing the difference  in cost
between repair and replacement of the window
with LBP funds.  In this way, LBP program
funds can reduce more LBP hazards by paying
only the incremental cost difference between
repair and replacement, rather than the full cost
of abatement.
                  5. Coordinate with other rehabilitation
                             programs
               Effectiveness
               Cost
               Equity
               Political
               Feasibility

               Administrative
               Ease
              LBP work most feasible
              during rehabilitation.
              Allows full LBP reduction
              benefit, with only the
              incremental cost.
              Will assist households already
              receiving rehabilitation
              assistance.
              Politically popular to realize
              savings through cooperation.
              Requires good coordination
              with other programs.
       Local communities might be able to
more effectively use of their resources by
coordinating several programs.  For example, if a community's HOME-funded homeowner
rehabilitation program was not expected to be able to meet the complete rehabilitation needs of a
particular home, a community might choose  to pay for the costs of LBP hazard reduction in the
unit with funds from a LBP program, thus achieving both HOME rehabilitation and LBP hazard
reductions -- and potentially credit for matching contributions under the  HOME program.    !

       In terms of equity, a    'inating programs may tend to provide more thorough assistance
to a smaller number of peop   than allowing the programs to function independently.  This option
is likely to be popular in theory, because it has the potential for efficient use of resources. In
practice, however, coordination between  agencies can be challenging.
       Option 6:  Promote information sharing.
 While LBP is not yet a universally recognized
problem in this country, more and more states
and local governments have begun to address
LBP hazards. These agencies have undertaken
different programs and have used different
funding sources.  An important government role
could be to promote information sharing with
respect to financing mechanisms and revenue
sources to ensure that the experiences of the
past inform decisions about the future.
        This strategy promotes effective program
design and development. While the specific
situations of particular communities may prevent
programs from being replicated exactly, many
aspects of an effective strategy in one community
may be applicable to another community.  It is a low-cost way to encourage the development of
                  6. Promote sharing information about
                financing mechanisms and revenue sources

               Effectiveness   Could promote development
                            of effective LBP hazard
                            reduction programs.
               Cost          Inexpensive.
               Equity        Will help lower-income
                            households if programs are
                            targeted to this group.
                            Politically popular approach.
Political
Feasibility

Administrative   Needs careful coordination,
Ease          but not difficult to administer
October 20, 1993
Financing Options
                                 Page 22

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effective LBP programs.  Information sharing is also a relatively easy approach to sell politically.
Doing it well takes coordination and effective management, but it is not difficult to implement.

       The exhibit on the following page summarizes the evaluation of the six financing options.
October 20, 1993                      Financing Options                               Page 23

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COMPARISON OF FINANCING OPTIONS
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
Option 1:
Insure LBP
Reduction Loans
Potential for high
impact for owners
able to repay loans
Fairly high, but
substantially less than
equivalent numbers
of grants. Will vary
with riskiness of
eligibility criteria
Addresses only
households with
moderate ability to
pay for LBP
reduction
Potentially acceptable
because of
precedents; large
losses would decrease
popularity
Moderately difficult
to administer
Option 2:
Enhance or Develop
New Private-Sector
Financing
Mechanisms
Unknown. Could
yield nothing, or
could reduce
financing problems
for owners able to
repay a loan
Inexpensive
Does not address
needs of households
with low ability to
pay
Enhances private
market mechanisms
- politically popular
Easy, but requires
careful structuring to
work effectively with
lenders
Option 3:
Develop Nonprofit
Capacity to Oversee
LBP Hazard
Reduction
Uncertain impact on
lender willingness to
make lor - . M3P
repairs
Low to modest
Intended to serve
households with
moderate ability to
pay directly, but can
also benefit those
with low ability to pay
Politically popular to
strengthen nonprofit
capacity ^
The training task is
manageable,
convincing lenders to
take advantage of
nonprofit capacity
could be harder
Option 4:
Sponsor Government
Subsidy Programs Tor
Hazard Reduction
Targets funds to
properties most in
need of assistance
Expensive
Addresses households
with low ability to pay
Cost politically
unpopular
Complex, depending
on program
Option 5:
Coordinate with
Other Rehabilitation
Programs
LBP work most
feasible during
rehabilitation
Allows full LBP
reduction benefit,
with only the
incremental cost
Will assist households
already receiving
rehabilitation
assistance
Politically popular to
realize savings
through cooperation
Requires good
coordination with
other programs
Option 6:
Promote Sharing
Information
Could promote
development of
effective LBP hazard
reduction programs
Inexpensive
Will help lower-
income households if
programs are
targeted to this group
Politically popular
approach
Needs careful
coordination, but not
difficult to administer
, 1993
Finangaj' Options
&&e
24

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   Endnotes

   1. U.S. Department of Housing and Urban Development, Office of Policy Development and Research,
   "Comprehensive and Workable Plan for the Abatement of Lead-Based Paint in Privately Owned Housing:
   Report to Congress," 1990.

   2. For example, "Geographic Patterns of Mortgage Lending in Boston, 1982-1987" by Bradbury, Case, and
   Dunham, New England Economic Review, September/October 1989 describes the differences in lending  :
   patterns in that city.  Numerous other studies have shown similar results in other cities. Discussions with
   lenders on a national basis confirm this trend.

   3. Conversations with secondary market, private mortgage insurers, and lenders in Baltimore and
   Cleveland.
October 20, 1993                          Financing Options                                   Page 25

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           UNDERWRITING STANDARDS AND LEAD-BASED PAINT HAZARDS
1.
       Introduction
                                                                  Key Issues
                                                     What is underwriting?

                                                     Who is involved in underwriting?

                                                     How does the underwriting process address
                                                     LBP?

                                                     How can the underwriting process be modified'
                                                     to encourage or require LBP hazard
                                                     reduction?
       Lenders, a cornerstone of the housing
industry in this country, depend on underwriting
standards  to guide their decision making.
Underwriting is the art of determining whether a
requested loan constitutes a good risk from the
lender's perspective.

       Underwriting plays a key role in the
lending process.  Owners of residential housing
can obtain loans, whether to purchase a property
or to address lead-based paint (LBP) hazards,
only if the underwriting process deems these
projects to be good risks.  Because lending plays
such an important role in the real estate market, it has the potential to serve as a tool for
encouraging or requiring  LBP hazard reduction.

       This paper provides a basic understanding of the underwriting field.  The issues discussed
are integrally connected with several important issues presented in other papers in this series.
The property values on which underwriters base their decisions are established through the
processes  described in the appraisal paper.  The liability and insurance papers also provide
important   cormation about factors affecting an owner's ability to obtain a loan.  Finally,
underwriting guidelines affect the viability of many of the options described  in the financing
paper.

       The  remainder of this paper is organized as follows:

       Section 2:     Provides background on the underwriting process  and its participants.

       Section 3:     Describes the industry's current and evolving approaches to environmental
                     hazards.

       Section 4:     Briefly evaluates policy options for reducing LBP  hazards that might be
                     accomplished through the underwriting industry.
2.
       Background
       In order to assess how the underwriting industry can play a role in LBP hazard reduction,
it is important to understand underwriting and the major participants in the process. This section
briefly discusses these topics.

       Underwriting Process

       Underwriting is the technique used by lenders to assess the risks involved in lending
money.  Underwriting standards focus on determining two things:
October 20, 1993
                                   Underwriting Standards
Page 1

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       (1)    Whether the prospective borrower is able and willing to repay the loan;
              and

       (2)    If for any reason the borrower does not repay the loan, whether the lender
              could foreclose and resell the property at a price sufficient to recoup its
              losses.

These two elements are discussed below.

       When underwriting is not done carefully and well, financial institutions  can fail.  The
losses that led to the savings and loan (S&L) crisis of the 1980s serve as a stark reminder of the
importance of good underwriting.  While poor underwriting was only one of several factors that
contributed to that crisis, it illustrates vividly the costs  of such institutional failure. While
financially healthy lending institutions can and  do absorb  a few bad loans, neither individual
institutions nor the industry as a whole can tolerate such  defaults in large numbers. Thus, the
financial health of individual lending institutions, investors, and borrowers alike critically depend
on effective underwriting.

       Ability and Willingness to Repay the Loan

       Assessing a borrower's ability and willingness to repay the loan, or creditworthiness,
involves examining both the resources available to a borrower to repay a loan and the borrower's
motivation to make regular payments. Such an assessment is conducted for both owner-occupants
and jnvestor-owners, although the assessment techniques  vary somewhat. The  key factors in this
assessment are the borrower's:

       •      .  come and debts;                              -
       •      Assets;
       •      Liability risks;
       •      Credit history, and
       •      Motivation to repay.

       A borrower's income and debts are primary indicators of ability to repay the lender. For
owner-occupants, lender's examine the amount of the  household's income, as well as income
stability over time and  security for the future.  The lending community has established a set of
generally accepted debt-to-income ratios that most lenders use to assess the adequacy of the
borrower's projected income. These ratios consider both the ratio of housing costs to total
income (front-end ratio) and the ratio of all debt to total income (back-end ratio).  Exhibit 1
explains how these ratios are calculated  and identifies  the typical acceptable ratios, which vary
somewhat by lender and  loan product.  The purpose of these ratios is to ensure that after meeting
basic household needs, a borrower will have sufficient income to repay the loan.  For rental
properties, lenders conduct a similar analysis by examining the property's projected rents and
income stream to calculate the debt coverage ratio (DCR), which also is described in
Exhibit 1.

       A borrower's assets are another indication of ability to repay a loan.  Whether the loan is
to an owner-occupant or to an investor-owner, substantial accumulated assets, especially relatively
liquid assets, indicate that if the borrower encounters temporary disruptions in  cash flow, the
mortgage can still be paid.
October 20, 1993                    Underwriting Standards                             Page 2

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                                                                 Exhibit 1
                                                 CONVENTIONAL DEBT-TO-INCOME RATIOS*

                                               OWNER-OCCUPIED

                                                     Front-End Ratio:
                                                     Housing Costs
                                                     Total Income

                                                     Back-End Ratio:

                                                     Total Debt
                                                     Total Income
                                Typical maximum = 28%
                                Typical maximum = 36%
                                               RENTAL
                                                     Debt Coverage Ratio (DCR):

                                                            Net Operating Income
                                                         (Total Income-Total Expenses)
                                                               Debt Service

                                                            Typical acceptable range = 1.1 to 1.3
                                               * Acceptable ratios vary by lender and loan product.
       For rental properties, a borrowers
ability to pay is also affected by liability risks.
Lawsuits can force owners into bankruptcy
and default.  Lenders can take title to these
properties, but are not equipped to manage
such properties effectively, and often lose
money on the carrying costs involved in
maintaining the properties until resale. In
some cases, lenders may be reluctant to
foreclose on properties with environmental
hazards (including LBP) because they may
become liable for abatement and any damages
to the tenants. For these reasons, lenders
typically  require that owners of multifamily
properties take steps to reduce potential
environmental hazards and obtain general
liability insurance.

       A borrower's credit history is also an
important component of assessing the
likelihood that the lender will be repaid.
Before agreeing to make a loan, a lender will
require evidence that the borrower is
conscientious about paying off debts.  For an
owner-occupant, this procedure might involve
a credit check that f "uses on previous
mortgage payments,  .nt  payments, or credit                    ^
 ard repayment. For rental property owners, it could involve reviewing the ownership entity's
credit history or the credit records of the principal investor(s) and owners.

       A borrower's motivation to make payments is important because, regardless of'the amount
of money available to the borrower for repaying the loan, if making loan payments is not in the
borrower's best interest, the lender faces a risk of default.  Most owner-occupants are highly
motivated to make payments to ensure shelter for their households. In addition, the higher the
equity in a project, the greater the loss an owner will face in the case of a default. Thus, lenders
require that borrowers establish a financial stake in the form of a down payment and, over time,
build up  equity.  For owners of rental properties that do not rely on the property for shelter,
lenders require equity investments substantial enough to ensure that the owner has a vested
interest in making regular payments.

       Value of the Property                                                             ,

       If, despite efforts to ensure that the borrower has both the means an
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similar properties in similar locations that have             PROPERTY VALUE MEASURES
been recently sold, and assessing the value of
                                                    Loan-to-Value (LTV) Ratio:

                                                                Loan Amount
                                                               Assessed Value
                                                    Maximum LTV Ratios:
                                                    Conventional Owner-Occupied:
                                                    Privately Insured Owner-Occupied:    95%
                                                    FHA-Insured Owner-Occupied:       97%
                                                    Rental Property.                  75%
the subject property based on the sales prices of
these comparable properties. The factors
examined include the property's location, design,
construction, amenities, and physical condition.
In addition, the underwriter expects the
appraiser to note any obvious environmental
hazards that could materially affect the
borrower's  liability risks or the future resale
value of the property.1 For investor-owned
properties,  the appraisal takes into account not
only the physical condition and location of the
property, but also the anticipated value of the
cash flow that will be generated through tenant rents and other income sources.

       Underwriting Participants

       Lending money can be risky. The nation's lending system is designed to minimize that risk
by making sound loans and to share the risk that cannot be avoided. The major participants in
the private mortgage lending field are the primary market, the secondary market, and mortgage
insurers. In addition, because the private market does not serve some important segments of the
population, government lenders and insurers also play an important role.  Although the federal
government is not generally a direct player in the underwriting process, federal regulators have an
important effect on the underwriting decisions that lenders make.

       Prima'v Market

       The primary mortgage market  is composed of several types of firms, including commercial
banks, mortgage banking companies, federal savings banks (formerly S&Ls), and credit unions.
While the missions and regulations for these organizations differ, they  all play essentially the same
role in the  lending process:  they work with potential borrowers to find ways to lend funds that
will be repaid with interest  and provide capital funds for the purchaser, a profit for the lender
(except in the case of nonprofits, such as credit unions), and a return for investors.

       Secondary Market

       Primary lenders have a finite amount of money available for mortgages. As a simple
example, consider a neighborhood lender that collects depositor savings and uses those funds to
lend money to home buyers. The neighborhood's joint  savings may be sufficient for, say 100
households to purchase homes, but eventually, all of those funds will be loaned out.  As the
mortgages  are repaid the funds will be available to loan out again, but  that does not help the
101st household that wants a mortgage today.

       The secondary  market addresses this problem by bringing together investor funds to
purchase the loans made by the lender, thus restoring the lender's available cash.  The lender can
then make loans to the next 100 households to purchase homes in the neighborhood. The long-
term investors in  the secondary market in turn purchase those mortgages from the lender, and the
lending cycle can begin again.    Lenders can  hold loans in their own portfolios, but most are sold
to the secondary market.
October 20,  1993                   Underwriting Standards                             Page 4

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       The principal players in the secondary market are the Federal National Mortgage
Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation
(FHLMC, or Freddie Mac).  These two government-sponsored enterprises serve as a conduit to
purchase bundles of loans from individual lenders and resell them to investors. The Government
National Mortgage Association (GNMA, or Ginnie Mae) also operates as a secondary market
player, but purchases only mortgages insured by federal programs.  Private conduits also purchase
a small portion of the loans sold on the secondary market.  The bulk of the mortgages purchased
by Freddie Mac and Fannie Mae are for owner-occupied properties, although both do have
programs for investor-owned rental properties.

       Because of the nature of financial markets, Fannie Mae and Freddie Mac, like all   :
secondary lenders, are concerned about the quality of the loans they purchase. If the secondary
market purchases large quantities of bad loans, their investors will not make a satisfactory return
'on their investments and  will no longer be willing to provide additional capital. Fannie Mae and
Freddie Mac have established minimum underwriting criteria to protect their interest. In general,
they purchase only loans  that conform to these standards.

       Because being able to sell mortgages to the secondary market is very important to primary.
lenders, most are careful  that their underwriting criteria conform to those of Freddie Mac or
Fannie Mae.  Thus, while primary lenders have their own underwriting guidelines and procedures,
the essential elements of  their policies are driven by the secondary market.  If Freddie Mac and   -
Fannie Mae revise their underwriting guidelines, changes in guidelines for lenders across the
country come quickly.

       Private Mortgage Insurers

       In order to ensure thai the value of the property will be sufficient to cover any losses
encountered, the secondai • market will generally purchase loans for only up to 80 percent of the
appraised value of the property. Many buyers,  particularly low-income and first-time buyers have
difficulty assembling a 20  percent down payment plus closing costs. For this reason, a market has
developed for private mortgage insurance (PMI) for owner-occupied properties, which insures the
portion of the loan between 80 percent of the value of the property and the amount borrowed —
typically up to 95 percent. With this insurance, the secondary market is willing to purchase
mortgages with higher LTV ratios.  Borrowers pay regular fees to the PMI, typically until  their
LTV reaches 80 percent of the value of the property.  In the case of a default, the PMI
reimburses the lender for an agreed upon portion of the outstanding principal loan balance.

       Government Insurers/Lenders

       In addition to private mortgage insurers, several federal government agencies and some
states provide mortgage insurance, or guarantees, for single family owner-occupied as well as
rental properties. The federal agencies include the Federal Housing Administration (FHA) and
the Veteran's Affairs Department (VA). Like PMI, these programs provide mortgage insurance
so that lenders will provide loans for a higher portion of the value of the property. These
programs allow lower-income borrowers to assemble smaller down payments and make
homeownership feasible for a larger range of households.  They also help property owners obtain
mortgages for acquisition  as well as rehabilitation of rental housing. Several government
programs also do  direct lending. For example, the Farmer's Home Administration (FmHA)
makes direct  loans for both owner-occupied and rental properties.
October 20, 1993                    Underwriting Standards                             Page 5

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3.     Underwriting Approaches to Environmental Hazards

       The institutions that develop and implement underwriting standards are motivated by the
need to make and buy sound loans.  While their goals may be compatible with public health
issues, they are not pursuing a public health agenda. Underwriters are largely driven by market
factors and will value the public health agenda only when the market does.

       This section explores the attitudes of various underwriting institutions toward
environmental hazards in general and LBP hazards  in particular, and the actions that they have
taken to address these concerns. It begiiu by reviewing underwriters' concerns about
environmental hazards in owner-occupied and rental housing. This' review is followed by a
discussion of the current approaches used to reduce the lending risks presented by environmental
hazards. The section concludes by identifying the mechanisms through which changes can be
made to these approaches.

       Concerns About Environmental Hazards

       Underwriters examine environmental hazards in the context of their financial risks.  In
particular, they are concerned  about:

       •      Negative impacts on the resale value of the property;
       •      Owner defaults due to lawsuits; and
       •      Lender liability.

The impact of environmental hazards on the resale  value of the property is relevant in
underwriting  loans for both ownf iccupied and rental housing. The other two areas of concern
pertain primarily to rental propert- -s.                          x

       Impact on Resale Value

       If a borrower defaults,  a lender typically recoups its losses by foreclosing and reselling the
property.  If an environmental hazard reduces the market value of the property, the lender may
be unable to  sell the property  at a price that covers its costs.

       Lenders have been most concerned about the  loss in residential property values from
hazards outside the property boundaries, such as toxic waste dumps or air-polluting businesses.
Love Canal is the classic example of an external environmental  hazard that had a devastating
impact on property values in a neighborhood and made lenders  unable to recover their costs
when borrowers defaulted.  While serious environmental hazards are relatively rare, lesser hazards
can and do affect market valuation of properties, and  underwriters must be sure that such risks
have been  accounted for adequately at the time loans are made.

        Underwriters have found that a general, hazards occurring on the housing premises, such
as radon, asbestos, and LBP, are less likely than external ones to seriously reduce resale values.
The magnitude of the effect of a particular type of  hazard on resale value varies from market to
market.  For example, in areas with a particularly high incidence of radon and high levels of
public awareness about the radon problem, the value of a property with radon may fall relative to
those without the problem. In most communities, however, awareness of the dangers of LBP has
not yet reached the point where property values appear to be affected.
October 20, 1993                   Underwriting Standards                            Page 6

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       Owner Defaults Due to Lawsuits

       Borrowers may be sued by tenants believed to be injured by environmental hazards in
their properties. In such cases, borrowers may declare bankruptcy and default on their loans.
The lender can foreclose on the property and resell it. Unfortunately, the resale price may not be
adequate to cover the lender's costs.  In addition, the borrower's assets, including the property
serving as collateral for the lender, might be awarded to the plaintiffs.  While liability insurance .
may offer some protection, insurance companies are beginning to exclude environmental hazards
such as LBP from coverage (see liability insurance paper).

       Lender Liability

       Lenders that foreclose on rental properties with environmental hazards may assume    % - -
liability to injured tenants and become obliged to alleviate the hazards.  In a trial that pits an
injured child against the "deep pockets" of a lender, the lender may be likely to lose if the trial
reaches a jury.  Some lenders are concerned that they may be held liable for such damage even
without taking title to the property, despite a reported lack of precedent for such actions.

       Current and Evolving Approaches to Underwriting for Environmental Hazards

       This section examines the underwriting industry's approach to environmental hazards. It
discusses the differences in underwriter's concerns with regard to rental properties and owner-
occupied properties.

       Rental Properties

       Underwriters take several steps io ensure tha* the rental properties they finance are
environmentally sound.  While industry-wide standan , regarding environmental hazards have not
been established, most  lenders require an environmental assessment.  Lenders typically accomplish
this by hiring an environmental consultant to perform an initial investigation into the presence of
environmental hazards  in a property,  typically referred to as a "Phase I Environmental Review."
If potential hazards are identified through such a review, follow-up examinations may be required.
The American Society for Testing of  Materials (ASTM) organization has recently established a
standard Phase I assessment protocol, but its use is not mandatory.

       An ASTM Phase I assessment does  not require investigating the presence of
environmental risks such as radon,  asbestos, and LBP.  Lenders report, however, that standard
industry practice includes requesting that information about LBP hazards be added to the  report
for rental  properties constructed before 1978, although the type of LBP investigation requested
can vary.  Unless the lender specifies that a wipe test or an x-ray fluorescence (XRF) test
should be conducted, the investigator will generally note only the presence of defective paint
surfaces.  In the future, the standard industry practi ;e could evolve to follow the risk assessment
and inspection guidelines developed in response to Title X.

       If the Phase I investigation report notes potential LBP hazards,  the lender will require
that those hazards be addressed before making a loan. The industry has no mandatory standards
as to how LBP problems should be addressed.  In general, lenders and secondary market
institutions report that  the defective paint surfaces must be scraped and repainted before a loan
will be approved.3
October 20, 1993                    Underwriting Standards                             Page 7

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       In addition to correcting defective surfaces, lenders generally require ongoing monitoring
for potential maintenance problems, including LBP hazards, through operations and maintenance
(O&M) plans that are included as part of the loan documents for most rental properties.  An
O&M plan typically requires that the owner conduct inspections every six months to determine
whether the paint has remained intact. If the mortgage for a property with an O&M plan in
place is purchased by the secondary market, the lender is responsible for ensuring that the work is
completed as agreed upon in the loan documents. If an O&M plan is not followed, the mortgage
holder has the option of foreclosing on the grounds of technical default.  However, mortgage
holders have little incentive to foreclose on properties if borrowers nre making payments,
particularly if the mortgage holder would acquire liability for LBP h  zards in the process.

       If a lender forecloses on a property that has LBP hazards, it will typically be sold as-is,
and the' purchaser will be responsible for addressing any LBP concerns.  State and local law can
require lenders to take additional steps to reduce LBP hazards.  Lenders, however, report that
these costs have not yet significantly affected their perception of the threat to their investments
posed by LBP hazards.4

       Owner-Occupied Properties

       Currently, private lenders do not appear to be widely concerned about environmental
hazards in owner-occupied properties. As  noted above, property values in most communities do
not appear to be affected  by the presence of LBP. Similarly, if a lender forecloses on an owner-
occupied property with LBP hazards, there are generally no tenants with the potential for making
liability claims.  (Under limited circumstances, however, children may be able to sue their parents
for damages from LBP.) Because the lender's investment is seldom threatened by the presence of
LBP in cvvner-cccupied property, underw:.  -s generally assume that borrowers must take
responsibility for any potential environment, i risks posed by the property.

       .Unlike the conventional lender's approach to LBP  hazards in owner-occupied properties,
the' FHA requires that LBP hazards be considered during project underwriting.  Property
constructed after 1978 or certified as lead-free is assumed to have no LBP. Otherwise, the
underwriter works under the premise that LBP is present and requires that the property be
inspected to locate LBP hazards such  as damaged paint surfaces. If the inspection reveals
damaged paint surfaces, the problem is treated just as lenders typically treat LBP hazards in rental
properties:  If all paint is intact, no further work is required; when peeling or flaking paint is
found, it must be scraped  and  the surface must be repainted.  The FHA does not require ongoing
monitoring for owner-occupied properties.5

        Changing Underwriting Standards

        Underwriting standards are dictated by market experience. LTV ratios and debt ratios
reflect analysis of the history of the performance of large pools c c loans.  They are set at levels
intended to ensure that the lenders making the loans will earn a reasonable profit.  Changes to
those standards  usually stem from new analysis demonstrating that revised criteria are likely to
increase lender profits while minimizing risk.

        A lender could unilaterally require all properties for which it loans money to reduce LBP
hazards.  Unless the entire market did so, however, that lender would be at a competitive
disadvantage, particularly in areas with high concentrations of LBP.  Unilateral hazard reduction
requirements would  be most damaging to lenders that finance owner-occupied properties, an area
in which other lenders are likely to perceive little  risk in making loans for properties with LBP haza|


October 20, 1993                    Underwriting Standards                             Page 8

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       Similarly, the secondary market players are reluctant to institute stricter LBP
requirements.  These institutions believe that consumer demand should drive approaches to lead-
safe housing, not underwriting standards.  If purchasers begin to value lead-safe housing,
appraised values will reflect that preference, and the underwriting standards will not need to
change.

       Although it is theoretically possible to mandate changes through the underwriting process,
it is important to recognize that underwriting standards have not traditionally been subject to
significant government intervention. While lenders are regulated to ensure the integrity of the
nation's Gnancial institutions, underwriting is the private sector's internal mechani m for meeting
both those requirements and its own need to earn a profit.  Mandating changes in underwriting
would break with traditional methods of government intervention in the housing market and
would likely raise serious concern in the lending industry.
4.     Policy Options

       This section discusses several policy interventions that could be considered with respect to
the underwriting industry.  Many of the options presented both here and in the other issue papers
have the potential to reduce the LBP poisoning problem in this country.  It is crucial, however, to
keep in mind the unintended effects that implementation of any option could have on the nation's
affordable housing stock.

       Much of the affordable housing in this country is old and contains LBP.  Many existing  .
rental housing rehabilitation programs already require extensive efforts to assemble sufficient
financing to make the deals financially feasible.  ' dding a substantial cost for LBP reduction has
the potential to make many of those deals impoi  ble unless additional financial resources are
made available.  Similarly, requiring LBP reduction could put homeownership o  i of reach of
many young families anxious to purchase their first homes. For example, if underwriters were to
require full LBP abatement as a condition for making a loan, the effect on the housing market as
a whole would be serious.  The effect on affordable housing could  be devastating. Where owners
pass through the costs of LBP hazard abatement, the rent increases may be unaffordable to many
low-income households.  Where owners are unable or unwilling to  address LBP-hazards, the
supply  of affordable housing units may decrease.

       As shown in Exhibit 3, two types of options for government intervention in the
underwriting field are presented here:

       (1)     Providing better information to help those involved in underwriting make
              decisions that reflect LBP hazards; and

       (2)     Developing new methods of promoting  LBP hazard evaluation or
              reduction.
October 20, 1993                    Underwriting Standards                             Page 9

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                                           Exhibit 3
                            OPTIONS FOR UNDERWRITING INDUSTRY
            Providing Better Information

            Option 1:
            Option 2:
Work with the American Society for Testing of Materials to make LBP
hazard evaluation a standard component of the Phase I Environmental
Assessment for rental housing property.

Educate underwriters about the best methods for addressing LBP hazards
and about potential LBP liability.
            New LBP Programs and Requirements

            Option 3:  Encourage the secondary market to purchase a limited number of LBP
                     acquisition and rehabilitation loans as part of a demonstration project to help
                     develop new financing mechanisms for LBP hazard reduction

            Option 4:  Require LBP  evaluation as a condition of making loans for owner-occupied
                     properties.
       Providing Better Information

       Underwriting standards are established based on the best information available to decision
makers at the nation's underwriting institutions. Those institutions make decisions on a wide
range of issues on a daily basis, however, and fe\v c.  ^ntly track progress in the LBP field
carefully.  One important vehicle for promoting undt ivriting policies that reflect state-of-the-art
information about the LBP problem is keeping those in a position to change LBP policies
informed.  The following two options present potential ways to encourage the underwriting
community to make informed decisions about issues related to LBP.

       Option 1:  Make LBP hazard evaluation standards for rental property. One possible
way to encourage consistent attention to LBP hazards for rental housing would be to work with
the American Society for Testing of Materials (ASTM) to make LBP hazard evaluation a
standard component of the ASTM Phase I Environmental Assessment for privately-owned rental
housing. Although there are no industry-wide environmental assessment standards, encouraging
ASTM to make its standards consistent with the forthcoming Title X standards on risk assessment
and inspection would help ensure that lenders that use the ASTM Phase I assessment consistently
receive appropriate information about LBP .hazards.

       Underwriters are already aware in general terms of the importance of LBP hazards and
typically request that evaluators hired to conduct Phase I assessments visually inspect for obvious
defective paint in pre-1978 units.  Changing the ASTM standards would offer a vehicle for
ensuring that LBP  hazards are evaluated consistently whenever lenders follow the ASTM
guidelines.  In addition, these guidelines offer a forum for requiring more sophisticated assessment
techniques than lenders generally pursue today, such  as XRF or wipe tests.

       Because lenders that arrange for a  Phase I assessment nearly always require a visual
evaluation of LBP  hazards, most potential  borrowers  already pay for a basic LBP hazard
assessment.  Adding a visual LBP hazard inspection to the standard ASTM protocol would
therefore add little to the cost.  If the ASTM standards were expanded to require a more rigorous
October 20, 1993
               Underwriting Standards
Page 10

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assessment of LBP hazards, the cost of the
assessment could rise by $200 to $400 per  unit,
the estimated cost of LBP risk assessment  or
inspection under HUD's draft revised "Guidelines
for the Evaluation and Control of Lead-Based
Paint Hazards in Housing."6  For multifamily
properties, per unit  costs could be lowered by
testing a sample of the units. Even so, conducting
full risk assessments or inspections would add a
significant amount to the costs of determining
whether a rental housing project  is feasible.

       The burden  of increased LBP assessment
costs would fall disproportionately on older, more
affordable units. Public subsidies to help fund the
increased costs of LBP risk assessment for
affordable housing transactions could decrease the
impact on affordable units, but would require
politically difficult government expenditures.

       The ASTM standards are created by an
industry organization and changes cannot be
mandated by the government. It  may be feasible,
however,  to work with ASTM to  advocate
changes in their protocols.  Politically, adding what is
to the Phase I assessment would likely be acceptable
requirements  to require more extensive testing could

       Option 2: Educate underwriters about
LBP.  Educating underwriters about the best
methods for addressing LBP hazards  and
potential LBP liability risks would likely
encourage lenders to incorporate information
about  LBP hazards into their lending decisions.
Discussions with persons  in the underwriting
industry indicate that LBP hazard reduction is
not well  understood. Because the LBP field is
evolving quickly, it will be particularly difficult
for lenders to keep abreast of current
developments. This option would provide  a
forum to help underwriters obtain good
information.

       When underwriters recognize liability
risks associated with LBP hazards in rental
properties they have required that steps be taken
to address the hazards. Lenders might
strengthen their requirements to go beyond
scraping and painting, however, if they were
aware of state-of-the-art hazard reduction  techniques
of lenders strengthening these requirements would be
                  1. Make LBP hazard evaluation standard for
                              rental property
                  Effectiveness
                  Cost
                  Equity
                  Political
                  Feasibility


                  Administrative
                  Ease
 Would standardize existing
 practices and increase
 effectiveness of evaluations.
 Standards are voluntary,
 however.
 Visual inspection relatively
 inexpensive, but testing adds
 costs.  Any subsidies to  >
 keep units affordable would
 add to the cost.
 Burden of increased
 evaluation could reduce the
 affordable housing stock.
 Requires working with
 ASTM to modify voluntary
 standard.
 Relatively easy to modify
 assessment protocol
               currently perceived as the industry standard
               to .  ' industry, but strengthening those
               met. stiff opposition because of cost.
                   2. Educate underwriters about LBP hazards
                                and liability
                 Effectiveness
                 Cost
                 Equity
                 Political
                 Feasibility


                 Administrative
                 Ease
Can hasten process of
reflecting LBP hazards in
underwriting.
Inexpensive unless subsidies to
keep units affordable are
added.
If effective, burden of
increased evaluation could
reduce the affordable housing
stock.
Not likely to be controversial,
except for any subsidies for
affordable housing.
Relatively easy to implement.
               and their costs and benefits. The likelihood
                increased by providing up-to-date
October 20, 1993
Underwriting Standards
                     Page 11

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information about the methods available and the litigation against owners in various parts of the
country.

       This approach promises to encourage more extensive LBP hazard reduction, especially if
the current trend toward LBP litigation continues.  Lenders must protect their interests from
owner default due to liability suits, and one important tool for doing that is to require owners to
undertake thorough hazard evaluation and reduction procedures.

       The costs of this approach will vary with the extent of the hazard reduction required by
lenders.  The higher the standards for mitigating or eliminating LBP hazards, the more costly the
option will be.  This option would have a disproportionate effect on older and lower-cost
properties because of the prevalence of LBP and deteriorated conditions in many of these
properties. If underwriters impose additional LBP hazard reduction requirements, the rents for
units are likely to rise, or some units are likely to deteriorate as owners choose between
investments in LBP reduction and other needed repairs.

       Under this option, well-informed underwriters are expected  to voluntarily impose more
stringent requirements in  order to protect their investments.  Government agencies would simply
support the education process by providing a forum for sharing LBP information with
underwriting decision  makers.

       While this approach would encourage lead-safe housing in part of the privately-owned
housing stock, it could have a detrimental effect on affordable housing. Government financial
assistance may be required if affordable housing is to be maintained in situations where the value
of the property will not support the costs of required LBP hazard reduction, or where the
resuming rise in rents would make units less  affordable to lov ',icome households. Adding direct
subsidies would make this  option less politically feasible.

       New LBP Programs and Requirements

       In addition to  providing information  to the underwriting market, the government could
choose to intervene directly, mandating or encouraging the development of particular programs to
promote the reduction of LBP hazards. The following discussion presents two such approaches
that would work through underwriting institutions.

       Option 3: Encourage a secondary market demonstration program. One approach would
be to encourage the secondary market to support the development  of more generous LBP loan
standards through demonstration-type projects. For example, the secondary market might agree
to purchase a limited number of LBP acquisition and rehabilitation loans made through
experimental lender initiatives. Through this mechanism, the secondary market could help
establish the information base that might be required to underwrite such programs on an ongoing
basis.

       The secondary market has precedents for purchasing loans that do not conform to its
usual standards. For example, in order to promote homeownership opportunities among low-
income  households, the secondary market has devised programs to raise permissible LTV ratios or
ease debt to income ratios in certain cases.  Modified underwriting is at the core of much of the
secondary market's community reinvestment lending. The secondary market could take similar
actions to support LBP hazard reduction.
October 20, 1993                    Underwriting Standards                           Page 12

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       The secondary market would bear some
costs in this scheme, ranging from the costs of
developing standards for the loans that would be
purchased under the demonstration program to
educating primary lenders about the program.
In addition, the secondary market would absorb
the risks and costs associated with loans that do
not meet typical underwriting standards.  While
the secondary market has demonstrated its
concern  about the LBP problem, for example
through  the Fannie Mae foundation's
contributions to the National Center for Lead-
Safe Housing, this approach would provide
another opportunity for promoting concrete
steps toward a safer housing stock.
                      3. Encourage a secondary market
                          demonstration program
                 Effectiveness
                 Cost
                 Equity
                 Political
                 Feasibility


                 Administrative
                 Ease
                                                                   Potential for high impact on
                                                                   borrowers that cannot
                                                                   currently get LBP loans.
                                                                   Inexpensive unless government
                                                                   offers subsidies to support the
                                                                   demonstration.
                                                                   Will help purchasers with the
                                                                   ability to pay for LBP hazard
                                                                   reduction.
                                                                   A demonstration relying on
                                                                   the private market is unlikely  .
                                                                   to raise opposition.
                                                                   Requires secondary market
                                                                   lenders to establish a special
                                                                   product and system for
                                                                   monitoring loan performance.
       The loans purchased from lenders
participating in such a pilot project would be
made to borrowers with incomes high enough to
repay the loan, and would not, without
additional public subsidies, include lower-income
purchasers.  Politically, demonstration  programs are palatable, and because this one would not
require direct government funding, participation of the secondary market players would be the
primary prerequisite for implementation.
                                                     4. Require L  P hazard evaluations for owner-
                                                               occupant transactions
                                                     Effectiveness
                                                     Cost
                               Extends coverage to owner-
                               occupied units.
                               Significant costs to
                               homeowners.
                               Owner-occupied less likely to
                               be low-income.
                               Legislation politically difficult.
                                                     Equity


                                                     Political
                                                     Feasibility

                                                     Administrative  Requires monitoring of real
       Option 4:  Require LBP evaluations for
owner-occupant transactions.  A more far-
reaching system than a demonstration program
would be to require LBP evaluation as  a
condition of making a loan for owner-occupied
properties. (Underwriters already require LBP
evaluations for rental properties through the
Phase I environmental assessment process).
This option, which is also presented in the risk
assessment and appraisal papers, would be
enforced through an underwriting system that
would require evidence that an evaluation had
been conducted as a condition of making a  loan.

       This option would be an effective
method of ensuring  that property owners
gradually become aware of the presence of "»BP problems.  While such an assessment would add
approximately $200  to $400 per unit to already-costly real estate transactions, they would not
preclude most transactions from occurring.  Mandating that buyers receive specific information
about LBP in the  particular property they are purchasing, rather than simply having the
opportunity to get information as currently  provided for in Title X, could  have a significant impact
on LBP hazard reduction in the long run.

       This requirement adds both time and costs to real estate transactions and may encounter
political resistance.  The middle-income constituency that would be most affected by such a
regulation is large and tends to be vocal about such issues.  Administratively, the underwriting
                                                     Ease
                               estate transactions.
October 20,  1993
Underwriting Standards
                                                                                       Page 13

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process would make enforcement of this requirement straightforward, because lenders would not
make loans without verification that the evaluation was complete. It would not, however,
influence units that are not financed through conventional lenders.  Efforts would need to be
made to ensure that the LBP evaluation infrastructure was able to meet the demand for LBP
hazard assessments. The demand on the existing infrastructure could be eased by phasing  in this
requirement.

       The exhibit on the  following page summarizes the evaluation of the four underwriting
options.
October 20, 1993                    Underwriting Standards                           Page 14

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COMPARISON OF UNDERWRITING STANDARDS AND
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
Option 1:
Make LBP Hazard
Evaluation Standard for
Rental Property
Would standardize
existing practices and •
increase effectiveness of
evaluations. Standards
are voluntary, however.
Visual inspection
relatively inexpensive,
but testing adds costs.
Any subsidies to keep
units affordable would
add to the cost.
Burden of increased
evaluation could reduce
the affordable housing
stock.
Requires working with
ASTM to modify
voluntary standard.
Relatively easy to
modify assessment
protocol.
, Optk
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Endnotes

1. A hazard such as an underground storage tank would generally have a more significant impact
on an underwriter's valuation of a property than LBP hazards because LBP hazards do not
appear to affect property values substantially in most markets. The liability risks of LBP, •
however, are a growing concern (see the liability paper).

2. Conversation with staff of Maryland National Bank.

3. Conven itions with staff of Maryland National Bank, Freddie Mac and Fannie Mae.

4. Conversations with staff of Maryland National Bank, Freddie Mac and Fannie Mae.

5. Conversations with FHA staff.

6. Peer Review Draft, prepared by The National Center for Lead-Safe Housing, September 1,
1993.
October 20, 1993                    Underwriting Standards                           Page 16

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             LEAD-BASED PAINT HAZARDS AND THE APPRAISAL INDUSTRY
1.
       Introduction
                                                                Key Issues
                                                   What is an appraisal?

                                                   How is the appraisal industry regulated?

                                                   Why don't appraisals consider LBP hazards?

                                                   How can greater attention be focused on
                                                   LBP hazards in the appraisal process?
       The purpose of this paper is to
discuss the manner in which appraisers and
market forces interact to reflect the market
effects of lead-based paint (LBP) hazards in
residential buildings.  An appraisal identifies
the value of real estate (or other property)
based on the property's location, physical
features, condition, and desirability. It
typically assigns property values based on the
sales histories of comparable buildings and
the public's willingness (or unwillingness) to
pay for certain features.  In this respect, it is
a reactive industry. Nonetheless, since a
market is driven by information, the
appraisal profession, by identifying the market impact of LBP, can help raise public awareness
about the need to evaluate and reduce LBP hazards.

       This paper is organized in the following manner:

       Section 2:     Dis'  t ~es the real estate appraisal proce  , its influence on sales
                     prices  underwriting, and other financial transactions, ar 1 the
                     methods used to appraise properties.  It also reviews th^ regulations
                     and professional bodies that influence the performance of
                     appraisals.

       Section 3:     Explores the current and evolving approaches regarding lead-based
                     paint hazards.  Because the appraisal  profession's response has
                     been limited, this section discusses the challenges that appraisers
                     face in identifying and valuing environmental hazards.

       Section 4:     Introduces three options that would focus greater industry and market
                     attention on the appraisal of LBP hazard reduction.

       This paper is closely related to the underwriting and  hazard  evaluation papers. An
appraisal is generally required  as part of a sale or a refinancing of an existing mortgage. Although
an appraisal is not a risk  as- essment or inspection, it  can identify the need fo  further
investigation of adverse conditions such as flaking paint in an older  house.  Lenders and
purchasers use the results of appraisals to determine whether they are taking  reasonable risks by
making loans against a property. This paper is less related to the liability insurance paper. As an
indication of potential liability, information on the presence  of LBP is important to the insurance
industry,  but insurers would obtain this information through  risTc assessments or inspections rather
than appraisals.
October 20, 1993
                                         Appraisal
Page 1

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2.     Background

       This background discussion has three parts:

       (1)    Brief review of the appraisal profession and its role in the housing market;
       (2)    Summary of the regulations applicable to appraisers and appraisals; and
       (3)    Overview of appraisal societies and their role in the industry.

       The Appraisal Profession and Its Role in Housing Markets

       An appraisal estimates the market value of a property.  It helps determine how much
money an owner may realistically request for a property on the open market and how much a
purchaser should pay for it to receive a fair exchange.  An appraisal may also establish the
replacement value for a property for use in insurance underwriting (i.e., how much it would cost
to repair property damage and return it to its former condition).

       As a tool for valuation, appraisals are requested for a number of purposes. Lenders use
appraisals to set a limit on how large a loan they would make against a property.  (As described
more fully in the financing paper, lenders usually make conventional mortgage loans of 80 percent*
of the value of an owner-occupied property to limit their liability in case of a default.  With       \.,
appropriate protection against risk, such as private mortgage insurance, they may lend as much as
95 percent of the value.)  Insurers use appraisals to determine the replacement value of a  home
so they can  set appropriate coverage limits in a property insurance policy.  The purchasers and
sellers, especially of investment properties, use them to ensure they have set a fair market price
for the property.  Lcca! gover  .^ its use the valuation of an appraisal  to establish property tax
rates or to reimburse an owne  ;f the building is claimed under eminent domain proceedings.
                                                                                        i
       In each case, the needs of the client influence the way appraisers estimate value. They
use three methods for determining value:

       (1)    Market Approach: The first approach is to examine the sales  histories of
              comparable properties. An appraiser reviews the sales prices of similar
              homes, adjusts for different features (a two-car garage versus a one-car
              garage, for example), and assigns a value to the property.

       (2)    Income Approach:  The income approach, used primarily for multifamily
              properties, uses the present value of the anticipated income stream as a
              proxy for the market value.

       (3)    Cost Approach: The cost approach estimates the replacement .value of the
              structure by estimating the cost of constructing a comparable unit.

Whereas purchasers and lenders for single-family properties rely on the market approach,
purchasers and lenders for multifamily properties use a combination of the market approach and
the income  approach.  Property insurers rely on the  cost approach.
October 20, 1993                         Appraisal                                   Page 2

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       The Regulatory Environment

       This section describes the Appraisal Foundation, the appraisal profession's regulatory
body, and related organizations. It also discusses federal and state requirements of appraisers that
were established by Title XI  of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 (FIRREA). The two sets of requirements — those of Appraisal Foundation and of
FIRREA — are interdependent. Although the Appraisal Foundation was founded before
FIRREA, Title XI of FIRREA authorizes the Appraisn' Foundation to set standards for appraiser
conciact. The Appraisal Foundation's rules, in turn, serve  as the basis for FIRREA's appraisal
requirements for financial institutions.  This section addresses the Appraisal Foundation first.

       Industry Standards --  the Appraisal Foundation

       The governing body for the appraisal industry is the Appraisal Foundation, located in
Washington, DC. The Appraisal Foundation was created  in 1987 by eight of. the major appraisal
membership organizations to be an educational and self-regulatory organization for the industry.
The Appraisal Foundation promotes uniform practices and professionalism through its two
independent boards, the Appraisal Standards Board (ASB) and the Appraiser Qualifications
Board (AQB).

       •      The ASB develops, interprets, and amends the  Uniform  Standards of
              Professional Appraisal Practices, the generally accepted standards for the
              appraisal profession.

       •      The AQB establishes!! e minimum educational, experience, and
              examination requirements for real estat  appraiser licensing and
              certification programs.

       The Uniform Standards of Professional Appraisal Practices (USPAP) establish
professional ethics  and competency standards for appraisers. They require appraisers to employ
recognized methods and techniques and to communicate the results of the appraisal in a direct,
accurate manner. A brief overview of USPAP is provided in Appendix I.

       The Competence and Ethics Provisions of USPAP affect an appraiser's responsibility to
identify potential LBP and other environmental  hazards.   Under the Competence Provision, an
appraiser is explicitly charged with basing all conclusions on reasonably clear and appropriate
evidence and fully  considering any external market factors that may affect the results of the
appraisal, such as zoning or other regulations.  Under the  Ethics Provision, the appraiser must
conduct an appraisal to the best of his or her ability, present the results in a manner that is not
misleading, and set forth all assumptions and limiting conditions that affect the analysis and
conclusion. The appraiser must note all reasonably e ident adverse conditions in a property,
therefore, including such things as deteriorated paint surfaces.

       Nonetheless, an appraiser's responsibilities regarding environmental hazards are limited.
The ASB issued an Advisory Opinion in December 1992 stating that, in regard to environmental
hazards, "recognizing, detecting or measuring contamination is  often beyond the scope the
appraiser's expertise. .. .  Remediation and compliance cost estimation involves knowledge and
October 20, 1993                          Appraisal                                   Page 3

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experience beyond that of most appraisers."1  USPAP does not require the appraiser to be
capable of identifying environmental hazards or estimating the cost of hazard reduction.

       Licensing and Certification. Title XI of FIRREA requires that appraisers involved in .
federally-regulated transactions be state-licensed or -certified. The regulatory agencies must
differentiate between transactions that require licensed or certified appraisers.  Certified
appraisers are required to complete a higher level of training and are qualified to appraise
properties of higher value than are licensed appraisers, particularly residential transaction having a
value of $1,000,000 or more and complex one to four unit residential .ransactions of $250,000 or
more.2

       The AQB's standards for appraiser licensing and certification programs describe the
qualifications one must have to become a licensed appraiser, a certified residential appraiser, or a
certified general appraiser.  To receive one of these qualifications, a candidate must successfully
complete  the specified AQB-endorsed Uniform State Certification/Licensing Examination or its
equivalent. Subsequent to certification or licensing, appraisers must meet the AQB's continuing
education requirement of 10 classroom hours (or their equivalent) of instruction in courses or
seminars for each year during the period preceding the renewal.  The specific requirements for
each classification are as follows:

       •      Licensing: Two thousand hours of appraisal experience and, to sit for the
              exam,  75 hours of real estate related coursework.

       •      Cer<-  Cation:

                      Residential: A minimum  of two years' appra;-.al experience and, to
                      sit for the exam, 175 classroom hours which i ay include the 75
                      hours requirement for the licensing requirement; and

                      General:   The equivalent  of two years' appraisal experience and, to
                      sit for the exam, 165 classroom hours which may include the 75
                      hours of the licensing requirement.

The course work for each qualification differs slightly.  See Appendix II.

       Federal Requirements

       Title XI of FIRREA, the Real Estate Appraisal Reform  Amendments, was established to
protect federal financial and public policy interests in real estate-related transactions and to
prevent the recurrence of residential property overvaluation that preceded the collapse of the
savings-and-loan industry.3  Title XI requires federally-regulated  fi  ancial institutions to use
appraisers who are state-licensed or -certified for all real estate transactions over a certain dollar
limit. This requirement applies  to any real estate transaction involving one or more of the
following agencies  as listed  in FIRREA:

        •       Federal Deposit  Insurance Corporation (FDIC);
        •       National Credit Union Administration (NCUA);
        •       Office of the Comptroller of the  Currency (OCC);
 Ociober 20, 1993                          Appraisal                                    Page 4

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       •      Board of Governors of the Federal Reserve;
       •   •   Office of Thrift Supervision (OTS);
       •      Resolution Trust Corporation (RTC);
       •      Federal National Mortgage Association (FNMA or Fannie Mae); and  .
       •      Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

FIRREA also requires that licensed or certified appraisers working on transactions involving these
agencies operate according to USPAP.

       As  previously noted, Title XI requires each of the above federal financial institutions to
establish guidelines under which it must use a licensed or certified appraiser.  A certified
appraiser is required for all federally related transactions with a value of $1,000,000 or more must
have a certified appraisal, and a certified or licensed appraiser is required  for one-to-four unit,
single family residential appraisals depending upon the size and complexity of the transaction.
The regulated financial institutions may institute additional rules as they deem appropriate. The
FDIC, for example, follows the AQB guidelines for licensed versus certified appraisals for
transaction dollar amounts but also requires certified appraisals for nonresidential transactions of
$250,000 or more. Additionally, under FDIC rules, transactions below $50,000 do not require
licensed or certified appraisals.

       Title XI  also allows each institution to establish de minimis dollar values  (threshold levels)
under which licensed or certified appraisals are not required. There is no common de minimis.
standard for all agencies.  The FDIC has set its de minimis standard at $50,000, while the Board
of Governors of the Federal Reserve System and the Office of Thrift Supervision "'ave set their
de minimis standard at $100,000.  These two . .unties also have their own rules fc< asing a
certified versus a licensed appraiser.

       Finally, FIRREA's Ttile XI created an Appraisal Subcommittee  of the Federal Financial
Institutions Examination  Council consisting of persons designated by the heads of the federal
financial institutions regulatory  agencies. This Subcommittee is responsible for:

       •      Monitoring the appraisal regulations adopted by the federal regulators for
              financial institutions within their jurisdiction,

       •      Monitoring the appraiser certifying and licensing agencies established by
              the states;

       •      Maintaining a national registry of state certified and licensed appraisers;

       •      Transmitting an annual  report to Congress describing the manner in which
              it carried out the aforementioned duties; and

       •      Monitoring and  reviewing the practices, procedures, activities, and
              organizational structure of the Appraisal Foundation.4
October 20, 1993                          Appraisal                                    Page 5

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        State Requirements

        Title XI does not require states to establish appraiser licensing and certification programs,
'but, since it requires federally regulated financial institutions to use state-licensed or -certified
appraisers to prepare the appraisals for major real estate transactions, all states have consequently
established appropriate programs and regulatory bodies. Some of these state bodies require that-
all practicing appraisers be licensed or certified. Other states have only voluntary licensing or
certification regulations.  An appraiser who chooses not to become licensed or certified cannot
work on federally related transactions.

        The state of Massachusetts, as an example, has mandatory licensing and certification
requirements.  The regulatory body, the Board of Real Estate Appraisers (Board)5, is comprised
of certified and licensed appraisers appointed by the Governor. It establishes the educational and
experience requirements, and the examination specifications for licensed and certified appraisers.
These requirements are consistent  with and equivalent to Title XI and the guidelines issued by
the Federal Financial Institutions Examination Council or its Appraisal Subcommittee.  The
Board's duties also include:

        •       Approving or disapproving applications for certification or licensing;

        •       Maintaining a registry of state certified/licensed appraisers;

        •       Establishing administrative procedures  for disciplinary proceedings, and

        •       Adopting  a code of professional res-.?', nsibility consistent with the
               requirements of Title XI.

The Secretary of Consumer Affairs has the authority to review the rules and regulations proposed
by the Board to verify that such rules and regulations  are consistent with Title XI and other
provisions of state law.

        In North Carolina, a state where certification and licensing are voluntary, the Real Estate
Appraisal Board carries out similar functions to the  Massachusetts Board.  The Governor appoints
five of the seven volunteer members and  the General  Assembly appoints two members.  Five
members must be licensed or certified real estate appraisers but the other two members must not
be associated with the real estate or appraisal industry.  Unlike the Massachusetts Board, the Real
Estate  Appraisal Board provides advice and assistance to the North  Carolina Real Estate
Commission which in turn establishes and issues the appraiser qualifications.

        Appraisal Societies

        Finally, while the Appraisal Foundation is the  rule-making body for the appraisal
profession, it does not serve as a membership organization.   This role is served by a number of
appraisal societies which  regulate their members' actions, provide educational and professional
support, and ensure that  appraisers are properly trained to perform  accurate valuations in an
ethical manner.  These societies can serve as information sources on environmental hazards as
well as other appraisal issues.
 October 20, 1993                          Appraisal                                    Page 6

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       Membership in an appraisal society requires the appraiser to agree to uphold a code of
standards, which are generally based on USPAP. A society's standards cover the appraiser's
responsibilities to his or her clients, to other appraisers and the member society, allowable
appraisal practices and methods, work standards, and ethics.  Many, but not all, appraisers belong
to one-or more-societies, such as the Appraisal Institute or the American Society of Appraisers.
3.     Current and Evolving Appraisal Approaches Regarding Lead-Based Paint

       This section discusses precedents in the treatment of environmental hazards identified
during property appraisals. Because the appraisal profession's response in this area has been
limited,' this section also discusses the challenges  that appraisers face in identifying and valuing ...- •
environmental hazards.

       Recognizing Environmental Hazards in Property Appraisals

       The attention given to  asbestos, radon, and other environmental hazards has created an
awareness of the need for education about these hazards and a dialogue among participants in the
real estate industry (e.g., lenders, brokers,  investors, public officials) on these issues and the
potential market impacts.6  Because of increased public awareness, some bank appraisers do look
for hazards such as asbestos or underground storage tanks, and they will consider the cost of
abatement if the hazard appears significant. Others assume the responsibility of asking the
current owner whether any hazards exist.7  Nonetheless, the ASB's published opinion is that .-
appraisers should identify environmental hazards only where they are clearly evident (e.g., r '< on
the ground or a protruding pipe from an underground ,*^>rag& tank).  Furthermore, an
environmental hazard such as asbestos does not reduce the value of the property unless the
contamination risks and cleanup costs are  particularly high. Consequently, there is little
precedent for incorporating LBP hazards into residential housing valuations.

       Arguably, the appraisal profession  has not established protocols for hazard evaluation in
general, and LBP hazards in particular, because the public has not asked for them. In most
markets, the public appears to assign little, if any, value to lead-free housing versus lead-
contaminated housing, and many clients instruct their appraisers to assume that no LBP hazards
exist8 An appraisal finding of peeling LBP in a  pre-1978 home affects the market value only
insofar as peeling paint affects the value of any home. Until public awareness is raised, neither
home buyers and underwriters are likely to insist that appraisers factor the presence of potential
LBP hazards into property valuations.

       Another reason for the appraisal industry's current response is that appraisers are not
trained in environmental risk assessment.  Their job is to estimate property values based on
recognized appraisal methods,  not to identify environmental risks. While they could reflect the
results of independent hazard  evaluations  in their appraisals, they are not qualified to identify
LBP hazards or to estimate the cost of hazard reduction themselves.  (This point was stressed
during many of the interviews  with real estate appraisers conducted for this paper.)
Consequently, the response to LBP hazards has been muted.
October 20,  1993                         Appraisal                                    Page 7

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       Potential Market Reactions to LBP Hazards

       Although appraisers and lenders generally do not address LBP hazards, there is evidence
that LBP hazards do affect some markets. A study of rental property sales during 1984 in the
City of Baltimore suggested that observed price differences were due to buyers' perceived risks of
having to abate LBP hazards.  Researchers found a statistically significant reduction in sales price
of $15,250  (or $3,813 per unit in a four unit building), after controlling for rent, that they
attributed to a property's location in a census tract where the risk of having to abate was  high
versus low.   During the sales period, the Baltimore City Health Department operated a lead
abatement  program that required abatement to begin within three days of notification of  a lead-
poisoned child's presence in the unit. The actual abatement costs ranged from $2,466 to  $3,264
per unit  plus legal costs. Therefore, one possible explanation for this finding is that the buyers
had factored the cost of abatement into their purchase offers.

       If the market indeed did respond to LBP hazards in this manner, this reaction would
correspond to the  prediction of one appraisal professional who suggested that, in markets that
valued lead-free housing, an appraiser would have to subtract the cost of hazard evaluation and
reduction (as necessary) from  the market value of a comparable lead-free house to arrive at pre-
reduction market value.10  While the Baltimore findings are based on a limited number of cases,
they do suggest that a property's value can be reduced by the presence of LBP, because either
local legal requirements directly affected the properties' marketability or the appraisers factored
those requirements into their valuations.11

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       Furthermore, it is unlikely that property owners without the financial means or incentives
to address potential  hazards will do so.  Owners of economically distressed housing in particular
may not reduce hazards even with improved information, because they do not have the resources
to pay for hazard reduction and there would be little economic return to the investment.
Consequently, these options are not expected to affect distressed housing in a significant manner.
See the paper on economically distressed housing for a detailed discussion of this issue.
                                                         1.  Require Appraiser Education
       Option 1:  Require education and
training on environmental issues as part of
the appraisal licensing/certification
standards.  The Appraiser Qualifications
Board and state appraisal boards could
require education  and training of appraisers
on warning signs of LBP (and other
environmental) hazards as part of the
licensing and certification curriculum.

       This option would not be costly to
implement. The needed new appraisal
course materials should be relatively easy to
develop. While most of the materials would
be applicable throughout  the nation, each
state's appraisal education organization(s)
could tailor certain materials to reflect local
needs and  conditions.  Implementing the
option would require changes in AQB
standards and corresponding changes by state
licensing and certification programs. The willingness of the appraisal industry to adopt these
changes is  uncertain.

       In addition, implementation of this option may not significantly affect the number of
hazard evaluations and reductions performed since the decision to contract for these services lies
with the client, not the appraiser. The market would have to demand this information in order
for the appraisal to have its fullest impact.

       As  an alternative, the AQB could include a course on environmental hazards as an
allowable continuing education offering.  This option would require fewer changes in the licensing
and certification curriculum.  An added benefit is that the course could be reoffered to all
appraisers  (not just candidates for qualification) as new information on environmental hazards is
found
                                                Effectiveness
                                                Cost
                                                Equity
                                                Political
                                                Feasibility
                                                Administrative
                                                Ease
Will raise appraisers' awareness, but
may not result in effective use of
information by clients.

Low.

Will not affect bousing where
owners do not use information.

Uncertain support by appraisal
industry. Requires changing AQB
and state licensing and certification
requirements.

Course materials should be relatively
easy to develop.
October 20,  1993
                                          Appraisal
                         Page 9

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                                                       2.  Revise Appraisal Forms to Report
                                                               Potential Hazards
                                                Effectiveness
                                                Cost
                                                Equity
                                                Political
                                                Feasibility
                                                Administrative
                                                Ease
                    Will inform clients of potential
                    hazards but may not result in
                    effective use of information.

                    Will add to current appraisal costs.

                    Will not affect bousing where
                    owners do not use information.

                    Uncertain support by appraisal
                    industry. Likely opposition from
                    banking industry. Likely support
                    from consumers' groups

                    Difficult since form was revised
                    recently. Completion of the form
                    would require additional work
        Option 2:  In conjunction with the
 federal agencies regulated under FIRREA,
 revise standard single- and multifamily
 appraisal forms to reflect the potential for
 LBP hazards. Most appraisers use the
 Uniform Residential Appraisal Report
 (URAR) for single-family appraisals, and it is
 likely that a standard form for multifamily
 properties will be developed.  The URAR
 provides space for the appraiser to note the
 age of the house and any adverse
 environmental conditions, but does not
 specifically require the user to discuss the
" possibility of LBP  hazards.

        If the form were to contain an item
 in which the appraiser were specifically
 required to discuss the potential for LBP
 hazards, it would require appraisers to have a
 sufficient understanding of LBP to act in
 accordance of the  Competency Provision of
 USPAP. This information also would ensure
 that appraisal clients had sufficient knowledge of potential LBP hazards to act appropriately. A
 standard disclosure cf potential LBP hazards could lead to a uniform treatment of LBP hazards
 within the banking industry, and could consequently lead the market o place a higher value on
 lead-safe housing.

        This option entails difficulties in  cost, political feasibility, and administrative ease. The
 URAR was revised recently by an appraisal industry working group on behalf of Fannie Mae,
 Freddie Mac, HUD, and the Department of Veterans Affairs.  One goal of the working group
 was to eliminate the need  for addenda to the URAR. It may be administratively unfeasible in the
 near future to create a new version of the form or a new addendum to address this option.

        In addition, many federal banking agencies feel that the appraisal requirement of
 FIRREA is an obstacle to providing credit for real estate transactions, in part because  of the
 appraisal cost.12 Since the completion of an environmental hazard addendum would require
 additional work on the part of the appraiser, there would be additional costs that the banking
 agencies might oppose. Consumer groups, on the other hand, would likely favor the increased
 protection provided through the addendum.

        Finally, the client could not  rely on  the appraiser's suspicion of LBP  hazards  to accurately
 assess the risks involved.  Consequently, this option's effectiveness as a means of reducing LBP
 hazards would be dependent on the client's willingness to follow through with a hazard evaluation.
October 20, 1993
Appraisal
                                                                                       Page 10

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                                                    3.  Require Hazard Evaluation in Appraisals
                                                Effectiveness
                                                Cost
                                                Equity
                                                Political
                                                Feasibility

                                                Administrative
                                                Ease
                     Identifies hazards in appraised
                     properties.  Would increase hazard
                     reduction but not ensure uniform
                     treatment.

                     Costly to parties who must pay for
                     evaluation (e.g., landlords).

                     Unlikely to reduce hazards in
                     economically distressed housing.

                     Financial agencies and property
                     owners are likely to object.

                     Requires extensive monitoring and
                     enforcement.
       Option 3:  Require hazard
evaluation in all appraisals of pre-1978
housing.  Federal  financial institution
regulatory agencies, secondary market
agencies, or federal or state legislatures
could require hazard evaluation for LBP as
part of an appraisal performed on all target
housing (at sale, for example) unless the
owner presents a certificate showing the
home to be free of hazards.  (The risk
assessment and inspection paper examines
possible certificate programs.)

       This option would have the greatest
impact of all  three appraisal options by
providing information to the market on LBP
hazards.  In markets that reacted to LBP
hazards, owners may reduce the hazards in
order to protect the value of their properties
(assuming that the hazard reduction
increases the value of a property more than it costs).  Furthermore, banking and insurance
agencies would have information with which to identify potential liabilities.

       In general, this option would be effective in identifying LBP hazards in units undergoing
appraisal.  It  would not ensure equitable and effective hazard reduction, hrv /ever.  Owners of
economically distressed housing generally cannot afford to invest in hazard reduction and buyers
who are not concerned about LBP hazards aie unlikely to undertake controls or abatement.  By  '
imposing costs on  owners of economically distressed housing, this option could lead to some  non-
compliance or possible disinvestment in distressed housing and a decline in the low-income
housing stock.

       Whoever bears the cost of the evaluation ~ the clients for appraisals, most likely — would
oppose this measure, as would the appraisal industry if it placed additional responsibilities on
appraisers. Furthermore, as mentioned in option 2, the federal banking agencies will likely
oppose any measure that adds to the appraisal requirements for real estate transactions.

       Finally, this option faces administrative difficulties.  First, until there is a mature risk
assessment and hazard reduction industry, this option could delay the completion of appraisals and
result in the identification of risks that cannot be reduced in a timely manner.  This problem,
however, could be addressed by phasing in the requirements (e.g., older properties first).  Second,
public agencies will have to develop a mechanism for monitoring and enforcing compliance with
this requirement.  Last, evaluating low-risk housing units may not be cost effective, so procedures
would have to be developed to target resources appropriately.

       The exhibit on the following page summarizes the evaluation of the three appraisal
options.  For further analysis of similar options, see option  1 of the risk assessment and inspection
paper and option 4 of the underwriting paper.
October 20, 1993
Appraisal
                                                                                       Page 11

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Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
COMPARISON OF
Option 1:
Require Appraiser
Education
Will raise appraisers'
awareness, but may not
result in effective use of
information by clients
Low
Will not affect housing
where owners do not use
information
Uncertain support by
appraisal industry
Courses materials should
be relatively easy to
develop
APPRAISAL OPTIONS
Option 2:
Revise Appraisal Forms
Will inform clients of
potential hazards but
may not result in
effective use of
information
Will add to current
appraisal costs
Will not affect housing
where owners do not use
information
Uncertain support by
appraisal industry.
Likely opposition from
banking industry. Likely
support from consumers'
groups
Difficult since form was
revised recently. _
Completion of form
would require additional
work

Option 3:
Require Hazard
Evaluation in Appraisals
Identifies hazards in
appraised properties.
Would increase hazard
reduction but not ensure
uniform treatment
Costly to parties who
must pay for evaluation
Unlikely to reduce
hazards in economically
distressed housing
Financial agencies and
property owners are
likely to object
Requires extensive
moi )ring and
enfo. cement
October 20, 1993
Appraisal
Page 12

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Appendix I: Overview of USPAP


USPAP may be summarized as follows:13

1.     Professional ethics standards. In light of an appraiser's fiduciary responsibilities, he must
       perform ethically, maintain confidentiality, perform in a professional manner, and maintain
       written records.

2.   -  Competency standards.  Before accepting an assignment, the appraiser must determine
       whether he is competent to perform it. If he is not competent to perform it, he must
       either refuse the assignment or disclose his shortcomings to the client and take all steps
       necessary to complete the assignment competently.

3.    . Departure provision.  An appraiser may perform an appraisal that departs from the
       USPAP if so requested by the client, but only if the appraiser has both determined that
       the appraisal will not mislead the public and advised the client that his or her request is a
       departure from the USPAP.  All of the federal regulators and the  RTC have rejected the
       Departure Provision.  Accordingly, an  appraiser preparing an appraisal subject to the new
       standards must not depart from the USPAP.

4.    . Substantive standards.  The appraiser must correctly employ recognized methods and
       techniques and must communicate the appraisal in a manner that is not misleading and
       which makes certain disclosures.  These methods, techniques and disclosure*  include:

  a.   Avoid errors.  A old errors or omissions, particularly those that t ;nder the appraisal
       misleading.

  b.   Identify terms. Identify the real estate, the interest in the real estate, the reason for the
       appraisal, any limiting conditions, and the effective date of the appraisal.

  c.   Define value. Define  the value; if that value is market value, explain  the most probable
       structure of payment.

  d.   Limitations on value.  Consider easements, restrictions, ordinances, and similar limitations
       on value.

  e.   Fractional interest. If the appraisal is based on a fractional interest in the Teal property,
       discuss whether that fractional interest contributes pro-rata to the value of the whole
       interest

  f.   Personal property. Identify any  personal property or fixtures included in the appraisal.

  g.   Regulations and other factors.  Consider the effects on use and value of land use
       regulations, economic demand, neighborhood trends, and the highest and best use of the
       real estate.

  h.   Appraisal .method.  Value .the site by an appropriate method.
October20, 1993                          Appraisal                                  Page 13

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  i.    Analyze comparables.  Analyze comparable cost data related to any improvements and
       comparable data relating to the accrued depreciation of any improvements.  Analyze
       comparable sales data, rental data, operating expenses, and other data as necessary to
       estimate rates of capitalization or discount.

  j.    Rent. Base predictions of future rent and expenses on  reasonably clear and appropriate
       evidence.

  k.   Leases.  Consider the effect on value of the terms of any lease.

  1.    Value. Separately analyze the value of the whole and of the component parts.  Consider
       the effect on value of any anticipated improvements on or off site.

  m.   Market information.  Identify the market information affecting the appraisal.

  n.   Proposed  improvements.  Appraise proposed improvements only after examining all
       relevant plans, time for completion, and proposed costs.

  o.   Sales.  Analyze any available sales agreement, option, lease, or listing for sale of the
       property.  Analyze prior sales of the  property within specified time periods depending on
       the type of property.

  p.   Clear and accurate disclosures. The appraisal must not be misleading;  it must contain
       sufficient information to be understandable, and must disclose any assumptions or limiting
       conditions and their impact on value.

  q.   Specific disclosures.  Identify the real estate and the interest being appraised, the purpose
       Of the appraisal, that the value is merely estimated, the effective date of the appraisal, and
       the date of the report. Describe how data was collected. Set forth all assumptions and
       limiting conditions.  Set forth the information considered, the procedures followed, and
       the reasoning supporting the conclusion.  Set forth an opinion of the highest and best use.
       Explain the failure to include either any usual valuation    approach or any of the
       information otherwise required to be disclosed.

  r.    Certification. The appraisal must contain a certification by the appraiser in a substantially
       similar form to the one presented in  the USPAP.  The  major aspects of the certification
       are that the appraisal presents the appraiser's un    biased professional opinion,  that he
       or she has no personal interest in the property, and that the report was  prepared in
       conformance with the USPAP. The  certification also must indicate whether the appraiser
       made a  personal inspection of the property, and the names of anyone who  provided
       professional assistance in the appraisal.

  s.    No limitation of professional responsibility.  Any appraiser who signs the  report in any
       capacity is responsible for the contents of the report.
October 20, 1993                          Appraisal                                  Page 14

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Appendix II:  Educational Requirements for Appraisers14




  The following table shows the subjects required for appraisal licensing and certification-

.Influences on Real Estate Value
Legal Considerations in Appraisal
Types of Value
Economic Principles
Real Estate Markets and Analysis
Valuation Process
Property Description
Highest and Best Use Analysis
Appraisal Statistical Concepts
Appraisal Math and Statistics
Sales Comparison Approach
S ,e Value
Cost Approach
Income Approach
- Gross Rent Multiplier Analysis
- Estimation of Income and Expenses
- Operating Expense Ratios
- Direct Capitalization
- Cash Flow Estimates
- Measures of Cash Flow
- Discounted Cash Flow Analysis
Valuation of Partial Interests
Appraisal Standards and Ethics
Narrative Report Writing
Licensing
S
^
/
S
S
S
S
S
S

S
S
S
S
S
S
J
S

Certified
Residential
S
S
S
S
S
V
S
S
S

S
S
S
S
S
S.
S
S
S
S
Certified ;
General
S
S
S
S
S
S
J
S

/
S
S '
/
7
S
S
S
S
S
S
S
S
October 20, 1993
Appraisal
Page 25

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  The following subjects are accepted for continuing education credit:

       (a)    Ad Valorem Taxation
       (b)    Arbitration
       (c)    Business courses related to practice of real estate appraisal
       (d)    Construction estimating
       (e)    Ethics and standards of professional practice
       (f)    Lard use planning, zoning, and taxation
       (g)    Management, leasing, brokerage, timesharing
       (h)    Property development
       (i)    Real estate appraisal
       (j)    Real estate law
       (k)    Real estate litigation
       (1)    Real estate financing and investment
       (m)    Real estate appraisal  related computer applications
       (n)    Real estate securities and syndication
       (o)    Real property exchange
October 20, 1993                          Appraisal                                  Page 16

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Endnotes

1. Appraisal Standards Board Advisory Opinion G-9, December 8, 1992.

2. Hicken, Joanne Robbins, "Real Estate Appraisers and Appraisals: Changes Mandated by
FIRREA," Real Estate Law Journal, 1991, p. 163. A transaction is complex if the property, its  -.
form of ownership, or the market conditions relating to the property are atypical. Atypical
property factors include the ag<  and size of improvements, the architectural style, the lot size, the
neighborhood land use, potential environmental hazard liability or leasehold interests.

3. FIRREA, §1101.

4. FIRREA, §1103.

5. Chapter  112 Section 175 of the Annotated Laws of Massachusetts

6. Thomas A. Dorsey, "Asbestos and Appraisers," The Real Estate Appraiser and Analyst, Summer
1988, p. 8.

7. Telephone conversations with bank appraisers, BayBank (Boston, MA)  and South Shore Bank
(Chicago, IL).

8. Telephone conversation with Ernest Demba, American Society of Appraisers,  Chairman, Real   .
Property Committee, August 19, 1993.

9. 'Jeborah Ann Ford and Michele Gilligan, "The Effect of Lead Paint Abatement Laws on
Rental Property Values," AR1 'JEA, Spring 1988, p. 92.

10. Telephone conversation with Ernest Demba. According to Mr. Demba, the appraiser would
also have to reduce the market value of the units to account for a "stigma effect" attached to
lead-unsafe housing.  (The stigma effect is the result of a buyer's fear of living in a house where
there were  LBP hazards, even if those hazards have been properly controlled.)  The appraisal
profession has not quantified this discount, and the amount would depend upon  potential
residents' concerns.

11. While the reduction in property values has negative effects for existing homeowners, the
reduction in market prices could enhance affordabiliry by lowering the amount that a buyer had to
finance. With the savings in monthly mortgage costs, the buyer may be able to afford  LBP hazard
reduction and possibly still maintain affordability.

12. Interview with Debbie Sharpe, Appraisal Foundation, October 14, 1993.  •

13. Hicken, pp.  164-166.

14. Appraiser Qualification Criteria of the Appraisal Foundation, February 9, 1993.
October 20, 1993                         Appraisal                                  Page 17

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                  ROLE OF LIABILITY IN ADDRESSING LBP HAZARDS
1.
       Introduction
                                                                Key Issues
                                                 • What theories of liability apply to LBP
                                                   hazards?

                                                 • What barriers or defenses exist to recovery
                                                   of damages from LBP injuries?

                                                 • What parties are involved in LBP
                                                   litigation?

                                                 • How effective is the liability system in
                                                   encouraging the reduction of LBP hazards
                                                   or compensating injured persons?

                                                 • What policy options exist to modify the
                                                   liability system to further reduce LBP
                                                   hazards or compensate injured parties?
       Lawsuits concerning lead-based paint
(LBP) have increased throughout the 1980s
and 1990s. In the context of LBP, liability
refers to an obligation to Compensate a lead
poisoning victim for actual or threatened
harm or a legal responsibility to abate lead
hazards.  Lawsuits are a means to enable
individuals to recover damages (e.g., medical
costs, lost future earnings, and pain and
suffering) resulting from exposure to LBP,
recover abatement costs (e.g., costs for
contractor to remove  LBP), or to allow
individuals or agencies to compel a party
(e.g., an owner) to abate lead hazards.

       The purpose of this paper is to
present background information  on the
liability system and LBP. This paper
discusses the ability of the liability system to
encourage the reduction of LBP hazards and
to compensate injured persons. The effects of the liability system on private, rental housing are
emphasized. This papei s closely related  to several other papers in this series. The insurance.
paper discusses the role of liability insurance in addressing LBP hazards and the impact of the
liability system on the availability of insurance.  The administrative compensation paper evaluates
what mechanisms could be established to compensate individuals for lead-based paint damages
outside of the liability system.

       The remainder of this paper is organized as follows:

       Section 2:    Provides an overview of the liability system for LBP abatement,
                     damage claims, settlements, litigation, and related trends.  This
                     section also discusses the ability of the liability system to encourage
                     the reduction of LBP hazards and to compensate injured persons.

       Section 3:    Discusses proposed Maryland  hazard and liability reform recommendations
                     *hat include potentially responsible owners making "qualified offers" of
                     Compensation to parties injured by exposure to LBP hazards.

       Section 4:    Presents policy options to revise the liability system, such as
                     establishing federal or state statutory liability standards, including
                     provisions for due care or "safe harbor" defenses.
October 20, 1993
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Page 1

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2.     Background

       Parts 2.1 through 2.3 of this section address the sources and terms of liability, the defenses
to liability, and the types of damages or compensation awarded, respectively. This discussion
focuses on the most common type of LBP litigation: actions against rental property owners by
children and their guardians (suits on behalf of minors may be brought by their legal
representative or guardian) and other parties. Part 2.4 applies general liability concepts to other
defendants such as abatement contractors, paint manufacturers, and people involved in day-care
centers, schools, and other properties with LBP hazards.  Finally, Parts 2.5 and 2.6 review the
ability of the liability system  to encourage the reduction of LBP hazards and to compensate
injured persons.

2.1    Sources and Theories of Liability

       The majority of liability law develops at the state  level and is made by both legislators
(e.g.,  through statutes) and judges (e.g., through common law).  Legislators  enact statutes that
may impose duties or standards of conduct on a party (e.g., property owners).  A property owner
who breaches  this duty may be subject to an enforcement action by  a regulatory agency or a
lawsuit by injured parties. Another source of LBP liability law is the common law. Generally,
common law legal rights are not the result of legislative enactment but are judge-made law,
derived from the application of reason, a sense of justice, and the dictates of conscience.
Common law varies among the states and there is no general federal common law concerning
environmental liability or landlord-tenant liability. Common law duties are often derived from
usages and customs that have been recognized and enforced by courts in judicial decisions. Court
records of actual judicial decisions (precedent) determine how common law rules and principles
are applied to a given set of facts.                             X

       State and federal laws do impose some duties concerning LBP. As knowledge of the
potential dangers and prevalence of lead exposure has expanded, many states have developed
legislation to address poisoning from LBP.  The duties imposed by state laws vary significantly and
may include LBP evaluation, abatement, notification of tenants, damages for .injury,  and
enforcement provisions.  For example, Massachusetts enacted a lead poisoning law in 1987 that
establishes a duty for property owners to abate LBP hazards if young children will be present in
the dwelling.1  At the federal level, the Consumer Product Safety Commission  banned the
manufacture of paint containing more than 0.06 percent  lead by weight for  interior and exterior
residential surfaces, toys, and furniture and Title X established duties,  principally concerning  non-
private housing.

       Common law doctrines, such as the implied warranty of the habitability of rental units,
may be another means by which injured  parties seek abatement of lead hazards or compensation
for damages.  In a Louisiana case, a father sued the landlord-owner of his apartment building for
personal injuries suffered by his two sons.2  The tenant's  sons ingested lead paint chips that had
fallen from the walls in the apartment. The court held that the owner had a duty to maintain an
apartment in a fit and habitable condition.  The court reasoned that it was not unreasonable to
hold the owner liable to prevent LBP hazards within an apartment when the owner  knew that
small  children will thereby be constantly  exposed to the temptation of eating this fallen material.
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For further information on these common law doctrines, see specific discussion on the liability
theories below.

       For injured parties seeking compensation or damages, LBP poisoning claims are litigated
or settled under both statutory and common law principles. In Maryland, a court of appeals
affirmed  a $518,000 jury award against a rental property owner for injuries to children exposed to
LBP.3  The owner rented an apartment that was unfit for human habitation in that it contained
LBP. One of the children's blood lead levels tested as high as 59 micrograms per deciliter and
both children suffered brain damage.  The claim relied on the common law doctrine of negligence
and the Maryland Consumer Protection Act.  The appeals court upheld the jury verdict that the
owner was negligent and allowed the injured party to seek reasonable attorney fees under the
Consumer Protection Act.

       Lawsuits may seek to use a variety of liability theories in LBP litigation.  Examples of
liability theories are discussed below.

       Strict Liability

       Under strict liability, an injured person need not show that a rental property owner's
conduct was deficient or an owner acted without due care.  An injured person need only
demonstrate that a hazard caused the injury to be able to seek recover for the harm.  Lead
poisoning control  statutes in several states such as Maine and Massachusetts require an owner to
remove LBP before renting to a family with a  child under the age of six.  Under these statutes, an
owner can be held strictly liable for penalties for noncompliance from LBP hazards without the
owner knowing about the hazard or its responsibility to address it.4 Similarly, in Connecticut, a
court held an owner strictly liable for violating a state statute and city ordinance to maintain
rental property free of LBP.   For some environm -ntal hazards, strict liability is imposed by
common- law. At  least one court in Illinois, however, addressed the issue of common law strict
liability and concluded that strict  liability does  not exist for LBP hazards.6 Under that holding,
an injured party must demonstrate that an owner had  knowledge of the existence of LBP, notice
that the paint was peeling and still failed to abate the situation.

       Negligence and Negligence Per Se

       Under common law, negligence refers to conduct that falls below the standard of conduct
for a reasonably prudent person under similar  circumstances.  In a claim for negligence, a party
seeking judicial relief must demonstrate four elements:
                                                                                         v
       (1)     A duty of care (based on the actions of a reasonable man in similar
              circumstances);

       (2)     A  breach of this duty through an act or omission;

       (3)     A causal connection between the breach and the injury or harm; and

       (4)     The injury or harm.
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Generally, a person owes a duty to those whose physical safety or property would be put at an
unreasonable risk if the person  failed to act with due care. If a party can prove that a rental
property owner knew or should have known of peeling LBP or LBP in areas accessible to
children, the owner may have a duty to warn the tenants of the LBP hazard. If the ownet fails to
warn a tenant, the owner may have breached this duty.  The party bringing the lawsuit must also
demonstrate that due to the failure to warn, a young child ingested LBP chips or dust and
suffered from lead poisoning.

       A similar theory of liability is negligence per se.  Under this theory, a court may adopt as
the duty of care the requirements of a legislative or regulatory LBP hazard standard.  For
example, in LBP litigation, if an owner violates the state or local health code concerning LBP
poisoning prevention or control, the owner may have violated a duty of care to the tenants.  This
violation demonstrates  that there was a duty and a breach by the owner. The injured party,
however, must still show that the breach of this duty caused the injury or harm and demonstrate
the actual injury or harm.  Negligence per se creates a strong incentive for owners to comply with
statutory LBP standards.  Care  in drafting such standards becomes especially important when the
standards will be used to establish a legal duty under a negligence per se standard.

       Breach of Implied Warranty of Habitability

       Over time, common law developed the duty that a rental property owner implicitly
warrants that an apartment is fit to live in at the time of renting and will remain fit throughout
the lease. If an owner does not remove cracked or peeling LBP from an apartment, he may have
breached a'duty to provide a habitable place to live because of the potential hazard of lead
poisoning.  In  Connecticut, the  State codified this implied warranty of habitability such that t'.-.
presence of cracked, chipped, blistered, flaking, loose, or peeling LBP paint that constitutes
health hazard renders an apartment unfit for human habitation.   Therefore, the presence of a
LBP health hazard breaches the owner's duty to the tenant. The tenant may be able to sue an
owner and force the owner to undertake hazard reduction activities (i.e., make the unit
habitable).

       Misrepresentation

       Any word or action by a rental property owner that intentionally deceives or misleads a
tenant about the presence or potential hazards of LBP may be a misrepresentation.  For example,
if a tenant asks an owner whether an apartment contains LBP, an owner's deliberate silence when
he knows that the apartment contains LBP is as much a misrepresentation as an actual denial.
The tenant may be able to seek recovery for any damages caused by the LBP  hazard.

       Joint and Several Liability

       Another important common law doctrine is joint and several liability. Under joint and
several liability, an injured person who successfully  sues at least one of two or more liable parties
may collect the entire award from any one or combination of these parties without having to
apportion the harm. This common law doctrine is defended on the principle that is fairer to
make a partially responsible wrongdoer bear the entire cost of a resulting injury than to leave an
innocent victim only partially compensated. Potentially  this concept would prevent owners from
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avoiding liability by showing that lead poisoning was caused by sources in addition to LBP (e.g.,
air pollution).

2.2    Primary Defenses to Liability

       Parties being sued for damages from LBP hazards often raise factual or legal arguments
that may diminish or defeat claims for recovery of damages.  These defenses may be as simple as
a flat denial of the other party's allegations or a legal hurdle such as the assertion that LBP was
not the source of the child's injuries. The applicability of different defenses depends on the
liability theory being raised by the claimant.  The following discussion highlights some of the
primary legal defenses that have been raised in recent LBP cases.

       Lack of Causation (Proximate Cause)

       The key issue of causation is whether the breach of duty resulted in the harm.  In most
states, a party must prove that, more likely than not, the defendant's conduct caused or
substantially contributed to the party's injury. For example, a party must demonstrate  that LBP,
which a rental property owner had a duty to remove, injured a young child. Often this link or
causation is demonstrated through the use of expert testimony.  An expert may testify  that a
child's elevated levels of lead in the blood and injuries probably came from the LBP chips and
dust in the apartment.  An expert may also testify that a child's  learning disabilities or  low IQ
resulted from elevated blood lead levels.

       Property owners and other defendants, on the other hand, may dispute that a child's
injuries \vere caused  by exposure or ingestion of LBP in the child's apartment or soil
contaminated by deteriorating LBP on the exterior surface of the building.  C*her sources of lead
exposure exist, such as the water supply, soil (which may contain lead from th  emissions of
vehicles that used leaded gasoline, leaking petroleum storage tanks, or nearby industry), glass, and
pottery.  Owners and paint manufacturers also contend that any injuries, including learning
disabilities, are traceable to sources  other than lead such as malnutrition, drugs, alcohol,  or
problems with the public education system.

       Contributory Negligence

       Rental property owners and paint manufacturers have raised the defense that the parents'
negligence contributed to  the child's injury.8  Under this defense, the owner or manufacturer
must demonstrate that a parent breached a legally imposed duty to care for his or her  child, thus
contributing to the child's injuries. These claims may allege that a parent knew an apartment
contained LBP, failed to supervise the child, and/or failed to prevent the child from  eating LBP
chips.  In Massachusetts, a court allowed an owner to argue a contributory negligence  defense on
the basis of the mother's negligence in allowing her child to ingest LBP.9 ^ successful defense
of contributory negligence would bar any recovery by the injured party.

       One potential problem in  using this defense is the doctrine of parental immunity. Many
state statutes contain some type of parental immunity doctrine that precludes minor  children from
suing their parents to recover damages for injuries.1" This doctrine generally holds that acts of
parental authority or supervision are essential to the parent-child relationship and any  actions
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relating to this parental authority or supervision are protected from lawsuit. Therefore, even if a
parent negligently supervises his/her child, the parent would be shielded from LBP liability.  In
New Jersey, a judge rejected an owner's counterclaim that the parents' negligence contributed to
the child's injury from lead poisoning.11  The judge held that the parents were protected by this
parental immunity doctrine. Similarly, a Maryland statute provides:

       In an action on behalf of an infant to recover for ... personal injury . . . the
       negligence of the parent or custodian of the infant may not be imputed to the
       infant.12

Based on this parental immunity doctrine, a Maryland court refused an owner's request for
contributory negligence.13  In this case, the owner failed in its duty to keep the interior surfaces
of the apartment free from loose and defective material including LBP and the court concluded
that this doctrine precludes consideration of the fact that the injured  child's parents had agreed to
do all inside painting.

       Assumption of the Risk

       Rental property owners may also attempt to prove that tenants assumed the risk of living
in apartments with LBP. To utilize this defense, owners must establish that a tenant was aware of
the specific risks of lead exposure and that the tenant knowingly and  voluntarily exposed his/her
family to the hazards. In a New York case, a court rejected the owner's defense that a family's
agreement to repaint an apartment  and abate the LBP  hazard under  an alleged agreement for
rent reduction ended an owner's statutory obligation to provide a lead-free environment for
families with young children.14

       Comparative Fault

       In most states, if an injured  party's conduct and a dangerous condition (e.g., a LBP
hazard) both operated to cause a harm, the injured party's conduct will be evaluated and the
damage award will be reduced proportionately by her fault. Take, for example, the
Massachusetts' case where the court allowed the property owner to raise the defense of the
mother's negligence in allowing the child to ingest LBP chips and dust.  If the owner's actions are
determined to have caused 90 percent of the child's injuries and the mother's negligence is
responsible for 10 percent of the child's injury, the owner would be required to only pay 90
percent of the damages. The law of "comparative fault", however, varies from state to state.  In
some states, if an injured party's comparative fault is greater than the defendant's misconduct, an
injured party may be barred from recovering damages.  In other states, an injured party's conduct
will not totally bar her claim even if her fault for the injury is greater than the proportionate
contribution of the defendant.

       Statute of Limitations

       Statutes of limitations prescribe the time period in which a party can file a claim.
Depending on the state, the statute of limitations for filing claims for LBP injuries vary. For
example, in  Louisiana, the statute of limitations is one year; in  Connecticut, the statute of
limitations is three years.
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       In some jurisdictions, the time period does not begin to run until a party discovers the
lead poisoning or in the exercise of reasonable care should have known of the lead poisoning. A
party who fails to file a claim before the end of the mandated time period is barred from bringing
this claim before a court. If blood tests from a young child demonstrate elevated levels of lead,
the time period begins to run.  The time period may also be considered to have begun to run if
other children in a multi-family building are known to have elevated lead blood levels because
"reasonable parents" would get their own children tested to check for lead poisoning. Not all
states, however, follow the doctrine that a statute of limitations time period begins when an injury
is discovered.  In Connecticut,  a court held that a three-year statute of limitations for lead
poisoning claims begins at the date of injury (e.g., a child ingests LBP) and not when the injury
becomes known.15

2.3    Types of Compensation or Relief Awarded

       When a party is successful in proving that the defendant's  conduct proximately caused an
injury or that the defendant is responsible for the injury, a trial judge or a jury will award
damages.  Damages from LBP  poisoning range from compensation for actual loss or injury to
punitive damages (unrelated to loss or injury) to punish a defendant for "outrageous conduct." A
variety of factors may influence the amount of the damage award  such as the victim's age, blood
lead levels, number of chelation treatments (the use of medications to remove lead from soft
tissues), conditions of the property, and actions or inaction by the responsible party. In most
cases, a physical injury,  that is verifiable and established to reasonable degree of medical certainty,
is a prerequisite to recovery. Awards for damages for LBP injuries widely vary.  Juries confronted
with essentially the same facts in LBP trials have reached outcomes ranging from no award to
million dollar awarrls.

       Tl s following discussion examines some of the types of compensation that courts may
award for LBP injuries.

       Economic Damages

       Specific damages may include compensation for the costs of present and future medical
care to reduce the levels of lead in a child's bloodstream and may cover future medical
monitoring.  The cost for special education and care for an injured child represents another type
of damage. The child or guardian may also seek future  earnings lost by a child because of
diminished intelligence.  In Connecticut, a property owner who failed to maintain a rental
property free of LBP was assessed almost $830,000 for the lead poisoning of a tenant's child; the
jury award represented  the lowest computation of the child's loss of earning capacity due to his
severe and permanent mental disability.16 Claims for the cost of past and future medical
expenses or the cost of rehabilitation often can be measured with  accuracy.  Even where not  -
measurable with  precision, a reasonable estimate may be made. Calculations about lost earnings
are much more speculative.

       Non-economic Damages

       Another area of recovery is for non-economic damages (e.g., damages for pain and
suffering or emotional distress).  Generally, common law allows a  physically injured person to
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recover for mental, as well as physical, suffering.  This doctrine allows compensatory damages for
emotional distress. Emotional distress may include "fright, nervousness, grief, anxiety, worry,
mortification, shock, humiliation, indignity, embarrassment, apprehension, terror or ordeal."1

       Abatement Costs

       In addition, damages may include or be limited to recovery of costs to reduce the lead
hazard if a property owner fails in its duty to abate or reduce the hazard. This recovery may
consist of the cost to remove lead-based pa;nt from child accessible areas (e.g., windows, door
frames, stair spindles) or to encapsulate the remaining LBP. A judgment against an owner or a
settlement between the parties may also include compensation for temporary or permanent
relocation to avoid continued LBP exposure, including during hazard reduction or abatement
activities.

       Punitive Damages

       Finally, another type of award is punitive damages.  The purpose of punitive damages is
not to compensate a lead poisoning victim for proved injury or loss, but to punish the responsible
party and  to deter other parties from engaging in such conduct in the future. In Maine and
Massachusetts, landlords that fail their duty to delead may be subject to treble damages in the
event of noncompliance.   In considering punitive damages, a court may consider the degree of
reprehensibility of the defendant party's conduct, the defendant party's awareness of the problem
(e.g., notices of violation for LBP hazards), any concealment, and the existence and frequency of
similar past conduct.  A court may also examine the profitability to the partv of the wrongful
conduct and the desirability   " removing that profit.
                                                             f-
2.4    Application of General Liability Concepts to Other Parties

       Liability standards  for LBP hazards continue to evolve under statutory and common law.
Examples of potential claims  under different legal theories against the following parties are
discussed below:

        •      Insurers;
        •      Lenders;
        •      Abatement contractors;
        •      Paint manufacturers; and
        •      Other  potentially responsible parties.

       Insurer Liability

        While property owners may be the primary party sued for lead hazards, insurers may
become parties to the lawsuits. The ability of owners to pay awards may partially depend on their
liability insurance. Some liability insurance policies explicitly exclude LBP coverage.  In other
situations, owners may consider that litigation defense costs and damages, including bodily injuries,
are covered by their commercial general liability  (CGL) insurance policies.    Under the so-
called pollution exclusion, CGL policies do not cover claims caused by environmental pollution.
Some insurers have disclaimed coverage for LBP liabilities based on this exclusion. The
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applicability of coverage for injuries and damages associated with LBP poisoning is currently being
decided in both federal and state courts.

       The pollution exclusion, at least as interpreted by the New York Court of Claims, deprives
rental property owners of virtually all coverage of LBP claims.20  In this case, a woman alleged
that she and her unborn daughter were injured by LBP in their apartment. The owner tendered..
the claim to its insurer for defense.  The insurer disclaimed coverage because the claim came
within the pollution exclusion and the court agreed with  this interpretation of the policy. The
court held that LBP was a "pollutant" within the meaning of the exclusion and that ingestion of a
"pollutant" in the rental apartment was not covered by the CGL policy.  On the other hand, the
Supreme Judicial Court of Massachusetts reached the opposite conclusion concerning a  similar
exclusion. In the Massachusetts' case, the court held that LBP was not a pollutant within the .  .
meaning of the exclusion.21  Due to the unsettled nature of insurance law concerning LBP
coverage, the role of insurers in LBP liability remains uncertain. These issues are discussed  in
greater detail in  the insurance paper.

       Lender Liability

       In situations where a rental property owner is insolvent and no insurance coverage exists,
another party that may become involved is a lender to the owner. If the finances of an  owner are
not very strong or LBP awards are high, the cost of lead-based paint claims may cause an owner
to default on its  mortgage.  If a lender forecloses on the defaulted mortgage, the lender may be
sued for the injuries caused by LBP.  The possibility exists that an injured party may allege  that  .
the lender is responsible not only for the injuries after the mortgage default, but for the entire
period since the  lender firsi sr z<   the loan.  Under the theory of joint and several liability,  though
a lender may bear only a  smail p^.t of the responsibility for the victim's injuries, the lender  may
become liable  for the entire judgmei it because the more responsible owner is insolvent.  In these
situations, the lender may decline to repossess the property if its potential costs of liability are
greater than the  value it could recover from repossessing the building.

       Similarly, if a lender becomes overly involved in managing a borrower's business, the
lender may be deemed an owner and thus directly liable.22 The Massachusetts Lead Poisoning
Prevention and Control regulations appear to incorporate this position.23  The Massachusetts'
regulations provide that a bank or lending institution is considered the owner of residential
property if it does any of the following activities:

       •      Receives rent or profits;
       •      Makes open and peaceable entry on to the property;
       •      Obtains possession through court order; or
       •      Takes other lawful action that subjects it to the duties of an owner.

The key issue  appears to be that the responsibility of the lender begins as soon as it exercises any
right under its mortgage to control the property.  This lender liability  appears to be similar  to the
liability imposed  in the federal Comprehensive Environmental Responsible, Compensation,  and
Liability Act (CERCLA or Superfund) actions.24 In Superfund situations,  a lender  may become
exposed to liability by foreclosing on its security interest and becoming the owner of a site
contaminated with hazardous wastes or participating in managing or operating the site.
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       Lenders may also be liable if they fail to follow Federal Housing Authority (FHA)
statutory guidelines in making sure an appraised home is free of LBP hazards.26 In
Connecticut, a judge refused to dismiss claims against a mortgage lender who allegedly granted an
FHA loan without notifying the purchaser of LBP hazards prior to the purchase of the home.
Under 24 CFR 35.5, a lender must hire an appraiser to inspect for LBP and advise when
treatment or abatement is necessary.  Because of the lack of LBP hazard notification, the
homeowners' children suffered LBP poisoning.

       Abatement Contractor Liability

       While liability for LBP hazards is primarily the concern of property owners, abatement
contractors may also incur liability. LBP reduction activities often involve the disturbance of LBP
from surfaces. The generation of dust and paint chips may be hazardous to occupants, especially
pregnant women and children, or abatement contractor employees.  These injured parties may sue
the contractor for  failure to protect against such lead exposures if the contractor did not supervise
the work in accordance with proper standards.  Claims against contractors may potentially precede
under statutory or common law.  The following discussion examines the contractor's legal duties
and potential breaches.

       Lawsuits by contractor employees against the contractor.  Contractor employees may bring
lawsuits against the abatement contractor for violations of the Occupational Safety and Health
Act's (OSHA's) regulations on lead.27 The purpose of OSHA is to assure that "no employee
will suffer material impairment of health or functional capacity from a lifetime of occupational
exposure."28 The coverage of the Occupational Safety and Health Act extends to all employers
and their employees under federal »•_. diction. Small, family-ow-,.  . abatement contractors,
however, may not  be subject to OSH/ requirements. Also, OCCL >ants in dwellings where
abatement  occurred are not covered by OSHA health sta idards because lead exposure is not the
result of the occupant's occupational activities.

       The health standards for occupational lead are found  at 29 CFR 1910.1000. The "action
level" for exposure to lead is 30 iig/nr averaged over an eight-hour period.  If airborne lead
concentrations exceed this level, the regulations require periodic blood testing, medical
surveillance, training, and education.  The "permissible exposure limit (PEL)" for lead is 50 ng/m3
averaged over an  eight-hour day.  No employer may allow an employee to be exposed  to lead at
concentrations higher than the PEL.  The employer is responsible for monitoring lead  exposure
levels of employees and evaluating control methods such as respiratory devices, protective
clothing, and housekeeping practices. Employees may sue contractors for violations of these
health standards for occupational lead and if violations are proven; OSHA establishes penalties.

       Employees, however, may be limited in their ability to obtain compensation or damages
from their  employers. Employees may be subject to state-operated workers' compensation
programs that limit employee claims against employers to the categories and damages the injured
employee can prove from work-related accidents and diseases. The basic premise of worker's
compensation and employer liability is to provide benefits as a substitute for wages lost because of
industrial injury or disease. Compensation for lost wages, medical care, and rehabilitation is
determined under the program and is usually a fixed percentage of an employee's wages. The
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effect of most workers' compensation acts and employer liability is to make the employer strictly
liable to an employee for injuries sustained by the employee in the course of employment.

       Usually where workers' compensation is available, it is the employee's exclusive remedy.
Eligibility for workers' compensation bars any other common law remedy that the employee might.
have had against her employer such as claims based upon the employer's lack of caution or
negligence.  An exception to this general rule occurs when an employee can demonstrate that the
employer, knowing of a substantially certain harm that would happen to the employee,
intentionally required the employee to be continually exposed to the hazard.

       Lawsuits by occupants against a contractor. Occupants may sue a contractor for failure to
protect against lead hazards from abatement activities. The abatement contractor may have
compounded the danger to occupants and children by poor abatement practices such as scraping, -_
sanding, or burning the LBP.29  The contractor may also have allowed the occupant to be
present or nearby during control activities or the  contractor did not perform, appropriate clean-up
before allowing occupants to return to a dwelling unit.  (New Hampshire, for example, prohibits
children from being present during the abatement of lead hazards.  )  In addition, a contractor
may have failed to warn the occupant of the potential of increased lead exposure or possible
poisoning of young children.

       Liability of Paint Manufacturers

       Property owners often lack sufficient assets or insurance  to pay damages  awarded to   \ -
successful  plaintiffs.  Thus, plaintiffs have sued financially viable  manufacturers of lead paint
alleging that the manufacturers weu r^s^   sible  for poisoning children exposed  to lead paint.
Plaintiffs have used various product liability theories, including:  ./'

       •      Negligent product design. These  claims state that children were poisoned
              because LBP manufacturers  produced and marketed LBP that they knew
              or should have known would be applied  to surfaces of residences in which
              children live.

       •      Negligent failure to warn. The based on this theory argue that LBP
              manufacturers had a duty to warn  retailers and users that  the paint
              contained lead and should not be  applied to surface areas exposed to
              young children. These claims also state that manufacturers had a duty to
              provide  a complete and timely public warning advising of the dangers that
              LBP posed to young children if ingested.

       Parties suing manufacturers of LBP  have  two  major hurdles to overcome in pursuing
claims

       (1)    Statutes of limitations.  LBP for residential surfaces has not been
              manufactured since 1978 so claims against manufacturers often are blocked
              by statutes of limitations. The trigger that starts the time  period of a
              statute of limitations for a products liability claim may be different than for
              other claims.
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       (2)    Inability to prove which company manufactured the LBP used in any
              particular building. Injured tenants can only rarely prove which company
              manufactured the LBP used in a particular rental property more than a
              decade ago and courts have rejected theories that would enable a party to "
              sue all manufacturers of LBP, whether or not the parties could prove
              whose paint was used in their buildings.

Suits against paint manufacturers, some by individual tenants, others by public housing authorities,
have been dismissed by courts in Louisiana, Massachusetts, New York, and Pennsylvania.31

       An example of the difficulty of bringing claims against paint manufacturers is a class action
suit brought by the City of Philadelphia and the Philadelphia Public Housing Authority.  The City
and the Housing Authority attempted to use a market share theory of liability. Under this theory,
if a party cannot identify the specific manufacturer but can prove the other requirements for
liability, such as product defect, failure to warn, causation of injury, and damages, the requirement
for identification is waived.32 Under the market share theory of liability, manufacturers of
fungible products that injure a party would be held liable in proportion to their respective market
shares.  The court rejected the applicability of this  theory to LBP.  In a similar case against a
group of manufacturers of the lead pigment used in lead paint, the court also dismissed the
claim.33

       Liability of Owners of Day-care  Centers, Schools,  and Other Properties With LBP Hazards

       Owners of day-care centers, schools, and  properties that house or are otherwise
frequented by children will have to pay close   ^ntion t<   Mr duties to identify and remediate
LBP hazards.  As more state and local  governments begi  to regulate lead reduction, owners of
these facilities may expect additional requirements  and duties.  Some state statutes and local
ordinances require inspection of public and private schools and day-care centers for the presence
of lead in paint, water, and soil  For example, in Rhode Island, all preschools, day care, nursery
schools, and kindergartens must  be lead free or lead safe as a license condition.3

2.5    The Ability of the Liability System to Encourage the Reduction of LBP Hazards

       The high costs of litigation and the potential for large judgments against property owners
and other parties provide an incentive to reduce LBP hazards. The magnitude of this incentive,
however, depends not only on the terms of a state's liability laws, but also on several other
factors, including:

       •      Potentially liable party's knowledge about LBP hazards, potential liability,
              and available hazard reduction methods;

       •      Regulatory requirements to reduce  LBP  hazards and the likelihood of their
              enforcement;

       •      Cost of abatement or interim controls, their effectiveness in preventing
              liability, and an owner's ability to finance these activities;
October 20,  1993                          Liability                                  Page 12

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       •      Ability to limit risk of liability by not renting housing to families with young
              children;

       •      Likelihood of one or more claims, the probability of their success, and the
              direct and indirect costs of negotiating or defending against claims;

       •      Likely amount of awards or settlements; and

       •      Actual loss to a liable party, considering factors such as insurance coverage
              and limited assets of liable party (e.g., liability of a corporation is limited by *
              its assets; owners potentially could establish a corporation for individual
              buildings and therefore, any liability for particular LBP damage claims
              would  be limited to the value of the building).

       If property owners recognize the risk of liability, they will often weigh  these factors in
deciding whether to undertake abatement activities. For example, an owner may compare the
costs of hiring an abatement contractor to remove LBP from an apartment (costs may range from •
$6,000 to over $30,000 per unit) and the benefits of removing the potential for lawsuits from
injured parties or enforcement actions from regulatory agencies. The benefits will depend on the
statutory and common laws that apply to  lead poisoning prevention and control.  Other owners
will not make these comparisons; instead  they will undertake abatement activities once they learn
of LBP hazards, if they are able to finance the costs.  For these owners, liability will  have little or
no impact on reducing LBP hazards.

       Insurance may also affect the action* u'vn. -  take to reduce hazards. Insurance transfers
financial risk from a policyholder to the insuiet. Fv.  example, an owner who has insurance, may
be less inclined to reduce hazards and the risk of liability because insurer and  not the o^-ner
wo'uld pay any injury claims. Insurance, however, may require owners of rental housing 10 reduce
the risks of LBP hazards as a condition for obtaining coverage.  For example,  an insurer could
require owners to conform to minimum standards of maintenance or to abate existing LBP.  -
Insurers may also charge different premiums to owners who take steps to reduce LBP hazards in
their rental property.  To the extent,  therefore, that owners seek or must have liability insurance,
insurers can encourage reductions in LBP hazards in setting conditions for coverage.  (See the
insurance paper for more details on these issues.)

       The capacity of the liability system to encourage the reduction of lead hazards from LBP
is often the  result of explicit public policy decision-making.  For example, in Massachusetts, the
legislature decided that, to remedy the problem of lead poisoning of young children,  owners of
residential property should be strictly liable when they own lead-contaminated property in which '
children under six years of age reside. The Massachusetts' legislature concluded that strict liability
would  provide an effective incentive for lead hazard abatement.

       In some Massachusetts' cities, the unintended effect of strict liability has been the
abandonment of some economically distressed  housing with LBP.35 Rental property owners
could not obtain financing to remove LBP and therefore, they could not rent their properties.
Some owners were forced to default on their mortgages. A bill  introduced in  the Massachusetts
legislature would amend the abatement and strict liability provisions for owners of premises with
October 20, 1993                           Liability                                   Page 13

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four or fewer dwelling units.36  Under the proposal, these owners may obtain a letter of
compliance that approves of the owner's LBP in-place management plan instead of complete
abatement of LBP. No strict liability may be brought against owners that have a letter of
compliance. These owners would remain subject to a standard of reasonable care or, in other
words, a negligence standard.

       In Louisiana, the legislature also examined public policy considerations but decided not to
impose strict liability.  They feared that strict liability, if imposed on all houses containing lead-
based paint, could remove from the rental housing market a large number of older, typically low-
income rental  properties.  The  legislature foresaw the negative economic impact on distressed
housing that is occurring in Massachusetts as a result of imposing strict liability.

       The Louisiana legislature decided to impose a duty on an owner of any residential
property to remove paint, plaster, or other accessible materials that contain dangerous levels of
lead when notified by a State health official.37 This duty applies wherever  a child under the age
of six or a mentally retarded person resides.  The legislature decided that this more limited duty
was an appropriate incentive to reduce lead-poisoning of children without eliminating a large
portion of the rental housing market.

2.6    Capacity of the Liability System to Compensate Injured Persons

       To the extent that the liability system fails to create incentives for owners to  reduce the
risks of LBP, Ihe liability system may provide some means to compensate persons injured by LBP.
As discussed earlier, the liability system awards various types of damages. Thousands of LBP
damage claims have been Gled in federal and st   -xju.  nationwide and the number of claims
appears ft be  increasing.  Litigation involving L - P damages has resulted in a wide range of award
and se ttlement amounts. The ability of injured parties to recover damages, however, depends on
variations in state liability laws.  Liability law for LBP is still not settled, adding to the uncertainty
with regard to future  damage awards.

       Within the liability system injured parties with a legal right to compensation may face
barriers to recovery such as the following:

       •       Lack of knowledge.  Victims of lead  poisoning may not have any
               knowledge of LBP hazards or harm.  Effects of lead poisoning may be
               blamed on other causes.  In addition, injured parties may not have any
               knowledge of their legal rights or options to recover for damages.

       •       Lack of access to the legal system. Part of the lack of access to the legal
               system is due to the lack of knowledge about legal remedies. The high cost
               of legal representation may present difficulties to persons with lower
               incomes or relatively small claims. However, the plaintiffs bar is actively
               representing lead poisoning victims on a contingent basis; that is the
               injured person does not pay any legal fees but pays a percentage of any
               compensation awarded.
October 20, 1993                          Liability                                  Page 14

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       •      Limited assets of defendants. The potential problem of bankruptcies and
              limited funds for LBP awards from owners of distressed housing affects
              victim compensation. In addition, the uncertainty of insurance coverage for
              LBP damages is currently being litigated in federal and state courts. This
              uncertainty is important because for some owners, insurance coverage may
              be their only means to pay an award.

       Awards for damages for LBP injuries widely vary. Juries confronted with essentially the
same facts in LBP trials have reached outcomes ranging from nc award to million dollar awards.
Often the only apparent justification for the different outcome is that a different judge or jury
decided the claims.  Differences may also depend on the unique circumstances of the injured
party or the responsible party's financial and/or insurance situation. In addition, the size of
awards may depend on jury attitudes that are affected by the degree of publicity that LBP hazards
and associated damages have received in a particular community and the persuasiveness of the
attorneys litigating the case. These inequities raise questions about the effectiveness of the
liability system to compensate victims. Compensation claims may also take years  to "resolve and
may not fully compensate victims.
3.      Proposed Maryland Hazard Reduction and Liability Reform Recommendations

       The Maryland Lead Paint Poisoning Commission is currently developing LBP hazard
reduction and liability reform recommendations to be submitted to the Governor and Maryland
Legislature.38  The proposed standards apply only to privately-owned rental dwelling units
constructed prior to 1950 that are not shown by the o/vr,er '.  "ic "lead-free." An owner may *
demonstrate that a renfal dwelling unit or multi-family rental ^roperty is lead-free by submitting a
report by a certified ia.pector to the Maryland Department of the Environment or other
appropriate regulatory agency that the unit or property has been tested and is lead-free.39  The
proposed recommendations establish duties for both owners and tenants to minimize lead
poisoning.

       Owners must provide tenants with information concerning the nature of LBP hazards and
the medical effects of lead poisoning, including instructions for-cleaning the unit to minimize the
opportunity for exposure to lead dust.  The owner must request that the tenant notify the owner
in writing by certified mail if a child under the age of six or a pregnant women lives in, or spends
more than 24 hours per week, in the unit. The owner must also advise the tenant to inform the
owner of chipping or peeling paint. The owner must advise the tenant to have any child under
the age of six screened for lead poisoning and also to notify the owner if any child who lives or ,
spends more than 24 hours per week is determined to have an elevated blood level greater than
or equal to 15 micrograms per deciliter.  In addition, the owner must advise the tenant that a
failure to provide the requested information may affect the tenant's legal rights.

       An owner of a rental dwelling unit to which these standards apply must either perform
lead dust testing or hazard reduction treatments no later than the first change in occupancy.
After the first  12 months from the effective date of this proposal, owners who are provided notice
that a person at risk lives or spends more than 24 hours per week in a unit must conduct one of
October 20, 1993                          Liability                                  Page 15

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the alternative intervention treatments (i.e., lead dust testing or hazard reduction). An owner
that has not been given notice has no obligation to undertake hazard reduction treatments.

       No lawsuit may be brought against an owner  seeking damages arising from an alleged lead
poisoning unless the owner has first been given notice of a child with an EBL and an opportunity
to make a "qualified offer" to the claimant.  Notice may be provided by the State, a child's parent,
legal guardian, health care provider, or any other person.  The owner who receives notice is
entitled to review any results of prior blood level tests.

       If an owner decides to make a qualified offer, it must be made within 21 days of the
notice of the EBL. A qualified offer must disclose that the offer is made for the purpose of
providing effective intervention or treatment for a child who has been found to have an EBL
greater than or equal to 25 micrograms per deciliter  (the qualified  offer provisions do not cover
EBL less than 25 micrograms per deciliter). The offer must include all reasonable expenses and
costs relating to medical treatment to reduce the effects of lead poisoning and if necessary, costs
to relocate a child's household to lead-safe housing.  The parent or legal guardian has 30 days to
either accept or reject the offer.  Acceptance of a qualified offer discharges all potential liability
on the part of the offerer for injury or loss alleged to result from the child's exposure or ingestion
of LBP.  A parent or guardian may refuse a qualified offer.  However, if an owner has complied
with the lead dust testing and hazard  reduction requirements during the period of the alleged
exposure and has made a qualified offer, the owner is not liable  to the claimant if the qualified
offer is rejected.
4.     Options to Revise Liability Sy  -
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       Increase the Effectiveness of Courts in Deterring and Compensating LBP Damages
                                                        1.
                Federal or State Statutory Liability
                   Standards for Landlords -
                                                     Effectiveness
                                                     Cost
                                                     Equity
                                                     Political
                                                     Feasibility


                                                     Administrative
                                                     Ease
                        Depends on liability standard;
                        could moderately increase
                        compensation for injured
                        persons and encourage LBP
                        hazard reduction.
                        Potentially costly to landlords
                        to compensate victims or
                        reduce hazards.
                        May cause disinvestment in
                        economically distressed
                        housing.
                        Unlikely to be passed by
                        Congress; controversial in
                        state legislatures.
                        Largely self-implementing.
       Option 1:  Establish federal or state
statutory liability standards for landlords. One
option is to establish federal or state statutory
liability standards for landlords.  These standards
would create a duty or standard of care for
owners of residential properties that house
children to conduct hazard evaluations to
identify paint, plaster, or other accessible
materials that contain dangerous levels of lead
and implement lead hazard  reduction control
measures.  This duty would  apply wherever a
child  under the age of six resides.

       The proposal would establish a
negligence standard to encourage  the reduction
of LBP hazards.  If an owner knows or should
have  known that there is a LBP hazard and does
not promptly and properly implement  LBP
hazard reduction controls after he first learns or
should have learned of its presence, the owner
violates a statutory duty. The statute could
specify when an owner should know of LBP hazards and other details of the liability scheme.
The owner is liable for any  damages caused by violating'the prc^.,st   tandard.  This proposal
would help  protect young children who are most susceptible to k-ad poisoning.
                                              j
       The proposed standard of care offers a compromise to a strict liability standard that an
owner is responsible for any damages caused by LBP. If liability is imposed on all rental units
containing LBP, this strict liability could cause disinvestment in affordable rental housing.  Owners
of economically-distressed housing generally would not be able to afford the costs to reduce LBP
hazards, because of their limited financial resources and inability to raise rents sufficiently to pay
for the costs.

       Under the proposal, owners would be able to document  that they have conducted hazard
evaluations  and/or completed appropriate LBP hazard control activities.  A "lead-safe" certificate
would be issued by licensed lead inspectors or risk assessors after an inspection demonstrates that
no LBP hazard exists on the premises.  The lead-safe certificate would be valid for different
durations:

       •       If an initial evaluation found no LBP hazard, or if all LBP had been removed, the
               certificate would be permanent.

       •       If an initial evaluation identified LBP hazards and these hazards  were addressed
               through interim measures, the certificate would be valid for a specified period,
               depending on the intervention.
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Liability
                                                                                       Page 17

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A hazard evaluation would be required after a certiflcate expires to determine if conditions have
changed from when the encapsulation or another interim control measure was implemented.

       The federal or state standards could establish that a valid lead-safe certificate would
provide an owner with either: (1) a "safe harbor" that offers complete protection from liability for
injuries caused by L8P hazards; or (2) evidence of due care that creates a rebuttable presumption
that the owner complied with the duty of care.  The first approach eliminates liability
uncertainties for owners by providing complete protection from  lawsuits. Because lenders are
fearful of incurring lead-related  liability, owners who possess such lead certificates may discover
that it is easier to finance or refinance the purchase or renovation of their properties under a safe
harbor law. The ability to obtain liability insurance will also improve because liability insurers
have indicated a willingness to insure where a safe harbor exists.

       Under the second approach, the certificate of lead safety would provide a more limited
protection  to an owner.  An owner would have a rebuttable presumption that he complied with
the statutory duty and acted with due care concerning any lead hazard.  This rebuttable
presumption means that the owner would be assumed to have acted with due care. Unless an
opposing party presented specific evidence contrary to this position, the owner would be
protected from liability.  In effect, the certificate would shift the burden to an opposing party to
demonstrate that the owner breached a duty of care. Even this more limited protection would be
beneficial to an owner in reducing the uncertainties of litigation.

       The effectiveness of this proposed option would depend on the extent to which the
liability standard differs from  -Tent state standards. In addition, simply clarifying the liability
standards by legislation  may t,  ,c irage hazard reductions especially if a c.   harbor is developed.
This option is likely to have h tie impact on economically distressed  housh.^ because owners  lack
the financial resources to reduce hazards or tenants cannot aftord rent increases.  If liability is
limited to units with young children, this option may cause housing discrimination against families
with young children.

       This option would not be costly to the government to implement (e.g., to establish a
standard format for certificates). By clarifying the liability standards, judicial resources could  be
conserved  because injured parties would gain certainty concerning their legal remedies and more
cases might be settled out of court.  Owners would also gain from the ability to use the lead-safe
certificates as a defense to LBP claims. Nevertheless, to the extent  that this option effectively
increases compensation or hazard reduction, it  would be costly to landlords.

        Based on the asbestos legislative experience, plus general experience of product
liability/professional malpractice liability reform, federal establishment of national liability
standards is unlikely. Similarly,  establishing state liability standards  are also likely to be
controversial.

        Option 2:  Educate potential victims about their legal remedies. Another option is to
educate potential victims about  their legal remedies.  This public information program would
focus on education about legal rights and how to use the legal system to reduce LBP hazards.
October 20, 1993                           Liability                                   Page 18

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                                                       2.  Educate Potential Victims About Their
                                                                  Legal Remedies
                                                     Effectiveness
                                                     Cost
                                                     Equity
                                                     Political
                                                     Feasibility


                                                     Administrative
                                                     Ease
                         Potentially reduces LBP
                         hazards and increases
                         compensation.
                         Inexpensive  to create
                         education program;
                         potentially expensive to
                         rental property owners.
                         To the extent effective, it
                         could cause  disinvestment in
                         affordable housing.
                         Would be strongly opposed
                         by rental property owners
                         and insurers.
                         Moderate effort to develop
                         educational  campaign.
       This program would provide step-by-step
instructions to tenants on how to exercise their
rights to reduce LBP hazards.  Information could
include self help guides to suing rental property
owners, who fail to reduce LBP hazards in
accordance with regulatory standards.  The
education program would attempt to reduce the
need for attorney help in gaining the full
protection of LBP poisoning prevention and
control statutes. Materials would also include
information on alternative dispute resolution
mechanisms (see below) as a means to avoid
litigation.

       This education process could encourage
LBP hazard reduction and recovery of
compensation for injured parties.  As potential
victims become more educated about the hazards
of LBP, the number of lawsuits could  increase
and this could raise equity concerns because of
the potentially greater impact on distressed
housing of the cost of litigation. The  education program would be inexpensive to create.
Potentially this program would be controversial and would generate strong opposition from rental
property owners and insurers.

       Option 3:  Encourage the use  of alternative dispute resolution mc;.hai  jms. Alternative
dispute resolution (ADR) mechanisms provide potentially less expensive an" time-consuming
options to  litigation. By encouraging non-judicial resolution of claims, ADR could secondarily
potentially increase compensation by reducing litigation and other legal  defense costs.

       Specific  methods of ADR are  discussed below:40

       Mediation.  In mediation, a neutral third-party facilitates discussions.  The mediator
generally will not take a position on the case, but will help  the parties clarify their positions. A
neutral third-party mediator should have demonstrated experience, independence, and subject
matter expertise. Mediation may be conducted at the same time as litigation. Parties may
withdraw from mediation prior to settlement if the mediation has been long and unsuccessful or
chances for settlement are remote.  Conversely, parties withdraw from litigation if mediation is
successful.

       Arbitration.  An arbitrator is a neutral third-party who decides issues through party-
determined procedures.  The injured party and the potentially responsible party determine prior
to arbitration whether the arbitrator's  decision is only advisory or the final judgment. Arbitration
is particularly appropriate in cases that do not justify expenditures for a formal administrative
proceeding or court trial. Unlike a mediator who only  facilitates discussion amongst the panics,
an arbitrator decides the issues.
October 20, 1993
Liability
                                                                                       Page 19

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                                                      3. Encourage the Use of Alternative Dispute
                                                              Resolution Mechanisms

                                                     Effectiveness   Does little to encourage
                                                                  hazard reduction; may
                                                                  increase compensation.
                                                                  Provides a less expensive and
                                                                  time-consuming alternative to
                                                                  litigation.
                                                                  Ineffective where owners who
                                                                  lack resources to pay claims.
                                                                  Has been successfully used in
                                                                  asbestos litigation.
                                                                  Requires cooperation of
                                                                  opposing pames.
          Cost
          Equity


          Political
          Feasibility

          Administrative
          Ease
       Fact-finding.  In fact-finding, a third-
party expert independently investigates particular
issues specified by the parties (e.g., extent of
lead poisoning, other potential sources of lead
poisoning than LBP).  The fact-finder gathers
information and produces a report of findings
and recommendations, which may be used in
settlement negotiations.  If the parties have
agreed to make the fact-finder's report binding,
the report may be admissible as fact in a
subsequent formal proceeding. The fact-finder's
report is only advisory if the parties have not
agreed to make it binding.

       Mini-trials.  A mini-trial is a forum in
which the parties present their cases to the
people who have authority to settle (e.g., the
injured party or guardian, the owner, a
management person in a corporation that has the power to make a decision on the claim). A
neutral third-party may also be present. The parties determine the procedures of the mini-trial,
and they usually provide an opportunity for each of the principals to directly examine the
opposing side. The parties negotiate after the mini-trial. If a neutral third-party is present, he or
she acts as a mediator. Mini-trials are not binding but may narrow the issues and give the
principals a different  view of their cases and thereby facilitate settlement.  The evidence
presented at the m:-   nal is not admissible in formal litigation unless the parties o  igree.

       Several attempts to use ADR occurred in asbestos litigation.  Thirty-six defendant; created
the Asbestos Claims Facility in 1985 to jointly process and defend asbestos claims.  The
defendants created this consensual effort, outside the  litigation framework, after extensive
negotiations with clients and insurance carriers. Although disbanded in 1988, it became a model
for other joint defense efforts, including the Center for Claims Resolution, where 18 companies
continue to cooperate today.  A formal ADR mechanism along these lines could be practicable
for large, multi-family buildings.  Settlement masters have been used successfully in New York,
Ohio, and Maryland and on an ongoing basis in New Jersey and Delaware to manage asbestos
claims.  Settlement masters can often establish settlement values before negotiations based on
their experience with the type of claims.  The settlement master may meet parties individually to
help  negotiate settlement agreements.

       ADR promotes cost savings by reducing litigation costs and conserving judicial resources.
ADR offers opportunities for quicker settlement of LBP claims and decreases the time  period an
injured party  awaits compensation. By encouraging non-judicial resolution of'claims,
compensation may be more equitable and merit-based because the uncertainties of litigation have
been reduced. This option will not help owners who lack the financial resources to pay claims.
ADR may also have limited impact on reducing LBP hazards. Potentially, settlements could
include costs  to abate an ongoing LBP problem.
October 20,  1993
Liability
                                                                                      Page 20

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       Option 4:  Streamline the class action
requirements or otherwise encourage case
consolidations.  Another option is to streamline
the class action requirements or otherwise
encourage case consolidations.  The number of
personal injury cases from lead poisoning
continues to rise.  As numerous parties file
claims, difficulty may arise in the courts' ability
to accommodate the large caseloads and still
balance fairness and efficiency.
               4. Streamline Class Action or Case
                  Consolidation Requirements

          Effectiveness    Does not reduce hazards of
                        LBP; may increase
                        compensation.

          Cost          Reduces litigation  costs and
                        may hasten awards.
          Equity         Ineffective where owners lack
                        the resources to pay claims.
                        Established mechanisms have
                        been used successfully.
                                                     Political
                                                     Feasibility
                                                     Administrative
                                                     Ease
                        Requires effective
                        management by courts.
       Two of the most important judicial
innovations are class actions and mass
consolidations.41  In a class action, a large
group of persons injured by LBP can bring one
lawsuit against potentially responsible parties.
The benefits generally attributed to class actions
as a procedural technique to replace individual claim adjudication include:

       •      Conserving judicial resources by allowing many claims to be heard
              simultaneously;

       •      Permitting more expeditious compensation to injured parties;

       •      Diminishing litigation costs; and

       •      Facilitating communication,  management, and settlement of claims.

       Another judicial innovation is the mass consolidation.  Trial judges may decide to combine
all their LBP cases into one mass case.  Factors that facilitate consolidation for LBP claims may
include similar apartments, similar exposure (LBP dust and chips), and similar injuries (lead
poisoning).  When properly structured, mass consolidations can result not only in the settlement
of a substantial number of consolidated claims, but also in fair trials for the  non-settling
defendants. Mass consolidations may also attain the benefits discussed for class actions above.

       The use of class actions and mass consolidations, however, may also:

       •      Increase the likelihood of compensating less meritorious claimants because
              individual claims will not be closely scrutinized.

       •      Decrease settlements, because the large number of cases to be
              simultaneously settled, may threaten a responsible party with bankruptcy.
              (The responsible party may  have little incentive to settle if it will drive him
              into bankruptcy. At least in a trial the responsible party may win and not
              go bankrupt.)
October 20,  1993
Liability
                                                                                       Page 21

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       •      Raise concerns about the fairness of the trial to individual defendants who
              may become jointly and severally liable for a large award.

       Judges have effectively administered both class actions and case consolidations in personal
injury cases concerning asbestos and the Dalkon shield.  Class actions and case consolidations
require careful planning and case management to be effective.  The benefits have included injured
parties being compensated quicker, lower litigation costs, and a conservation of judicial resources.
This option, however, may only work well in LBP situations where claimants are within the same
or. similar buildings.

       The exhibit on the following page summarizes the evaluation of the four liability options.
October 20, 1993                           Liability                                   Page 22

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COMPARISON OF LIABILITY
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
Option 1:
Federal or State Statutory
Liability Standards for
Landlords
Depends on liability
standards; could
moderately increase
compensation for injured
persons and encourage
LBP hazard reduction
Potentially costly to
landlords to compensate
victims or reduce hazards
May cause disinvestment
in economically distressed
housing
Unlikely to be passed by
Congress; controversial in
state legislatures
Largely self-implementing
Option 2:
Educate Potential Victims
about Their Legal Rights
Potentially reduces LBP
hazards 'and increases
compensation
Inexpensive to create
education program;
potentially expensive to
rental property owners
To the exter.i effective, it
could cause disinvestment
in affordable housing
Would be strongly opposed
by rental property owners
and insurers
Moderate effort to develop
educational campaign
OPTIONS
Option 3:
Establish Alternative Dispute
Resolution Mechanisms
Does little to encourage
hazard reduction; may
increase compensation
Provides a less expensive and
time-consuming alternative
to litigation
Ineffective where owners lack
resources to pay claims
Has been successfully used in
asbestos litigation
Requires cooperation of
opposing parties

Option 4:
Streamline Class Action
or Case Consolidation
Requirements
Does not reduce hazards
of LBP; may increase
compensation
Reduces litigation costs
and may hasten awards
Ineffective where owners
lack resources to pay
claims
Established mechanisms
have been used
successfully
Requires effective
management by courts
October 20, 1993
Liability
Page 23

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Endnotes

1. Mass. Ann. Laws chapter 111, § 199.

2. Davis v. Royal-Globe Insurance Co.. 223, So.2d 912 (La. Ct. App. 1969), rev'd on other grounds,
242 So.2d 839, cert, denied, 403 U.S. 911 (1971).

3. Richland Joint Venture 4 v. Brunson, No. 1384 (Md. Ct. of Sp. App. June 2, 1993).

4. Bencosme v. Kokoras, 507 N.E.2d. 748 (Mass.  1987).

5. Hardy v. Griffin, 569 A.2d 49 (Conn. Super. 1989). In another Connecticut decision, however,
a court held that a landlord could not be held strictly liable for injuries from LBP.  The tenant
must demonstrate that the landlord failed to correct the defective condition within a reasonable
time after receiving notice of the LBP condition.

6. Garcia v. Jiminez, 539 N.E.2d 1356 (111. App. 3d 1989).

7. Conn. Gen. Stat. §§ 47a-7 and 47a-8.

8. LeBlanc v.  Sherwin-Williams Co., No. 86-35232 (Mass. Super. Ct, Worcester County filed Aug.
15,  1986).

9. Ankiewicz v. Kinder, 563 N.E.2d 684 (Mass. 1990). In 1988, the Massachusetts Supreme
J' vcial Court abolished the common law doctrine of parental immunity that protected parents
it m these types ot lawsuits or counterclaims. Stambouiis v. Stamboulis, 519 N.E.2d 1299 (Mass.
10. Ga. Code Ann. § 51-2-1 (b) and Mass Stat. Ann. ch. 231, § 85D.

11. Ferriolo v. Del Vecchio, No. PAS L-3259-92 (N.J. Super. Ct., Passaic Co.).

12. Md. Ann. Code § 10-910.

13. Richwind Joint Venture 4 v. Brunson, No. 1384 (Md. Ct. of Sp. App. June 2, 1993).

14. Rodriguez v. Jan Jan Realty Corp.

15. Maria Pino v. Cornelius Thibodeau, No 0103593 (Conn. Super. Ct., Waterbury, May 3, 1993).

16. Hardy v. Griffin, 569 A.2d 49 (Conn. Super. 1989).

17. Madden, M. Stuart, Toxic Torts Deskbook (1992), page 174.

18. Mass. Ann. Laws ch. Ill, § 199 and Me. Rev. Stat. Ann. tit. 22, §1324.

19. See, J. Anderson, A Study to Determine the Availability of Lead Liability Insurance for the
Private Owners of Low to Moderate Income Rental Housing, May 1993.




October 20, 1993                          Liability                                 Page 24

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20. Gates v. State of New York, slip op. March 3, 1993.  The policy contained the so-called
"absolute" pollution exclusion that came into use in the mid-1980s. The exclusion states:  this
insurance does not apply to "[b]odily injury" or "property damage" arising out of the actual, alleged
or threatened discharge, dispersal, release or escape of pollutants ... [a]t or from premises you
own, rent, or occupy ... Pollutants  means any solid, liquid, gaseous or thermal irritant or
contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste
includes materials to be recycled, reconditioned or reclaimed."
                                                                                        ~N
21. Atlantic Mutual  Insurance Co. v. McFadden,  595 N.E.2d 762 (Mass. 1992).

22. Under common law, some states consider a mortgage as not just a security interest but an
actual conveyance of ownership (with foreclosure being required only to cut off the borrower's
right of redemption).

23. Mass. Code tit. 105, §460.

24. 42 U.S.C. §§ 9601-9675.

25. U.S. v. Mirabile,  15 Env. L. Rptr. 20994 (E.D. Pa.  1985).

26. Bruce Tackling v. Mary Shinerman, No. 521012 (Conn. Super. Ct, Feb. 23, 1993).

27. 29 CFR §  1910.1025 and potentially the new worker protection provisions for lead in
construction standards promulgated on May 4, 1993, found at 29 CFR 1926.

28. 29 U.S.C. § 657(b)(5).

29. E.g., Ferriolo v. Del Vecchio, No. PAS L-3259-92 (N.J. Super. Ct., Passaic Co >.  The parents
filed suit against the landlord and the abatement contractor alleging their son's lead poisoning was
caused by shoddy abatement-of lead in the family's home.

30. N.H. Rev. Stat. Ann. §§ 130A:1-130A:9.

31. Santiago v. Sherwin-Williams Co., 794 F. Supp. 29  (D. Mass. 1992); City of New York v. Lead
Industries Association, No. 14365/89 (Sup. Ct., N.Y. County  1991); City of Philadelphia v. Lead
Industries Association, 1992 WL 98482.

32. Sindell v. Abbott Laboratories, 607 P.2d 924  (Cal.), cert, denied 449 U.S. 912 (1984).

33. Santiago v. Sherwin-Williams Co., 782 F. Supp. 186 (D. Mass 1992).

34. R.I. Gen. Laws s. 23-24-1 to 23-24.6-26.

35. Stipp, D., "Dogma in Doubt: Some Question  Extent of Lead's Risk to Kids, Need to Remove
Paint," Wall Street Journal, Sept. 16, 1993, A-l.

36. Mass. H.B. 5302.
October 20, 1993                          Liability                                   Page 25

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37. La. Rev. Stat. Ann. § 40:1299.26-29.

38. The discussion describes the October 4, 1993 draft Commission recommendations.

39. MDE will establish standards and procedures for sampling and testing for LBP as well as
certifying inspectors.

40. EPA, Guidance on Alternative Dispute Resolution Techniques in Enforcement Actions
(1987)

41. Fed.  R. Civ. Proc. 23.
October 20, 1993                          Liability                                  Page 26

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                  ROLE OF LIABILITY INSURANCE IN ENCOURAGING
                     REDUCTION OF LEAD-BASED PAINT HAZARDS
1.
       Introduction
                                                               Key Issues
       The Residential Lead-Based Paint
Hazard Reduction Act of 1992 (commonly
referred to as "Title X") focusses on
preventing childhood lead poisoning by
reducing lead-based paint (LBP) hazards.
Title X encompasses a broad range of
strategies that target various hazard and
housing situations. The purpose of this
paper is to examine the potential of one
private sector institution, the liability
insurance industry, to  encourage the
reduction of current and  potential LBP
hazards in private housing stock, especially
rental housing stock for low and low-middle
income families with small children.

       This paper examines third-party
liability coverage for two different grouf of
policyholders: owners of rental property .md
abatement contractors. Owners of rental
property generally hold liability coverage
policies to protect themselves in the event
that a tenant  or other individual is injured on
their property.  LBP abatement contractors
may also purchase liability coverage policies to protect themselves in the event that third parties
are injured either immediately as a result of their work (e.g., a non-employee on site is injured by
a piece of machinery), or at some later point in time (e.g., a person residing on the property is
injured because abatement  procedures exacerbate, rather than alleviate, the LBP hazard).

       This paper focuses on third-party liability insurance (i.e., coverage for bodily injury to or
the damaged  property of individuals other than the policyholder). First-party coverage — most
typically a homeowner's policy ~ may be of limited importance in encouraging the reduction of
LBP hazards  because  the liability portion of such policies covers  only injuries to persons who do-
not reside on the property.   (Children have, however, had some limited success in suing their  .
parents for damages from LBP.) With certain exceptions that wi'" be discussed below, risks to
non-residents are sufficiently low that such insurance may not provide incentives to abate LBP.

       The remainder of this paper is structured as  follows:

       Section 2:     Provides background on insurance, including a discussion of the
                     theory behind insurance coverage and the major groups affecting
                                                • What is insurance and how can it
                                                  encourage reductions in LBP hazards?

                                                • What factors affect the type of insurance
                                                  available and its cost?

                                                • Is insurance covering LBP currently
                                                  available to rental property owners and
                                                  abatement contractors?

                                                • What factors will affect the availability of
                                                  such coverage in the future?

                                                • Would increasing the demand for insurance
                                                  coverage promote reductions in LBP     -';
                                                  hazards?

                                                • Would increfsmg the supply of in.  ance
                                                  coverage promote reductions in LBP
                                                  hazards?
October 20, 1993
                                     Liability Insurance
Page I

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                     insurance coverage and how they might use liability insurance to
                     encourage LBP abatement.

       Section 3:     Describes current and evolving approaches to providing insurance
                     coverage for LBP hazards for both rental property owners and
                     abatement contractors, and speculates about the future of such
                     coverage and its role in promoting reduction of LBP hazards.

       Section 4:     Presents policy options for enhancing the ability of liability
                     insurance to encourage reduction of LBP hazards.

Each of these sections includes separate discussions of issues related to coverage for rental
property owners and coverage for abatement contractors.

       As discussed above, this paper focuses primarily on  how insurance coverage might be used
to reduce current, as well as potential, LBP hazards. While liability insurance serves a number of
functions, including ensuring compensation for victims and  reducing the potential for bankruptcy
of the policyholder, these other functions  may play a smaller role  in the potential of liability
insurance to promote reduction of LBP hazards.  Consequently, these other roles of liability
insurance will be addressed in this paper primarily in the context of their connection with the
reduction of LBP hazards. Similarly, the availability of insurance will be addressed in the context
of the role of availability (or lack of availability) of liability  insurance on reducing LBP hazards.
2.     Background

       This section begins with a discussion of the theory behind insurance, including a summary
of factors that make a hazard an "insurable" risk.  It then describes insurance companies and
insurance regulators and their roles in enhancing the potential for liability insurance coverage to
encourage reductions in LBP hazards.

       What is Liability Insurance?

       Liability insurance is essentially a risk transfer mechanism.  By purchasing insurance, an
individual or business transfers at least part of the financial consequences of some type of risk (in
this case, damages resulting from LBP) to the insurer.  The insurer takes responsibility for those
financial consequences, and by virtue of performing a similar service for many other individuals or
businesses, spreads the risk among a large number of policyholders. The insurance policy is the
contract  that describes the terms and conditions under which this risk transfer takes place.  The
insurer is able to assume a financial risk that a policyholder would find unacceptable because  the
insurer is trading the smaller possibility of an individual, large payment (in the event that a
policyholder makes a claim) for the greater certainty of a regular stream of payments (i.e.,
premiums) from a large number of policyholders on which the insurer can also earn returns
through  investment.

       The ability to insure a particular risk is, therefore, linked to the following factors  that
enable the insurer to reasonably predict the stream of payments necessary to cover (or more than
cover) the smaller numbers of expected losses. These factors are:
October 20, 1993                      Liability Insurance                               Page 2

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       •      Large numbers of potential insureds:  The number of individuals or
              businesses that need insurance coverage must be large enough to allow the
              insurer to reasonably predict the probability of an event that will result in  -
              financial loss.

       •      Lack of adverse selection:  If loss probabilities vary across individual
              policyholders then insurers may price the risk based on the average risk for
              a group. However, if members of the group possess more information than
              the insurer does about their own risk level, then average pricing for the
              group may lead to adverse selection in which only the riskiest individuals in
              the group purchase insurance. Generally, such a risk would be insurable
              only if the there is some way to even out asymmetric information between
              the insurer and the insured.

       •      Fortuitous loss: The loss for which an insurer is providing liability
              coverage must be fortuitous; in other words, there may be a potential (even
              a strong potential) for a loss to occur, but the loss should not be certain to
              occur (e.g., insurers will not write fire coverage for a burning building).
              Conditions that suggest certainty of loss are called "pre-existing conditions"
              and are generally not covered  by liability insurance.  However, if being
              insured against a certain risk causes the policyholder to becomes more
              careless because it will not have to pay for the losses, then the risk could
              be uninsurable.  This moral hazard can be minimized, although not
              necessarily eliminated by risk shar'.it (e.g., deductibles, co-payments),
              periodic checking by the insurer (e *0., property inspections), and premium
              adjustment to offset the behavior change.

       •      Clear causal links between the policyholder and the loss:  It must be
              reasonably possible to  link damages to an individual  policyholder's actions
              and therefore to establish responsibility for the loss.  Losses with multiple
              causes or that cannot be clearly linked to one party add to unpredictability.

       •      Magnitude and timing of the financial loss must be predictable:  The
              insurer must be able to accurately predict not only the probability of an
              event that will result in loss, but also the size of that loss in financial terms
              and the point in time when the loss is likely to occur.  Thus, losses that are
              not independent (e.g., multiple losses could occur from a single
              catastrophic event) are more difficult to insurer; insurers seek diversified
              risks to make their losses more predictable.  Some non-diversified risks,
              however, can be addressed through reinsurance, where the risk is spread
              among several insurers.

These factors ensure that the amount an insurer can expect to pay for claims on policies is
relatively predictable. As a result of that predictability, insurers can set  rates for coverage that,
along with returns on investing premiums, will result in adequate streams of payments to cover
insured  losses.  Insurers will consider  risks that do not have the attributes outlined above as
unpredictable and inherently "uninsurable," and therefore will not want to provide coverage for
such risks.
October 20, 1993                      Liability Insurance                               Page 3

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       LBP risks currently present fundamental problems for insurers.  These problems stem
directly from characteristics of LBP hazards that make losses associated with them less predictable
and therefore less attractive to insurers. Some of these characteristics are:

       •      Lack of a clear causal link between a policyholder and LBP damages:
              While lead poisoning has been linked to the presence of LBP in residential
              property, lead poisoning may be the result of a variety of causes, including
              lead in drinking water supplies, lead in plumbing fixtures, and dust
              contaminated by lead from automobile exhaust and other outdoor sources
              that accumulates in soils.  It is often difficult to identify a responsible party
              for these other causes.  If there is LBP in a rental unit, the owner may be
              the most easily identifiable responsible party.  Thus, an owner could be
              held responsible for lead poisoning that resulted from other sources.  In
              addition, if a poisoned child has lived in several buildings containing LBP, a
              current owner may be held responsible for lead poisoning that occurred in
              a previous residence. The potential for a policyholder to be held
              responsible  for damages in addition to those for which it has direct
              responsibility makes LBP coverage unattractive to insurers.

       •      Magnitude of financial loss is currently unpredictable: Litigation
              involving LBP damages has resulted in a wide  range of payments to
              plaintiffs as  well as payment levels that may not be directly linked to the
              extent of damages in  the case. These differences in amounts that plaintiffs
              can recover may be a funct; - of differences in liability law in various
              jurisdictions. Liability law i    LBP damages is not ^settled, adding to
              uncertainty  with regard to fucure damages awards. 'In addition, the size of
              awards may depend on jury attitudes that are affected by the degree of
              publicity that LBP hazards and associated damages have received in a
              particular community.

       •      LBP damages may not be considered fortuitous by insurers: In order for
              damages to  result from  LBP in a residence, several uncertain events must
              occur.  First, the LBP must be in a form that can cause exposure to the
              hazard (e.g., dust or chips that can be ingested). Second, a child must be
              exposed to LBP and develop lead poisoning.  The widespread incidence of
              lead poisoning among children living in buildings containing LBP, however,
              may suggest that the mere presence of LBP in a residential property will
              ultimately result in claims.  LBP hazards may be considered easily
              identifiable  "pre-existing conditions" by insurers and therefore uninsurable.

       •      Current lack of abatement standards: The current absence of abatement
              standards means that even where LBP has been "abated" or addressed
              through interim controls, insurers still may not be able to adequately
              predict potential losses  related to LBP that remains in a residence.
              Available evidence suggests that at least in some cases, abatement activities
              may increase risks of lead paint poisoning.  Thus at present, abatement of
              LBP hazards may make insurers less  inclined to provide coverage for those
              hazards.
October 20, 1993                      Liability Insurance                               Page 4

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       Insurance and Insurance Regulators Roles

       Two groups - insurers and insurance regulators ~ affect the type of insurance coverage
available, conditions under which it is offered, terms of coverage, and levels of policy premiums
charged to policyholders. This section first describes each group and then discusses the specific
roles that each group  might play in encouraging LBP hazard reduction.

       Insurers

       Insurers sell several types of policies that may cover damages resulting from LBP hazards,
for both owners of rental property and abatement contractors.  As noted above, this paper
focuses primarily on policies providing third-party liability coverage. First-party coverage is not, in
most cases, relevant to LBP hazards, because such coverage is generally limited to paying for the
damaged property of the policyholder.  Health insurance, another type of first-party coverage,
may pay for costs of medical care  needed by a poisoned child.  Health insurance policyholders,
however, are the damaged parties themselves.  Thus, this type of coverage is not likely to affect
the behavior of rental property owners or contractors in reducing LBP hazards and is therefore
not discussed in this paper. The most common types of policies that may cover LBP hazards
coverage include:

       •      Commercial General Liability (CGL):  CGL policies provide general
              liability coverage for businesses of all types.  These policies typically cover
              injuries to non-employees, such as those caused by machinery or slips and   -
              falls, and damages  to neighboring property :' the event of an accident,
              such as a fire, on the policyholder's property  Both cental property owners
              and abatement contractors could carry such policies. CGL policies typically
              include a "pollution exclusion" that may or may not prevent the policy from
              covering LBP hazards.  Current court interpretations of the exclusion with
              regard to lead paint have varied.  This issue is discussed in greater detail in
              section 3, below.

       •      Owners, Landlords, and Tenants (OLT). Similar to CGL coverage, OLT
              coverage is general liability coverage that is specifically tailored to the
              liability needs of landlords. This type of policy also pays for  the costs of
              bodily  injury and property damage associated with accidents that occur on a
              landlord's property.

       •      Homeowners' Policies.  Homeowners' policies provide first-party coverage
              for the policyholder's property in  the event that damage to or loss of the
              property occurs as  a result of such events as fire or theft. These policies
              typically include a third-party liability portion that indemnifies the
              homeowner in the  event that a person visiting the property is injured.
              Generally speaking, homeowners policies will not provide liability coverage
              for LBP hazards because the liability portion of the  policy covers only
              individuals who do not reside on the property that is insured. In some very
              limited situations, however, a homeowner's policy might cover damages
              from LBP hazards.  For example, if a small  child is cared for during the day
              by her grandparents and is poisoned by LBP in the grandparents' home,
October 20, 1993                      Liability Insurance                               Page 5

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              the grandparents' homeowner's policy might cover the damages.  Similarly,
              children exposed to LBP at a home day care provider's residence may be
              covered by the day care provider's homeowner's policy.  (Policies may
              exclude such damages as "business exposures.")  Also, homeowner's policies
              may cover LBP damages in cases where a non-commercial property owner
              (i.e., small-scale owner of one to two properties) has added a rider to his
              homeowner's policy to cover liabilities associated with property rental.

       Another type of c Average, Environmental Impairment Liability (EIL) coverage, which
might be expected to play a role in covering LBP damages, is currently of no significance.  EIL
insurance is highly specialized coverage purchased by industries that may release toxic substances
into the environment and by other lower risk businesses that are concerned about liability for
releases of toxic substances  (e.g., hardware stores that sell paint and paint stripping chemicals).
Litigation involving insurance coverage for LBP claims has not yet resolved whether LBP is
considered pollution (see section 3, below). Insurers that currently write  EIL coverage are
apparently uninterested at present in covering LBP hazards. The EIL insurers'  lack of interest
may be due to current  uncertainty as to whether LBP hazards are considered pollution.

       The insurance companies most likely to be writing policies that could cover  for LBP
hazards are the "standard market" insurers with which most people are familiar.  These companies
include Allstate, Aetna Life and Casualty, Liberty Mutual, the Travelers, and State  Farm.

       Insurance Regulators

       Tne insurance industry is   g. lated exclusively by state governments through state
insurance departments r>r commit ions.  The federal government plays no direct role in the
regulating the insurance  .ndustry. (Certain aspects of the insurance business, such as advertising,
investments, and stock issuance, like other businesses, would be overseen  by the applicable federal
agency.)  While specific regulations vary by state, as a general rule, states  apply  different degrees
of regulation to different types of insurers. The following describes four major types of insurers
and the degree to which they are generally regulated:

       (1)    Admitted Insurers:  "Admitted" insurers are primary insurers licensed in
              the states in  which they operate. These are the most highly regulated
              insurers.  The terms of policies issued by admitted insurers, the rates they
              charge,  and the capital reserves that they must hold are subject to approval
              by state regulators. Admitted insurers also have access to  state insolvency
              funds in the  event that they incur unexpectedly large claims or large
              numbers of claims.   Admitted insurers are the primary source of CGL,
              OLT, and homeowners insurance that might cover LBP  hazards.  The
              major insurance companies listed above are all in  this group.  Most of
              these companies are licensed in nearly all states in the country.

       (2)    Excess  or Surplus Lines Insurers: Excess or surplus lines insurers write
              coverage  that admitted insurers do not offer, either because it is  too
              specialized, too risky, or demand for the coverage is too low. Although
              requirements vary by state, these insurers  need not obtain  rate and policy
              approval from state regulators. In some states, these insurers are not
October 20, 1993                      Liability Insurance                                Page 6

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              directly regulated at all; instead, the state regulates the excess or surplus
              lines broker who obtains the coverage for an individual policyholder.
              Excess or surplus lines insurers currently do not offer LBP coverage.l  If
              admitted insurers do not meet a demand for coverage of LBP hazards,
              excess or surplus lines insurers might enter this market.

       (3)    Offshore or "alien" insurers: These insurers are located outside of the
              United States and are not directly regulated by any state insurance
              commission or department.  Thus, these insurers are often subject to less
              oversight than other insurers.  If property owners cannot obtain coverage
              from admitted insurers, they may turn to off-shore providers.

       (4)    Captive Insurers and Risk Retention Groups:  Large commercial rental
              property owners may establish so-called "captive" insurance companies.
              Captives are insurance subsidiaries that provide coverage for the parent
              company. A risk retention group (RRG) is a special type of captive
              formed by a group of policyholders with similar risks.  The policyholders
              contribute capital  and pay premiums to the RRG,  and the RRG in  turn
              insures the risks of each member of the group. Captives are frequently
              located "off-shore" to take advantage of favorable tax and regulatory
              climates.  Even when located in the United States, these types of insurance
              companies are regulated less strictly than admitted insurers.

       Insurance regulators license admitted insurers and approve *ueir policy language and rate
structures. Regulators also develop lists of "approved" excess and surplus lines insurers (i.e.,
excess or surplus lines-insurers that rr ^et the set of minimum standards for approval). (These -
conditions are always significantly les: stringent than those for licensed insurers.) In making
decisions,  insurance regulators must balance considerations of coverage availability with coverage
scope. If  too strictly regulated (e.g., if policy terms or rates are too tightly controlled), insurers
may choose not to provide coverage in a given state or to a particular group. State regulatory
oversight therefore ensures that insurers have adequate resources to pay claims, that insurance
policies are available that provide a scope of coverage sufficient to meet the needs of the
insurance  consumer, and that rates established are adequate to cover a given risk while at the
same  time are fair to purchasers.

       Role of Insurance in LBP Hazard Reduction

       As discussed above, the primary function of insurance is to transfer financial risk from a
policy holder to the insurer.  Insurance does not, in and of itself, reduce the risks that  might result
in a financial loss.  While the primary function of insurance is not to change the  risk behavior of
policyholders, insurers may set conditions for providing coverage or for providing coverage at
lower cost that either create incentives to minimize risk or make losses more predictable.  Thus,
insurance  can encourage certain types of behavior or actions by the policyholders or would-be
policyholders. For example, many people drive more carefully to  avoid traffic violations in order
to keep their automobile insurance rates low, and many people install smoke detectors in their
homes to  reduce their homeowners' policy premiums.
October 20, 1993                     Liability Insurance                               Page 7

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       Rental Property Owners.  Insurance may encourage owners of rental housing to reduce
LBP hazards if insurers, as conditions for supplying coverage, mandate actions that reduce LBP
hazards.  For example, an insurer could require insured owners to conform to minimum standards
of maintenance or to abate existing LBP. Insurers may also charge different premiums to owners
who take steps to reduce LBP hazards in their rental properties. To the extent, therefore, that
owners seek or must have liability coverage and insurers are willing to provide such coverage for'
LBP hazards, insurers can set the conditions for supplying that coverage, and  in setting those
conditions, can encourage LBP hazard reduction.

       In order to act as an effective incentive to reduce LBP hazards, insurance must be
demanded by owners. Demand may be a function of financial calculations by  owners that
determine insurance to be the most cost-effective means for controlling Gnancial risk, or demand
may be induced through government or other institutional (e.g., lender)  requirements for
insurance coverage. If ah owner has little independent incentive to purchase  insurance (e.g.,
coverage'itself or meeting conditions for coverage is too expensive or the owner has few assets to
protect through insurance coverage) then insurance becomes a  less feasible means for inducing
owners to reduce LBP hazards on their properties.

       Abatement Contractors.  Insurance for abatement contractors may promote LBP hazard
reduction for somewhat different reasons.  Abatement contractors  may face substantial financial
risks due to the hazards involved in abating LBP.  For example, a child's elevated blood lead level
(EBL) may be attributed to  improper abatement activities.  Faced with potential lawsuits resulting
from abatement-related exposure to LBP, an abatement contractor may  require insurance in order
to remain in business.     'he  same time, insurers  may encourage abatement contractors to
engage in safer abatemt  . practices by setting conditions for coverage that require contractors to
meet performance standards for abatement, meet • lucation and training requirements, or obtain
certification.  Insurers may also ensure that contra «.ors comply  with any forthcoming EPA LBP
licensing or certification rules by requiring compliance with government  regulation as a condition
of coverage.  As with rental property owners, however, insurance can encourage safer abatement
practices only if abatement contractors must have  insurance coverage as a condition of doing
business or desire such coverage as a means of protecting themselves against losses. As with
owners, if an abatement contractor has few assets  to protect, it  may decide against purchasing
insurance altogether and therefore the conditions  for coverage would not influence the
contractor's behavior.

       Role of Insurance Regulators in LBP Hazard Reduction

       In their capacity to affect the terms of insurance policies, insurance regulators also have
the potential to indirectly encourage the abatement of LBP hazards.  Insurance regulators may,
for example, disallow general liability policy language that excludes coverage of damages resulting
from LBP hazards if they determine that excludii j these damages too narrowly restricts the scope
of coverage.  Such a prohibition has been proposed in New Jersey, although the State's Insurance
Commission has not yet acted upon the proposal.  Given the problems for insurers posed by LBP
hazards, if insurers could not exclude LBP damages from general liability policies, but wished to
continue writing such policies, they would almost certainly develop conditions for coverage that
would encourage identification, evaluation, and reduction of hazards  posed by the presence  of
LBP in the case of owners, or that would ensure safe abatement practices in the case of
abatement contractors.
October 20, 1993                     Liability Insurance                               Page 8

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       Insurers might, however, choose not to write insurance policies for rental housing
containing lead paint if they are required to cover LBP hazards and they cannot set conditions
that will enable them to make a profit.  Such a move could severely limit the availability o£
insurance coverage generally for these properties. Regulators may therefore hesitate to disallow
total exclusion of LBP hazards out of concern that insurers will stop writing coverage for owners
of any property that contains LBP or property of a certain type (e.g., older,  less well maintained •
property, low income rental units, or units rented to families with small children). This concern
has, in fact, delayed New Jersey's  action on the proposal mentioned above.  Insurers have
mounted significant opposition to the New Jersey proposal.  As a i alternative, regulators could
place other, less stringent limits on insurers.  For example, regulators could allow insurers to place
sub-limits on damages resulting from LBP (i.e., allow lower levels of coverage for LBP hazards
than for other insured hazards damages).
3.     Current and Evolving Approaches to Insuring LBP Hazards

       This section first describes the current availability of liability coverage for rental property
owners and discernable trends in insurance availability.  This section also discusses particular
groups of owners that would be most affected by the lack of insurance for LBP. This section
then reviews the availability of coverage for abatement contractors, using the experience of
asbestos abatement contractors as an analogy.

       LBP Coverage for Property Owners                                                '  -

       This section discusses first, the current approach of the insurance ind .cry to covering
LBP ha-/ irds, especially for owners of rental property, and then focusses on trends in the
provision of such coverage.

     '  Current Approach

       Liability insurance for property owners that does not specifically exclude LBP damages
generally continues to be available in many parts of the country, both for large  and small property
owners, including owners of  low-income rental housing. The Insurance Services Office (ISO), an
industry-supported bureau that develops standard policy forms  and endorsements  and obtains
approval for the forms throughout the country, has not developed new general  liability policy or
endorsement language that excludes LBP damages  and  has no plans to do so in the near future.2
However, there is mounting  evidence that the insurance industry as a whole is actively moving to
restrict the availability of coverage for LBP hazards, particularly in areas of the country with
substantial amounts of older, low-income, housing stock. The following examples illustrate trends
developing in the insurance industry:

       •      As of June 1993, New York State had granted conditional approval for
              exclusion of LBP damages from coverage of multiple family dwellings for
              21 insurers. Decisions on  similar requests from 18 additional insurers were
              pending.3

       •      Insurance commissions in Maryland  and Pennsylvania are currently
              approving policy and endorsement language that excludes LBP damages.4
October 20, 1993                      Liability Insurance                               Page 9

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       •      The Massachusetts Division of Insurance ruled that it will allow exclusion
              of LBP damages for property built before 1965 that contains LBP and of
              claims arising from lead poisoning of children under the age of six.
              Massachusetts adopted this compromise position after insurers threatened
              to cease writing coverage for all pre-1965 housing stock.5

       •      Aetna, one of the largest insurers of commercial residential properties, has
              obtained permission to exclude LBP damages from coverage under its
              policies in 40 states.6 Other major insurers are following suit, fi ing either
              for total exclusion of LBP damages from coverage or for exclusions limited
              to housing stock of a certain age (usually 20 to 25 years or older).

       •      The American Association of Insurance Services, a rating organization that
              develops policy language for 400 affiliated insurance companies, has filed
            - exclusions in all states (with approvals in 32 states to  date) for damages
              related to lead contamination caused by LBP, lead in drinking water, and
              lead in soil.7

       •      The American Insurance Association (ALA), a major  insurance industry
              trade  association, reports that its members are moving to exclude coverage
              for LBP hazards or are simply not  insuring properties that contain LBP.
              James Kimble, ALA senior counsel, recently stated that "old lead paint in a
              home is a pre-existing condition and not insurable.

       Genera • , insurers appear to be reacting to several recent jtrends that have focussed their
attention on the LBP issue. These trends include:

       '•      New Centers for Disease Control and Prevention (CDC) determinations,
              state  laws, and Title X provisions  establishing lower  blood lead levels as
              evidence of poisoning, requiring testing for elevated lead levels in children,
              and mandating evaluation and abatement of LBP.

       •      Increased litigation against rental property owners, especially in the States
              of Massachusetts, New York, and Maryland that have a significant amount
              of housing stock containing  LBP hazards. One result of the increased
              litigation has been the development, through case law, of strict liability
              standards for owners in jurisdictions with significant LBP problems.9

       •      Recent appearance of large court awards for poisoned children. Typically,
              settlements have ranged between $5,000 and $500,000.  Some court awards
              however, have been as high as $1.5 to $2 million.

       •      Huge potential liability. Even if settlements continue to be relatively low
              (e.g.,  below $50,000), insurers are wary of the volume of potential claims
              for which they may be held  responsible.  One representative of the
              American International  Group, a major insurer of environmental hazards,
              estimated that aggregate claims from poisoned children in New York City
October 20, 1993                     Liability Insurance                              Page 10

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              alone could consume 60 percent of the property and casualty industry's
              surplus (i.e., reserves that insurers must maintain to pay claims).10

       This situation is similar to situations involving other environmental liabilities, specifically
hazardous waste, underground storage tanks, and asbestos. In all of these cases, insurers faced
unanticipated claims and coverage for unfamiliar hazards.  The insurance industry responded by •
writing specific exclusions  for these hazards and withdrawing from these  markets. Later, as risks
became better understood and demend for coverage remained significant, especially for coverage
of hazardous waste management facilities, specialty markets emerged to provide coverage.  In
some cases, particularly for underground storage tanks, however, the markets have never fully
recovered.

       The trend toward excluding coverage for LBP  hazards is particularly pronounced for
rental housing stock that is older, less well maintained, managed by less profitable companies,'and
located in the Northeast.  Absent approved exclusions for LBP damages, many insurers are simply
not writing liability coverage for certain  classes of property. As discussed briefly above, even
where major insurers are continuing to cover LBP hazards, coverage is becoming difficult to find
for buildings more than 20 years old.  Some insurers are also restricting coverage for buildings
where young children reside.11  Even where insurance has not been specifically excluded,
insurers are claiming that policy terms, in particular the pollution exclusion and pre-existing
conditions exclusion, prevent the policy  from covering LBP damages.

       In cases where insurance is available for buildings known to contain LBP, strict conditions
for coverage are often imposed. For example, one insurance broker12 in Boston repc-'^-dly
continues to offer  liability  policies in Massachusetts with no exclusion for LBP  hazards 
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       Future Trends

       The future availability of insurance may depend heavily on the outcome of current
litigation. Pending lawsuits against owners will clarify liability standards and compensable *
damages, which will vary by state (see the liability paper). Insurance availability could therefore
also vary on a state-by-state basis. To the extent that property owners are held strictly liable and
that damage awards continue to rise, insurers will increasingly leave the market for LBP coverage.
In contrast, if damage amounts stabilize at  moderate or low levels, and abatement standards are
established, insurers may reenter the market.

       In addition, as owners face increased litigation and the potentially high costs of awards,
litigation over the scope of coverage provided by past insurance policies is also likely to increase.
Again, the outcome of these suits is likely to vary significantly  by state, and this variation might
affect insurance availability on a state-by-state basis. Lawsuits brought to date against insurers
have interpreted similar policy language differently.  For  example, a New York court ruled that
LBP is a "pollutant" and that damages resulting from LBP exposure are therefore excluded from
coverage under the absolute pollution exclusion  commonly found in most general liability policies
written since 1985.  In contrast, a Massachusetts court ruled that LBP is not a "pollutant" as
defined in the absolute pollution exclusion, and that LBP damages are therefore covered by the
policy. More  rulings similar to the Massachusetts ruling will encourage insurers to incorporate
specific LBP exclusions into their policies.15

       More extensive use of interim controls, including encapsulation as an  alternative to
abate ..»t of LEP, cculd reduce the likelihood of future claims against owners and, by extension,
their . .surers, to the extent that reducing LBP hazards in residential housing  decreases the
incidence of LBP poisoning.  Increased LBP abatement may not, however,  reduce claims resulting
from damages (i.e., exposures of small children to LBP) that occurred prior to the hazard
reduction activity if the prior exposure was not detected.  Claims involving small children currently
living in  residences with LBP, are therefore likely to continue, at least for the foreseeable  future.
Increased insurance availability may ultimately depend on creation of some "safe harbor" for
owners who abate LBP or  engage in other LBP hazard reduction activities. The safe harbor
concept  would reduce or eliminate owners' liability  in cases where LBP has been properly abated
or controlled.  Reduced liability would make LBP damages more predictable  and thus more
insurable from the insurer's standpoint. If a "safe harbor", approach completely eliminated a
owner's LBP liability, however, it is unclear that insurance covering LBP liabilities would be a
relevant  option for encouraging further reduction in LBP hazards.

       LBP Coverage for  Abatement Contractors

       Relatively little information is available, at present, concerning the availability of liability
insurance coverage for LBP abatement contractors.  The LBP abatement industry is relatively
new, and there is little industry experience from which to draw information concerning trends in
the availability of coverage. The experience of other abatement industries  (e.g., asbestos)  may
provide a useful model for analyzing the potential impact of insurance on the abatement industry.
Based on the  history of the asbestos abatement industry,  the cost and availability of liability
insurance may have a significant impact on the cost and availability of abatement services.
October 20, 1993                      Liability Insurance                              Page 12

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       In a number of ways, the LBP abatement industry and the asbestos abatement industry are
similar.  Like asbestos abatement, LBP abatement if conducted improperly may actually
exacerbate, rather than reduce, LBP hazards.  Thus, there is a potential for increased exposure of
persons to LBP during and following abatement activities. Abatement contractors, as well as
building owners who hired them, would be at risk for damages resulting from those exposures.
Asbestos abatement contractors wanted liability insurance to remain in business; those contractors
conducting abatements in schools were required by EPA to have such coverage. LBP abatement
contractor may find that they require similar coverage.

       In other ways, however,  the asbestos analogy is less than perfect. First,  the nature of
asbestos and LBP damages is different.  Asbestos damages are termed "long  tail," meaning that a
long period of time passes before evidence of damage manifests itself.  Long tail damages are less
predictable for insurers and are  therefore more difficult to insure.  LBP damages, in contrast,  .
manifest themselves much more quickly (especially assuming screening), adding to their
predictability.  Second, asbestos  abatement contractors operated for a significant period of time
without abatement standards, leading to greater numbers of claims for improperly conducted
abatements. Although LBP abatement is relatively new, a number of states  are already
developing standards for abatement. EPA is also in the process of developing contractor
standards  and expects to issue them  in April 1994.  Earlier regulation of LBP abatement
contractors may give insurers greater incentives to remain in the market. Finally, many LBP
abatement contractors formerly  provided asbestos abatement  contracting services and therefore
have greater experience than early asbestos abatement contractors regarding containment
procedures and other standards  that reduce risks  associated with abatement  activities.

       The availability of insurance  coverage for asbestos abatement contractors was constricted
in the early 1980s.  The high risks associated with asbestos abatement contracting coupled with
lack of regulatory standards resulted in insurance coverage that was either prohibitively expensive
or simply unavailable. Insurers specifically cited lack of data, large numbers  of claims, and the
size of claims as contributing- to  lack of available coverage. This situation  limited the number of
abatement contractors and consequently made asbestos abatement more difficult and costly.  By
the late 1980s, the  situation had improved. Factors cited by the industry for this change included
not only greater industry experience with such coverage, but also development of federal
contractor accreditation standards.  Currently, asbestos abatement contractors who follow
established practices are able to obtain affordable liability coverage from a number of offerers.16

       The availability of insurance  for LBP abatement contractors may not prove to be a
problem.  "The Insurance Marketplace,"  a directory of insurance companies offering nonstandard
and specialty coverage, lists more than 20 companies that currently offer coverage to LBP
abatement contractors.   Significantly, most of these insurers have previous  experience insuring
asbesios abatement contractors.   The insurance industry's experience with  asbestos abatement
contractor coverage may enhance the relative availability of coverage for LBP contractors.
Insurers are generally more willing to write policies in areas in which they have experience; this
experience enables them to more accurately predict their own risk under those  policies.  Even if a
group of insurers is willing to write coverage for contractors,  availability may remain a problem.
For example, the supply of affordable insurance coverage may not be sufficient to cover to the
growing numbers of LBP abatement contractors needed to address the widespread problem of
LBP in residential  housing.
October 20, 1993                      Liability Insurance                              Page 13

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4.      Policy Options

       This section discusses options for using liability insurance as a means for encouraging
reductions in LBP hazards. The options below cover a range of supply side incentives to insurers
to offer coverage and demand side incentives to rental property owners and contractors to buy
coverage. Each option is described in detail and evaluated based on the following five criteria:  •
(1) effectiveness in reducing LBP hazards; (2) public and private cost; (3) equity;  (4) political
feasibility; and (5) administrative ease.  The tables following the discussion  provide a comparison
of the options with respect to these criteria.  The six options are grouped into those that relate to
owners and  those that relate  to abatement contractors as follows:

       Rental Property Owners

       (1)    .Create demand for insurance coverage;
       (2)     Enhance supply by prohibiting exclusion of LBP hazards from coverage;
       (3)     Enhance supply by creating a certification of abatement program; and
       (4)     Develop alternatives to insurance.

       LBP Abatement Contractors

       (5)     Create demand for insurance; and
       (6)     Develop alternatives to insurance.

 Tiese options arc noi necessarily niutuaii> exclusive.
                                                             s

       Coverage for Rental Property Owners

       As discussed above, the potential for insurance to play a role in reducing LBP hazards
depends on  both  the demand of owners for that coverage and the willingness of insurers  to
provide it at an affordable price.  Several options that could be considered  for improving either
insurance demand or  supply.

       Option 1:  Create a Demand for Insurance Coverage.  As discussed in the section 2
above, the ability of insurers  to affect the behavior of policyholders ~ in this case, encourage
them to  reduce LBP hazards — depends to great extent on the demand for insurance coverage.
Only if demand for coverage is high enough that owners are willing to comply with  insurance
industry  conditions for coverage, can insurers have a positive impact on the behavior of owners.
One way to ensure demand for insurance is to require coverage for rental properties constructed
prior to  1978. These requirements could be established at the  federal, state, or local level.

       There are precedents for these types of requirements.  Automobile drivers, for example,
are required to have a minimum level of liability coverage. Home buyers are often  required to
purchase homeowner's insurance as a condition of obtaining a mortgage. Homeowners located in
areas subject to flooding are  also required to purchase flood insurance as a condition of receiving
federal flood assistance.  Other federal and state regulatory programs also require certain groups
of individuals (e.g., transporters of hazardous materials  and owners or operators of waste facilities,
underground petroleum storage tanks, and nuclear power plants) to purchase liability coverage.
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       Requiring coverage for LBP hazards
could prove an effective market-based approach
for encouraging in LBP hazard reduction. Given
the industry's current attitude toward LBP
hazards, insurers writing policies that cover these
hazards would likely establish conditions for
coverage that included, at a minimum, hazard
evaluation and maintenance standards. Insurers
might also price policies in a way that provides
financial  incentives to policyholders to conduct
more extensive reduction.  Requiring insurance
coverage might free federal, state, or local
governments from having to develop and enforce
abatement requirements. Insurers would, in
effect, become surrogate LBP regulators  by
enforcing the conditions of their policies.
Government would, however, need to monitor
and enforce the liability coverage requirements.
                1. Create a Demand for Insurance Covej-age
               Effectiveness
               Cost

               Equity
               Political
               Feasibility


               Administrative
               Case
Very effective if insurers
require significant hazard
reduction as policy
conditions.
Potentially costly to cvmers
Owners of low-income rental
units may not be able to
afford coverage conditions..
Insurers and  owners may
object to coverage
requirements
Requires some, monitoring
and enforcement.
       At the same time, requiring insurance coverage would not guarantee that coverage would
be available or affordable, particularly, to owners of low to moderate income rental housing units
for two reasons.  First, abatement requirements imposed by insurers as conditions of coverage
might prove too  expensive for owners of low to moderate income rental property. These owners '
often operate  at a very small profit margin  and might find the costs of meeting conditions for
insurance prohibitively high.  Similarly, such owners might find the cost of insurance itself
prohibitively high, even after meeting minimum requirements for coverage.  Second, ra  icr than
responding to  increased demand created as a result of these requirements by expanding the
availability of coverage, insurers may continue to exclude from coverage groups that are
considered  high  risk (i.e., owners of buildings more than 20 years old, owners with little equity,
etc.) unless LBP is totally removed.

       If unable to comply with requirements for insurance, owners of low to moderate income
rental properties might be forced to operate in violation of the rule or abandon their properties,
resulting in a decrease in available affordable housing. As a result of this danger, low-income
housing advocates, tentants, as well as rental property owners may be opposed to this option.
Again, there are precedents that may serve as  models; although insurance is required of owners or
operators of hazardous waste management  facilities, it was not widely available and some facility
owners and  operators found themselves unable to comply with coverage requirements. Some of" -
these facilities were ultimately forced to close.

       The difficulties that owners of low to moderate income rental property may fr-cc in
complying with insurance coverage requirements might be mitigated by combining Option 1 with
Option 4 below, develop alternatives to insurance.  Specifically, alternatives to traditional
insurance (e.g., risk retention groups, government risk pools) might be developed to enable
owners of low to moderate income rental housing to comply with liability coverage requirements.
system.
       Another difficulty of this option is that insurers may not be willing to participate in such a
October 20, 1993
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                   Page 15

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       •      First, insurers may fear that they will be forced to provide coverage even for
              housing that poses significant risks of contaminating small children with LBP.

       •      Second, the insurance industry may be  unwilling to accept the role of surrogate
              regulator.  Insurers have objected to playing similar roles in the past, arguing that
              it is well outside the scope of their business.  In fact, rather than playing the role.
              of regulation implementer, the insurance industry has more often used compliance
              with applicable government regulations as its criterion for providing coverage.

       •      Finally, insurers may object to the costs they will incur in order to develop and
              implement policy conditions that would enable them to profitably offer coverage.
              Insurers may, however, be able to pass these costs on to policyholders; the result
              would be more expensive insurance coverage for owners.

       Requiring insurance coverage also may prove to  be a somewhat inefficient means for
reducing LBP hazards.  Owners forced to purchase insurance will incur the costs of conducting
any hazard reduction that is required, as well as paying policy premiums.  It might be more
efficient and a better use of an owner's limited resources to simply require LBP controls to a level
that is generally considered adequate to prevent lead poisoning in young children.
       Option 2:  Enhance Supply by
Prohibiting Exclusion of LBP Hazards from
Coverage.  Insurance regulators can indirectly
encourage reduction of LBP hazards to the
                                 cccr*
i .verage provided by insurance companies. "As
an alternative to requiring owners to purchase
LBP coverage, insurance regulators could be
required or encouraged to prohibit exclusions of
LBP hazards from liability policies.  Under such
conditions, insurers that wished to continue
writing general liability policies for owners of
rental  properties containing LBP would need to
establish criteria for coverage that would allow
them to better predict their losses related to
LBP hazards.
                2. Enhance Supply by Prohibiting Exclusion
                     of LBP Hazards from Coverage
               Effectiveness
               Cost

               Equity
               Political
               Feasibility


               Administrative
               Ease
Less effective than Option 1
because owners are not
required to purchase
insurance.

Potentially costly for owners.
Owners of low-income rental
housing may not be able to
afford coverage conditions
May not be possible to
prohibit exclusions because
states regulate insurers.
Requires less monitoring and
enforcement than Option 1
       The potential effects of prohibiting
insurers from excluding LBP hazard coverage
would be similar in some ways to Option 1 above.  Insurers that wished to continue offering
liability coverage would establish coverage criteria, and policyholders would have to meet the
criteria in order to obtain coverage, resulting in reduced LBP hazards.  As in Option 1, federal,
state, and local governments would Jiave little administrative responsibility under this approach.

       This approach is likely to be less effective than Option 1 in achieving reductions in LBP
hazards,  however, because owners would not be required to obtain insurance.  Owners may elect
not to purchase liability coverage rather than incur the added costs of meeting coverage criteria.
Absent a requirement for LBP coverage, property owners, especially owners operating at smaller
October 20, 1993
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profit margins, may be more likely to choose no insurance coverage. Only owners with sufficient
assets to protect are likely to be encouraged to reduce LBP hazards under this approach.  To the
extent that owners most likely to go without liability insurance are owners of properties more
likely to provide housing to low income families, this policy option would not encourage reduction
of LBP hazards where children are most at risk of poisoning.

       In addition, it may not be politically possible to require insurance regulators to prohibit
exclusion of LBP hazards. Such requirements could be established either by the federal
government or by individual state governments.  If established by the federal government, states
might object. Insurance is currently regulated entirely by states; while the federal government
could exercise regulatory authority over insurers, it would run the risk of intruding on an area  that
has long been the purview of the states.  As a federal policy, it may be therefore possible, only to
encourage state insurance regulators to prohibit exclusions.  Regulators may not, however,
respond to federal encouragement because they feel pressured by the insurance industry to allow
exclusions in order to prevent insurers from withdrawing entirely from certain segments of the
market.  Evidence suggests that insurance regulators are currently approving LBP exclusions at
least in part due to their concerns that insurers will simply pull out of certain markets, particularly
for older, economically distressed housing.   If these owners cannot obtain liability coverage for
any hazards, they may decide to leave the rental business or be forced out if they are held
responsible for damages for which they have no insurance. The end result of this option could
therefore be to reduce the amount of low to moderate income housing  available.

       Alternatively, requirements could be imposed or regulated by state legislatures.  This
wou''1 create a different set of political problems.  First there would be  lack of uniformity among
statt  xmcerning requirements for LBP coverage, with some states having more stringent
requin /nents.  Insurers might respond by ceasing to write coverage in states that required LBP
coverage. State legislatures, faced with large scale withdrawal of insurance coverage for owners
might then repeal requirements, if already  established, or reconsider such actions, if not already
taken. Again, if owners cannot obtain any liability coverage, the may leave the rental business,
thus decreasing the amount of housing available, especially for low to moderate income families.

       This option would  require less monitoring and enforcement by the government than
Option 1. The administrative burden would be reduced because only insurance regulators would
need to be monitored to ensure that LBP coverage was being included  in policies.

       Finally, this option has the same difficulties related to the use of insurers as regulators
that were discussed in Option 1, though perhaps not to the same extent as Option 1.  Insurers in
particular may object to being placed in the position of developing and  policing hazard reduction
requnements.

       Option 3:  Enhance Supply by Creating a Certification  of Reduction Program.  Another
option that might encourage reduction of LBP hazards is the creation of a certification program
for LBP reduction. Such a program could resemble that outlined by the National Center for
Lead Safe Housing  and would allow a rental property owner to obtain certification  that it had
reduced LBP in its building(s) to a certain level.  (Similar options are discussed in the liability and
risk assessment and inspection papers.) Certification requirements might be developed at the
federal or state level.   Depending the on the reduction activities undertaken, the certification
would be valid for one, five, twenty years, or indefinitely if all LBP had  been removed.  Insurers
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                                                     3.  Enhance Supply by Creating a Certification
                                                               of Reduction Program

                                                                    Less effective than requiring
                                                                    insurance coverage because
                                                                    owners may choose not to
                                                                    buy insurance
                                                                    Potentially high costs to
                                                                    owners, significant
                                                                    government costs.
                                                                    Owners of low-income rental
                                                                    housing may not be able to
                                                                    afford hazard reductions
                                                                    required for certification.
                                                                    Relatively easy program to
                                                                    promote, safe harbor
                                                                    approach, however, would
                                                                    need to be  implemented by
                                                                    states to avoid conflict with
                                                                    existing liability laws.
                                                                    Would-require extensive
                                                                    inspection program.
               Effectiveness
               Cost
               Equity
               Political
               Feasibility
               Administrative
               Ease
could use certification as a criterion for offering
coverage or reducing rates. If certified, the
owner would then be able to purchase and
renew insurance coverage.  To the extent that
owners want coverage for LBP hazards, the
certificate program might encourage them to
reduce LBP in order to qualify for insurance or
to reduce the insurance premiums.

        A variation to this approach would
combing the certificate with a "safe harbor" for
owners as a further incentive to reduce LBP
hazards. Under the safe harbor concept, an
owner who meets certain standards (e.g., the
standards for certification) for LBP abatement
would no longer be held liable for lead poisoning
detected in children residing in the owner's
buildings. (See also the liability paper.)
Alternatively, an owner might instead be granted
less than full immunity from liability (e.g. a
rebuttable presumption that he has exercised
due care).    When able to demonstrate that he
had achieved the required standard, an owner
would be able to purchase insuranre or receive
reduced  2miums.  Safe harbor rules would need to be implemented at the state level to avoid
conflicting with stat; liability laws.

        This option is appealing because standards for hazardous reduction activities would
encourage insurers to cover LBP  hazards.  Insurers may also react favorably to this option
because it frees them of the need to develop their own sets of conditions for offering coverage.
However, this option only indirectly uses insurance  as the means for achieving reduction in LBP
hazards. Insurance coverage comes into  play only if the owner wants coverage (e.g., needs the
coverage to protect itself financially in the event of a claim) and the certification helps the owner
get it.  Owners  that do not want insurance or that cannot afford insurance in any case (and may
therefore also not be able to afford the abatement necessary to get the certificate) would not be
encouraged to abate LBP under this option. Owners operating with a thin profit margin may
decide to risk potential liability rather than incur the costs of certification. Like Option 2 above,
therefore, this option will do little to promote reduction of LBP hazards where the owners of
rental property cannot afford or choose not to abate their LBP or purchase insurance coverage.
Finally, if the safe harbor approach is attached to a certificate and provides the owner with
complete immunit' from liability,  it is not clear that he would need insurance coverage at all;
insurers would be providing coverage only in cases where the owner is not liable for damages.
Lack of liability will not necessarily prevent lawsuits from being brought against  an owner,
however, and insurance may have a role  in providing legal defense against those lawsuits.

        This option would also require government  to develop adequate certification standards
and to monitor their implementation.
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                                                         4. Develop Alternatives to Insurance
                                                     Effectiveness
                                                     Cost
                                                     Equity
                                                     Political
                                                     Feasibility
                                                     Administrative
                                                     Ease
                             Effective if conditions for
                             participation in alternative
                             require hazard reduction.

                             Cost of coverage could be
                             lower; qualifying for
                             participation could be
                             expensive
                             Potentially more accessible to
                             owners of low-income
                             housing
                             If alternative is government -
                             sponsored, could require
                             additional authority and
                             appropriations.
                             Government alternatives
                             would require administration.
       Option 4:  Develop Alternatives to
Insurance. If insurers are simply unwilling to
cover LBP hazards, either for all residential
housing or for those portions of the housing
stock that pose the greatest risk (e.g., older
housing and housing with young children), it may
be necessary to develop alternatives to
traditional coverage.  As discussed briefly in
Option 1 above, this approach may particularly
be necessary if owners are required to purchase
insurance coverage.  Several alternatives to
insurance could be used, including privately
sponsored and government-sponsored
approaches. These include:

       •      Risk Retention Groups (RRGs):
              As described in the background
              section above, RRGs are a type
              of captive insurer.  RRGs could
              be  formed by owners in a
              particular geographic area,
              owners supplying rental housing to particular groups, etc.  A
              problem with the use of RRGs as an alternative to traditional
              insurance for owners of low to moderate income housing is the
               expense often involved with joining such a group. In addition to
              premiums, which '"ould be high if the group is composed of high
              risk policyholders Tiembers of the  RRG may also be required to
              contribute towards the RRG's initial capitalization.  One RRG
              currently offers LBP coverage to its members. The Housing
              Authority RRG (HARRG) in Cambridge, Massachusetts was
              formed in  1986 to provide general  liability coverage to housing
              authorities and currently offers optional coverage for LBP hazards
              to members willing to meet underwriting standards.  These
              standards require policyholders to conduct risk assessments on
              insured property and agree to implement risk reduction
              recommendations that result from the risk assessment.19

       •      Risk Purchasing Groups: Risk purchasing groups (RPGs) are not
              insurers, but rather, are groups formed to collectively purchase insurance
              for members from non-admitted insurers.  The large number of
              policyholders associated with  a RPG may facilitate finding an insurer who
              is willing to provide coverage or negotiating better premium terms.

       •      Government-sponsored risk pools: In some cases where traditional
              insurance coverage is unavailable, the federal government or state
              governments have formed risk pools to provide liability coverage for
              regulated entities that are required to purchase insurance but cannot
              obtain it in the private market.  State  funds have been established, for
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              example, to assist owners and operators of underground petroleum storage
              tanks, especially small gas station owners, in complying with federal and
              state regulations that require liability coverage. A drawback to such pools
              is that they often provide coverage for the riskiest segments of a particular
              liability market, and therefore may require substantial government subsidies
              to remain solvent. Many state petroleum tank funds, for example, have
              found it difficult to remain solvent, given the large number of claims that
              they must cover.

       The impact that alternatives to traditional insurance would have in reducing LBP hazards
is unclear.  In order to have any impact, alternatives to insurance must have  conditions for
coverage similar to those established by insurers (e.g., LBP encapsulation, maintenance standards).
If owners are unable to purchase insurance in the traditional market because they cannot afford
to meet private insurance companies' criteria for coverage, however, the alternatives, to the extent
that the alternatives impose  similar requirements, may not serve as an incentive to abatement of
LBP.
       The public cost of government-sponsored alternatives to insurance could be quite high. If
set up as the "insurer of last resort," a government-sponsored alternative might attract the owners
with the highest risk of LBP damages. This adverse selection would occur for several reasons.
First,  owners that cannot qualify for commercial insurance because they cannot  afford to reduce
LBP hazards are more likely to be included in a government-sponsored alternative.  Second, these
same  owners may also be unable to  afford to conduct the routine maintenance of buildings that
prevents the development of LBP hazards.  Finally, owners that cannot afford abatement, interim
controls, or routine building maintenance are more likely to be supplying housing to low-income
families.  These k   -income  families are more likely to have small children, thus increasing the
potential for damages.

       Government subsidies may be required to maintain an alternative under these
circumstances.  The greater  number of high risk owners in a government-sponsored alternative is
likely to result in a greater number of claims for which the alternative must make payment. Also,
if LBP hazards are greater in buildings owned by higher risk owners, payments to claimants could
be higher than for other groups. In addition, the alternative may have fewer resources for paying
claims. To the extent that the owners served by the alternative have fewer resources than owners
purchasing insurance in the private market, premium payments may have to  be kept artificially
low.  The government could therefore find itself subsidizing a significant portion of the liability
bill. Development and implementation of government-sponsored alternatives might also impose a
significant administrative burden on government.

       The exhibit on the following page summarizes the evaluation of the liability insurance
options for rental property owners.
October 20, 1993                     Liability Insurance                              Page 20

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COMPARISON OF LIABILITY INSURANCE OPTIONS FOR RENTAL PROPERTY OWNERS
Criteria
Effectiveness
Cost
Equity
Political
Feasibility
Administrative
Ease
Option 1:
Create a Demand for
Insurance Coverage
Very effective if insurers
require significant hazard
reduction as policy
conditions
Potentially costly to owners
Owners of low-income
rental units may not be able
to afford coverage
conditions
Insurers and owners may
object to coverage
requirements
Requires some monitoring
and enforcement
Option 2:
Enhance Supply by Prohibiting
Exclusion of LBP Hazards from
Coverage Certification
Less effective than O, 1
because owners are not required
to purchase insurance
Potentially costly for owners
Owners of low-income rental
housing may not be able to
afford coverage conditions
May not be possible to prohibit
exclusions because states regulate
insurers "
Requires less monitoring and
enforcement than Option 1
Option 3:
Enhance Supply by
Creating a Certification of
Reduction Program
Less effective than requiring
insurance coverage because
owners may choose not to
buy insurance
Potentially high cost to
owners; significant
government costs
Owners of low-income
rental housing may not be
able to afford hazard
reductions required for
certification
Relatively easy program to
promote; safe harbor
approach, however, would
need to be implemented by
states to avoid conflict with
existing liability laws
Would require extensive
inspection program
Option 4:
Develop Alternatives to
Insurance
Effective if conditions for
participation in alternative
require hazard reduction
Cost of coverage could be
lower; qualifying for
participation could be
expensive
Potentially more accessible
to owners of low-income
housing
If al;_. native is
government-sponsored,
could require additional
authority and
appropriations
Government alternatives
would require
administration
October 20,  1993
Liability Insurance
Page 21

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       Coverage for Contractors

       The options outlined below are intended to provide incentives to contractors to properly
conduct L8P interim controls or abatement or to ensure that LBP abatement contractors are able
to obtain the liability coverage they need to stay in business.  Maintaining or increasing the pool
of available abatement contractors will encourage reductions in LBP hazards by making
abatement less expensive and more readily available.
       Option 5:  Create Demand for
Insurance. This option is similar in some
respects to Option 1 for owners, discussed
above. 'Requiring coverage for abatement
contractors might create demand  for coverage
that would induce the insurance industry to
expand its supply of coverage to meet the needs
of expanding numbers of contractors. The
insurance requirement would also help ensure
that contractors comply with  abatement
standards to the extent that such  standards are
conditions for obtaining coverage. If such
standards are related to compliance with state or
EPA-developed standards, this option would
assist in the implementation of those standards.
                   5.  Create Demand for Insurance
              Effectiveness
              Cost


              Equity


              Political
              Feasibility

              Administrative
              Ease
Effective if insurance
conditions affect contractor
behavior.
Contractors would incur costs
of coverage.

All contractors would face
similar costs

Precedents for such
requirements exist
Some administrative effort
required.
       Such a requirement   iuld be relatively easy to administer and would generate little public
cost.  Insurance coverage could be linked to state or federal contractor li~ensing or certification.
Private costs would be limited to the cost to contractors of purchasing in jrance and of complying
with any insurer requirements,, though to the extent that these costs would be passed through to
property owners contracting for abatement services, costs to contractors would be reduced.  This
option may be unnecessary if abatement contractors voluntarily demand coverage as part of their
own risk management practices.

       Option 6:  Develop Alternatives to Insurance.  If insufficient insurance coverage is
available to meet the demands of contractors, alternatives to traditional insurance might be
needed.  Potential alternatives would  include, for the most part, those alternatives described in
Option 4.  (This section will not repeat the discussion of Option 4.)  In addition, a bonding
alternative may be a useful alternative to provide contractors with the financial protection that
they would need to remain in business.

       In a number of ways bonding  resembles insurance.  Bonding would work as follows.
Abatement contractors would obtain bonds from a third party to cover their abatement project.
(A number of large insurance companies also have bonding operations.) These bonds would
guarantee a certain level of payment to the owner of the property that contracted for abatement
in the event that abatement services were either not completed or were conducted improperly
(e.g., caused lead poisoning). The purchase of bonds therefore limits the financial exposure of
the contractor in the event that something goes wrong during the abatement process.
October 15, 1993
Liability Insurance
                   Page 22

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                                                           6.  Develop Alternatives to Insurance
        Bonding is a common practice in the
construction industry.  Construction contractors
are often required, as a condition of their
contracts, to purchase bonds guaranteeing that
work will be performed within a certain
timeframe.  Bonding has also been successfully
used by asbestos abatement contractors as an
alternative to insurance. Government action
may be required, however, to make bonding a
viable alternative to insurance. The availability
of bonds is subject to factors similar in many
ways to the factors affecting the availability of
insurance. In particular, the bond supplier needs
to be able to predict the likelihood that the
bond will be drawn upon.  Government
intervention includes enforcing standards for
abatement practices. As an alternative to
insurance, bonding may not, therefore, be as
useful as the other alternatives discussed  in
Option 4 above.

        The exhibit on the following page summarizes the evaluation of the liability insurance
options for LBP abatement contractors.
                                                       Effectiveness




                                                       Cost


                                                       Equity


                                                       Political
                                                       Feasibility
                                                       Administrative
                                                       Ease
If insurance supply
insufficient, may help
preserve supply of abatement
contractors
Potentially costly to
government
Ensures access to coverage
for all contractors
If government-sponsored,
could require new
authorization and
appropnattons
Government-sponsored
alternative would require
administration
October 15, 1993
                                        Liability Insurance
                    Page 23

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COMPARISON
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
OF LIABILITY INSURANCE OPTIONS
Option 5:
Create Demand for Insurance
Effective if insurance conditions
affect contractor behavior
Contractors would incur costs of
coverage
All contractors would face similar
costs
Precedents for such requirements
exist
Some administrative effort required s
FOR LBP ABATEMENT CONTRACTORS
Option 6:
Develop Alternatives to Insurance
If insurance supply insufficient, may help preserve
supply of abatement contractors
Potentially costly to government if subsidies are
required to keep the alternative operating
Ensures access to coverage Lr all contractors
If government sponsored, could require new
authorization and appropriations
Government -sponsored alternatives would require
administration
October 20, 1993
Liabiit _, Insurance
Page 24

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Endnotes

1. "A Study to Determine the Availability of Lead Liability Insurance for the Private Owners of
Low to Moderate Income Rental Housing," Jackson Anderson, National Center for Lead Safe
Housing, May 1993, p. 25.                                                      "

2. Conversation with Thomas Caniano, ISO, September 15, 1993.

3. "Insurance News," State of New York Insurance Department, June 14, 1993, p. 3.

4. "A Study to Determine the Availability of Lead Liability Insurance for the Private Owners of
Low to Moderate Income Rental Housing," Jackson Anderson, National Center for Lead Safe
Housing, May 1993, pp. 26-7.

5. "State Eases Rules on Lead-Paint Insurers," Boston Business Journal, November 12, 1990, p. 1.

6. "A Study to Determine the Availability of Lead Liability Insurance for the Private Owners of .
Low to Moderate Income Rental Housing," Jackson Anderson, May 1993, p. 24.

7. "States grappling with lead liability exposures," National Underwriter, June 28, 1993, pp. 21-2.

8. "Mounting Pollution Risks Confront State Lawmakers," National Underwriter Property and
Casualty  - Risk and Benefits Management, November 30, 1992, p.2.

9. Litigation is also occurring in other areas.  Attempts have been made to hold manufacturers of
LBP responsible for damages. These eff< -.cs have been largely unsuccessful due to the difficulty
of identifying the manufacturers involved in specific cases and the length of time that has passed
since the paint was manufactured. Property damage litigation is discussed at greater length in the
liability paper.

10.  "Insurers Battling Increasing Claims From Lead Paint," Business Insurance, July 12, 1993, p. 1.

11.  Joan Guyther, National Association of Housing Partnerships, Risk Management Office,
telephone conversation, on September 14, 1993.

12.  Anthony Marino, Hastings Tarpley,  telephone conversation on September 15, 1993.

13.  Meeting with insurance industry representatives at the National Center for Lead-Safe
Housing, August 26, 1993.

14.  "Insurance News," New York State Insurance Department, June 14, 19931

15.  "Lender Liability for Injuries from Lead Paint," New York Law Journal, April 22,1993.

16.  AHERA §210 Liability Study, Step 4 Report, prepared by ICF Incorporated for the U.S.
EPA Office of Toxic Substances, January 1991, pp. 35-45.
October 20, 1993                       Liability Insurance                               Page 25

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17. The companies listed are:

All American Agency Facilities, Inc.
All Risks Ltd.
The American Agency
American E & S Insurance Brokers
American Home Assurance Co.
American Safety Risk Retention Group, Inc.
Beacon Hill Associates, Inc.
Russell Bond & Co. Inc./Environmental
       Liability Managers Co.
Capacity Managers International
Cooney, Rikard & Curtain, Inc.
Delaware Valley Underwriting Agency, Inc.
Environmental & Commercial Insurance
       Agency, Inc.
Environmental Insurance Services, Inc.
ERIC Syndicate, Inc.
           E & S Facilities, Inc.
           Fidelity Environmental Insurance Co.
           L.E. Harris Agency, Inc.
           Insurance Innovators, Inc.
           I.M.C. Inc., the Insurance Marketing Center
           Metcom Excess
           NAS, Ltd.
           National Environmental Coverage Corp.
           Pennock Insurance Inc.
           Phoenix Excess & Surplus Lines, Inc.
           Princeton Risk Managers, Inc.
           Quaker Special Risk
           Roush Insurance Services, Inc.
           Swett & Crawford
           Weekley and Co.
18.  "A Framework for Action to Make Private Housing Lead-Safe," National Center for Lead-
Safe Housing, June 1993.

19.  Conversation with Miles Mahoney, Housing Authority Risk Retention Group (HARRG),
October ,1 1993.
October 20, 1993
Liability Insurance
Page 26

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                     ADMINISTRATIVE COMPENSATION SYSTEMS
1.
       Introduction
       The amount of litigation involving
lead-based paint (LBP) damages is large and
frowing.  While currently most litigation is
c >nfined  to the Be ,ton and Baltimore
metropolitan areas and the State of New
York, a significant number of cases are likely
to be filed in every other major city in the
country, including cities on the West Coast.1
An increased awareness of the hazards posed
by LBP has prompted much of this litigation
as well as state and federal legislation
mandating reductions in LBP hazards and
testing of children  for lead poisoning.
                                                               Key Issues
                                                  How could an administrative compensation
                                                  improve compensation to victims of LBP
                                                  damages?

                                                  Should such a system be established by the
                                                  federal government or left to the states?

                                                  What injuries should be compensated
                                                  under an administrative system?

                                                  Who should be eligible to recover damages
                                                  from an administrative system?
                                                  How would an administrative compensation
                                                  system be funded?

                                                  What would the relationship be between
                                                  the administrative compensation system
                                                  and the-existing liability system?
       The potential number of cases
involving LBP damages is staggering. The
Department of Housing and Urban
Development (HUD) estimates that as many
as 57 million of the 72 million occupied
housing units built before . ?78 contain LBP.
While the preserve of LBP does not
iccessarily const i ate a hazard, even if only a
fraction of those units are a source of lead
poisoning in small children, the ultimate number of LBP suits could be quite significant.

       Current litigation involving LBP hazards has highlighted some potential problems in
leaving compensation of lead poisoning victims entirely to the judicial system.  Many rental
property owners may not be able to pay high awards, because they have neither the financial
resources nor insurance coverage to pay for these damages.  Victims therefore may not be
adequately compensated under the current liability system. (See the liability paper for a
discussion of the ability of injured persons to obtain compensation through litigation.) Increasing
claims against property owners may drive  them out of the rental business, thus reducing the
available housing stock.

       An administrative compensation system may provide an alternative to -the liability system
in compensatin , persons injured by LBP hazards. An administrative compensation system is a
non-judicial sysiem that would replace entirely, or in part, the traditional judicial approach to
compensating damage victims.  Under such an approach, lead poisoning victims would file claims
with an administrative authority that would review the claim and issue pre-determined
compensation based on the extent of the  damages involved.  The lengthy and costly litigation of
such claims and their negative impact on the affordable housing stock could be avoided.
October 20, 1993
                                Administrative Compensation
Page 1

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       This paper discusses key concepts associated with administrative compensation, reviews
existing and proposed administrative compensation systems, and evaluates optional administrative
compensation systems to handle LBP claims.  Comparisons of an administrative compensation
system with the traditional liability system draw on both the liability and the insurance papers,
which describe key components of the current system. This paper focuses primarily on
compensating for damages to residents of rental housing. It does not analyze compensation for
abatement workers; they are covered by workers compensation systems.

       The remainder of this paper is organized as follows:

       Section 2:     Provides background on the major components of administrative
                     compensation systems, including discussions of the goals and
                     drawbacks of such systems.

       Section 3:     Describes two current administrative compensation approaches and
                     discusses potential approaches: Black Lung Fund  and the Japanese
                     Pollution Fund.

       Section 4:     Evaluates three optional administrative programs to compensate
                     persons  injured by LBP hazards.
2.     Background

       This section begins by describing some of the potential go? \ of an administrative
compensation program.  It then reviews the major drawbacks that  in interfere with the
implementati n of such programs. Exhibit 1 identifies some of tht major components of an
administrative program as well as key options and issues for each component that are discussed in
this section.

       Potential Goals of an Administrative Program

       An administrative compensation system may seek to fulfill a number of goals:
              Ensure the adequacy and consistency of compensation;
              Ensure the availability of compensation;
              Avoid  rental property owner bankruptcy and disinvestment in low-income housing;
              Expedite the disposition of claims;
       •      Reduce litigation costs; and
       •      Spur blood lead  level testing and related hazard evaluation and reduction.

Each of these goals is discussed, in the context of LBP damages, below.
October 20, 1993                Administrative Compensation                          Page 2

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                             Administrative Compensation Fund     |
                   Components    I
                                     Options/Issues  I
                       Choose An
                  Administrative Sttucture
                        Develop
                  Admimstrative Procedures
                        Determine
                Relationship to Liability System
                                                                    - Provide Adequate Compensation
                                                                    - Avoid Bankruptcy or Disinvestment
                                                                    - Expedite Claims
                                                                    -Reduce Costs
                                                                    - Encourage Testing, Evaluation, and Reduction
                            -Federal
                            -Suite
                            -Rules of Evidence
                            -Filing Claims
                            - Appeals of Determinations
                            - Relation to Health Insurance
                                                                    - Medical Care and Monitoring
                                                                    -Relocation
                                                                    - Lost Potential Future Earnings
                                                                    • Emotional Distress
                                                                    - Hazard Reduction Costs
                                                                    - Sources of Injury
                                                                    - Standards of Care
                                                                    - Children of Homeowner
                                                                    - Time Period Limitations
                                                                    • Production and Import Tax
                                                                    - Sales Tax
                                                                    - Real Estate Transfer Tax
                                                                    - Property Tax
                                                                    - General Funds
                            - Mandatory Forum for LBP Damage Claims
                            - Optional but Exclusive Forum
                            - Optional and Nonexclusive Forum
October 20, 1993
Administrative Compensation
Page 3

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       Ensure the Adequacy and Consistency of Compensation

       One of the fundamental problems of compensating victims of significant LBP exposure has
been the inconsistency among awards. Typical settlements and awards range from $30,000 to
$50,000, with some approaching nearly $2 million. In most cases, the  size of the award is related
to the age of the poisoned child, the blood lead level found  in the child, medical procedures
performed, and the condition of the home in which the child was residing. Award amounts,
however, have been inconsistent among  Different jurisdictions and even within the same
jurisdiction. For example, a jury in the Loston area awarded $1.7 million to an injured child,
while a jury award in a jurisdiction outside the Boston area awarded only $5,000, even though the
blood lead level  in the latter case  was higher.2 Inconsistencies in settlements and awards may be
related 'to the skills of the attorneys involved in the case or may reflect differences in publicity
accorded to LBP hazards in different jurisdictions. These inconsistencies raise the issue of equity,
where cases of similar victims and liable  parties are measured using different standards.

       An administrative compensation  system could standardize awards and reduce
inconsistencies.  Injured parties would need to demonstrate  the right to recover, and the
administrative compensation system, depending on the types of injuries that it is established to
compensate, could ensure that similar cases receive similar compensation.

       Ensure the Availability of Compensation

       Another fundamental problem associated  with LBP suits is that defendants in these suits,
most often rental property owners, may  have insufficient resources to  pay award amounts.  Suits
   'Giving LBP cases are more likely to be brought agair   -vners of older rental housing
occupied by low to moderate income f*-nilies  because 01 he greater likelihood of LBP hazards
associated with such housing. Owners -f such properties are operate  their rental businesses very
close to' the margin, may have little equity in their buildings, and may  not have insurance
coverage, if available. The solvency of a defendant in LBP cases may become an even bigger
problem  as insurers move to exclude coverage for LBP  hazards from their policies.  (See the
insurance paper.) Thus, if subject to large damage amounts, defendants may be unable to pay
adequate damage.

       An administrative compensation  system would make the solvency of the liable party in
LBP suits generally irrelevant. Awards would be paid out of a trust fund, thus ensuring that
victims receive adequate compensation,  as long as the fund is adequately financed.  Depending on
its structure, the administrative system could then seek recovery of compensation costs, to the
extent possible, from owners or other identified responsible  parties.

       Avoid rental property owner bankruptcy and disinvestment in low-income housing

       If faced with liability for high LBP damage costs, some owners may be forced into
bankruptcy and  required to sell or abandon their property.  Other rental property owners, faced
with potential damages, may attempt to  limit their exposure by choosing not to rent to families
with small children. There is already evidence that this discrimination is occurring in areas like
Boston, where tenants have filed a significant number of suits against  owners for LBP damages.3
To the extent that these owners are more likely to be providing rental housing to low  and
October 20, 1993                Administrative Compensation                         Page 4

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moderate income families, increasing LBP litigation could reduce the amount of housing available
to low income families, especially those with small children. An administrative compensation
system could prevent this disinvestment in affordable housing by protecting landlords from the
high costs of paying LBP claims, while at the same time ensuring adequate compensation for
victims of lead poisoning.

       Expedite the Disposition of Claims

       The current liability system often results in lengthy pre-trial preparation, trials, and appeals
that may delay the payment of compensation for months or years. Once a child has been
determined to be lead poisoned, the child should be removed immediately from the LBP-
contamihated environment and should receive timely medical treatment to minimize long term
damages.  If these actions are delayed pending the outcome of a lawsuit, lead-poisoned children
could suffer aggravated injury as a result of continued exposure to LBP.

       Under an administrative compensation system, lengthy pretrial or discovery sessions, trials,
and appeals could be avoided.  Injured parties would file claims, whose  validity would be
determined in an administrative hearing.  Although appeals may be filed, an administrative system
tailored for lead poisoning cases would likely expedite the decisions. Quicker disposition of claims
may ensure that lead-poisoned children receive more timely medical care and avoid continued
exposure to LBP hazards.

       Reduce Litigation Costs

       Lengthy and costly litigation may be required to obtain compensation under the current
liability system. Costs to both  claimants and propert owners include attorneys' fees and court
expenses for initial suits as well as costly appeals.  A Jiore efficient ai'd productive  use of rental
property owners' resources could be more productively devoted to reducing LBP hazards rather
than defending claims.  Similarly, lengthy litigation uses significant public resources  as well,
resources that might be better  spent on directly addressing the problem of LBP hazards. An
administrative compensation system could reduce costs to both defendants and possibly the
government by eliminating the lengthy litigation process that currently characterizes the traditional
liability system. Of course, establishing and maintaining such a system would have its costs as well,
partially off-setting its savings.  Also, such a system may not entirely eliminate the costs to
property owners; taxes on property owners might help finance the system or the system  could be
designed to recover costs from particular liable parties.

       Spur blood lead level testing and related hazard evaluation and reduction

       Finally, the presence of an administrative compensation system may encourage blood lead
level testing and LBP hazard evaluation  and reduction.  If potential victims of lead  poisoning have
eas> access to compensation, they will have significant incentives to identify potential damages.
These incentives  might result in  earlier detection of lead poisoning and reduce associated
damages.

       An administrative compensation system could seek to address any of the above mentioned
goals.  The design of a system  must closely reflect the preferred goals.   For example, a system
October 20, 1993                Administrative Compensation                           Page 5

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designed to expedite claims may not directly create incentives for early detection and abatement
of hazards. In other cases, however, a system to address one goal may inadvertently support a
different goal. For example, expediting claims may effectively reduce litigation costs.  These
interactions must be  carefully considered in designing a system.

       Potential Major Drawbacks

       Although an  administrative program to compensate persons injured by LBP hazards would
have many benefits, several obstacles may limit the feasibility of sue i a program. These
drawbacks include:

       •      Need for public financing. Given the injuries that an administrative
              compensation system might cover (e.g., medical care and monitoring,
              relocation, and loss of future earnings), a substantial amount of public
              funding could be required. The most likely source of funding would be
              new taxes, levied either against potentially responsible parties (e.g., paint
              manufacturers, lead producers or importers, or property owners).
              Regardless of who ultimately funds the administrative compensation system,
              large  new public expenditures may not be politically feasible at this time.

       •      Possible reduced incentives for abating LBP hazards.  Potential exposure
              through  the liability system to claims caused by LBP hazards may currently
              provide strong incentives to rental property owners to reduce these
              hazards, especially for  properties where young children reside. If an
              administrative compensation syt  . protected these property owners from
              claims, they may not have incen /es to engage in>azard reduction
              activities  However, an administrative compensatic i system that can
              recover costs from individual responsible parties may still provide property
              owners with incentives to abate LBP. In addition, the lack of incentives
              could be mitigated by regulations mandating hazard reduction.

       •      Caps on the amount of compensation available to claimants.  An
              administrative compensation system would establish standard payments for
              a pre-defined set of injuries such  as medical care and monitoring,
              relocation, and lost potential future earnings. Funds for such
              compensation would necessarily require public financing (see above). To
              reduce public expenditures, the administrative system could limit
              compensation to victims.  The extent of this limitation could depend,
              however, on the whether the administrative system is set up as an exclusive
              forum for compensation or whether it allows  injured parties to, seek
              additional relief through judicial actions.

       •      A large administrative structure.  Any administrative compensation
              program would need a significant administrative structure.  Systems would
              need to be developed  to receive and process  claims, pay compensation to
              victims, handle appeals where necessary, and  recover costs from liable
              parties.  Given the potentially large numbers  of children that have been
October 20,  1993                 Administrative Compensation                          Page 6

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              exposed to LBP hazards, an administrative structure for a LBP
              compensation system could be extremely large and complex.

       Major Components and Options of an Administrative Compensation System

       There are a numerous ways to design an administrative compensation system.  Exhibit 1 •
above diagrams the potential structure of such a system. Several of the major components of an '
administrative compensation system and the key options for each component are described briefly
below:

       Choose an Administrative Structure

       An administrative compensation system can be established in two different ways:

       (1)    Federal system.  The administrative compensation system could be a
              federal system established by Congress.  This  federal system could be
              administered by a federal agency or delegated to the states. Such  a system
              would achieve national uniformity and consistency among states.  In
              addition, a federal system may be more realistic from a financial viewpoint
              because some funding options (e.g., taxes on  lead and lead products) are
              more feasible at the national than the state level. Depending on whether
              the administrative compensation system  supersedes the judicial system, a
              federally-administered system might conflict with existing state liability
              standards.  A state-administered system could be better coordinated with
               dsting state liability law.

       (2)    State system.  Administrative compensation system(s) could be > jtablished by
              individual state legislatures.  Such a system could be closely coordinated with
              existing state liability standards.

       Specify Compensable Injuries

       An administrative compensation system could be designed to cover a  wide range of
damages.  These costs could include:

       •      Medical care and monitoring expenses. These expenses encompass
              immediate treatment of lead poisoning (e.g., chelations) and any ongoing
              monitoring to detect long term neurological damage.  The fund might pay
              for these costs only if they are not covered by the victim's health insurance.

       •      Temporary and permanent  relocation.  It may be necessary to' remove a
              poisoned child from the contaminated residence while abatement activities
              are undertaken, or permanently if abatement is not  undertaken. An
              administrative compensation system could pay these costs.

       •      Lost potential future earnings.  Permanent brain damage may prevent a
              lead poisoned child from leading a self-sufficient life as an adult or reduce
October 20, 1993                 Administrative Compensation                          Page 7

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              future earnings due to inability to perform higher paid work.  The system
              could compensate these lost future earnings. Such payments could be
              calculated by developing a standard formula based on blood lead levels and
              the estimated duration of exposure could be developed, thereby creating
              uniformity and reducing administrative costs. Payments for lost potential
              future earnings can be very high.

       •      -Emotional distress.  Like lost potential future earnings, emotional distress
              is difficult to estimate.  Emotional distress in the context of exposure could
              include the anxiety associated with ongoing medical monitoring, the strain
              of parents dealing with a brain-damaged child, or even the trauma of being
              forced to vacate a residence with LBP hazards. Also, like lost potential
              future earnings, the costs of such payments could be quite high.  In one
              Massachusetts case, a woman was awarded $9,000 in emotional distress
              damages even though her child was found to have no lead in his blood,
              simply to compensate her for her concern that her child might be poisoned.
              This factor would need to be addressed in designing an administrative
              system, possibly by establishing a standard minimal amount for proven
              emotional distress.

       •      Hazard reduction costs. In order to prevent further exposure of a
              poisoned child to LBP, the administrative compensation system could pay
              for the costs of reducing LBP hazards in the child's residence or
              permanently relocating « child to an uncontaminated residence.

As is obvious from ine array of examp s above, the greater the range of injuries covered, t\ '.
more expensive the system  would be.

       Determine Eligibility •

       A variety of eligibility standards could also be established to limit the claimants able to
obtain  compensation. Some eligibility criteria that might be applied in the context of LBP claims
include:

       •      Harm caused by LBP hazards versus all environmental lead hazards.
              The administrative compensation system could be set up to pay only for
              injuries demonstrated to have been caused by LBP.  Other sources of lead
              exposure (e.g., lead in plumbing fixtures or soils) would not be
              compensable under system.  Separating damages caused by LBP  from other
              lead sources, however, may prove difficult.  It may be necessary to  limit
              coverage to  cases where proof of LBP hazards is documented  by
              inspections.  This limitation, however, could raise equity concerns because
              children with the same damages may or may not be eligible for
              compensation, depending on the documentation of the LBP hazards'
              existence.
October 20, 1993                Administrative Compensation                          Page 8

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       •      No fault versus non-negligence.  The administrative compensation fund
              may employ a "no fault" standard for recovering damages. Under a no
              fault standard, injured persons may be allowed to make claims and need
              only prove that a LBP hazard caused the harm.  Alternatively, the
              administrative compensation system may employ a "non-negligence"
              standard. Under a non-negligence standard, injured persons may be
              allowed to make claims only if they (or their parents or guardians) did not
              themselves contribute to their injury.

       •      Eligibility of children of homeowners.  The no fault issue is particularly
              relevant when determining eligibility of children of homeowners.  A no
              fault standard could allow children to make claims regardless of parental
              actions.  For example, even if a parent knew that a home contained LBP,
              the fund would provide compensation.  Alternatively, the eligibility
              standard may consider a parent's negligence or breached duty of care. (See
              the liability paper.)  For example, if a homeowner allowed paint  to chip
              and peel and then attempted to recover damages for his  or her lead
              poisoned child, the claim would be barred under a non-negligence standard.

       •      Limitations on when exposure occurred. The administrative compensation
              system could have broad or narrow criteria for the time period during
              which injured parties could recover  damages.  Under broad standards,
              injured parties could recover for a period of time after damages  become
              known.  For example, if an adult could prove  that he or she had sustained
              brain du  ige as a child due to the ingestion of 7-BP chips contaminated
              dust or Sv.il, he or she would be compensated  fcx ihose damages.
              Alternatively,  under narrower standards, time  limits could be placed on
              recovering damages.  For example, claims could be filed under the
              administrative compensation system only if less than two years had passed
              since the exposure occurred.

       Funding Sources

       As discussed briefly above, any administrative compensation system would require public
funding of some sort. The level of funding required is potentially substantial. Alternatives for
funding a LBP alternative compensation system include:

       •      Tax on lead production and importation. As the ultimate source of lead
              poisoning, taxing lead "removed" from a U.S. smelter and lead and lead
              products imported into the country  may be a reasonable  way tp fund the
              administrative compensation system. The lead industry is likely to
              vigorously oppose any such tax.

       •      Tax on sale of paint, petroleum, drinking water, and other products that
              contribute or contributed to lead in the environment Similar to a tax on
              lead itself, a tax on products that once contributed or currently contribute
              to lead in the environment may be a reasonable way to generate funds for
October 20, 1993                Administrative Compensation                          Page 9

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              compensating lead poisoning victims.  Producers of goods that no longer
              contain lead (e.g., paint manufacturers) may, however, object to such a tax
              since they are no longer contributing to the problem.  Also, some
              producers who entered the market after 1978 and have never contributed
              to the  problem may feel such a tax is unjust.

              Real estate transfer taxes. Given the association of LBP damages with
              housing, an administrative compensation system could be financed by real
              estate  transfer taxes.  Such taxes would likely be admi listened at  the state
              level.   Many states level a real estate transfer tax, and some, notably
              Florida, have used that income to develop a dedicated source of  funding
              for affordable housing.  Predictably, homeowners, and buyers and sellers of
              property that has no LBP hazards (e.g., buildings constructed after 1978 or
              buildings where LBP has been abated) may object to the tax as might
              affordable housing advocate who  would prefer to use funds to develop low-
              income housing.  In addition, such a system would likely be limited to
              taxing  property only when it is sold, while compensation would be paid to
              persons injured by all properties.

              Property taxes.  Like real estate transfer taxes, property taxes could be
              levied  to fund an administrative compensation system. Also, like real
              estate  transfer taxes, however, property owners are likely to object to any
              additional tax burden.

              General fu...   ^inally, the administrative compensation system could be
              funded, not ti  jugh a specific tax, but instead through general funds.
              Given  the potential costs of such  a system, some sort of tax increases
              would  likely be necessary in order to generate the revenues needed to
              cover the costs of administering the system and compensate victims.

              Cost Recovery. Regardless of the means used to-fund the administrative
              compensation system, a system would  attempt  to recover costs of
              compensating victims  from responsible parties (e.g.,  rental  property owners
              and their liability insurers) where feasible and  cost-effective.  This cost
              recovery would generally entail bringing lawsuits against or negotiating
              settlements with property owners and their liability insurers.  The ability of
              the fund to recover costs depends on the ability of the system to identify a
              responsible party and the solvency of that party once identified.  In
              addition, because cost recovery is covered by liability law, not all  funds
              would  have liable parties.  (See discussion of barriers to recovery in liability
              paper.) Whether the recovery of some costs would  significantly help cover
              the costs of the administrative compensation system would depend, in part,
              or the cost of cost recovery actions.
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       Relationship to liability system

       Another factor to consider in establishing an administrative compensation system is its
relationship to the current liability system.  An administrative compensation system might play the
following roles vis a vis the traditional liability system:

       •      Mandatory forum for LBP damage claims.  An administrative
              compensation system could be designated as the mandatory (and exclusive)
              forum for damage claims. Under this scenario, no claims could be brought
              in the judicial system; all LBP damage cases would be handled by the
              administrative system. If this option is chosen, the fund size would need to
              be very large or compensation amounts would need to be significantly
              lower than court recovered damages.

       •     -Optional but exclusive forum.  Alternatively, injured persons could be
              allowed to choose whether to seek claims through the administrative system
              or the courts. Once the decision is made, injured persons would not be
              permitted to seek claims under the other system.  Therefore, claimants
              would probably weigh the likelihood of recovery and the size of the claim
              against the effort involved in a judicial action versus an administrative
              claim.

       •      Optional and nonexclusive forum. Injured persons could be allowed to
              seek compensation through both administrative and judicial systems.  If the
              injured person re  ved compensation for some injuries I.* both forums, any
              administrative compensation would need to be offiset by j,-uicial awards.- It
              is possible that such a system would  compensate limited types of damages
              and leave the remainder to the courts.

       Administrative and other procedures

       Any administrative compensation system should have well-established guidelines and
procedures for reviewing claims, determining the validity of claims, and allowing for appeal of
decisions.  Generally, these procedures ought to be established to balance the goals of low
transaction costs, predictability of the outcome, and fairness.  These procedures include:

       •      Rules of evidence.  The administrative compensation system  may establish
              the rules of evidence that will govern the claimants' burden of proof in
              filing a claim. Rules  of evidence under an administrative compensation
              system could detail the types of proof needed  to demonstrate a right to
              compensation. For example, the presence of LBP in a poorly maintained
              housing unit could be determined to constitute proof that the LBP was the
              source of lead poisoning for children living in  that unit.  Rebuttable
              presumptions could also be established.  A certification program that
              allowed a property owner who conducts certain LBP hazard  reduction
              activities to receive some relief from liability could be considered a
              rebuttable presumptions (i.e., the owner would be presumed non-negligent
October 20, 1993                 Administrative Compensation                         Page 11

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              unless the claimant could prove extenuating circumstances such as poor
              building maintenance following certification.)

              Procedures for filing claims.  An administrative claims system will also
              need procedures for making claims.  Again, these procedures should be
              designed to balance goals such as fairness, administrative costs, and
              predictability.  Thus, procedures could include instructions for the type of
              documentation that must be submitted and rules for judging the validity of
              those documents. Other procedures could include conducting oral
              hearings, limiting the amount of written documentation required, and using
              an independent fact finder rather than relying on arguments by opposing
              parties.

              Procedures for appealing administrative decisions. Procedures for
              appealing administrative decisions may depend on whether the
              administrative compensation system is the sole source of compensation for
              a particular set of damages. If so, then a system of administrative appeals
              must be developed. If a claimant may still take his or her claim to the
              judicial system, however, a standardized administrative appeal system may
              not be necessary. If judicial appeals are allowed, the administrative
              compensation system will need to have rules concerning forfeiture of any
              compensation received from the system in the event that the judicial
              proceeding results in an  award.  Also, a system would need to establish
              whether judicial  appeals require a "new trial" separate from the
              admi    -ative procee' gs or whether the results of previous administrative
              proa  dings are consid -ed.                      *

              Relationship to health insurance programs.  An administrative
              compensation fund for LBP claims is likely to compensate medical
              expenses (both for treatment and monitoring). Some or all of these
              expenses may be covered under a claimant's private or public health
              insurance program.  To the extent that costs are covered elsewhere, the
              administrative system may wish to establish procedures for either collecting
              compensation from the health insurer for those costs or not paying these
              costs to claimants who can recover costs under their insurance.
              Alternatively, the administrative compensation system could be structured
              to replace health insurance for these claims.
3.     Current and Proposed Approaches to Administrative Compensation

       The United States and Japanese governments have established administrative systems to
compensate victims of certain diseases.  The U.S. Black Lung benefits program is a targeted
workers' compensation program, which  compensates miners who have contracted
pneumonconiosious (black lung disease) as a result of working in coal mines or their survivors.
The Japanese Pollution Fund is broader; it compensates persons who have contracted specific
diseases caused by toxic substances in designated areas of the country.  Exhibit 2 summarizes the
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major aspects of each program. The remainder of this section describes the systems in more
detail, including their administrative structure, compensable injuries, eligibility requirements, and
funding sources.

             Exhibit 2:  Comparison of Two Administrative Compensation Systems'
.
Goals
Administration
Eligibility
Compensable
Injuries
Funding Sources
Relationship to
Judicial System
Black Lung Fund
Compensate past victims and
surviving dependents of victims of
dust exposure in coal mines
U.S. Department of Labor
Coal mining employment and total
disability or death due to black lung
disease
Monthly benefits equal to 37.5
percent of the monthly pay rate for
federal employees in GS-2;
payments increase by 50, 75, and
100 percent if the claimant has one,
two, or three depen^nts,
respectively;
medical and chronic care expenses
Excise tax on coal sales;
payments by coal companies or
their insurers
If claimants seek fund
compensation, they cannot seek
judicial compensation
Japanese Pollution Fund
Compensate individuals suffering
from diseases caused by toxic
substances in designated areas
Japanese local governments
Mercury, cadmium, or chronic
arsenic poisoning and residence or
work for a specified period of time
in a designated zone
Medical care expenses, disability
compensation, rehabilitation,
survivors' compensation, and
funeral expense;
benefits are paid monthly;
disability compensation payments
equal 80 percent of »'.v<;rage
monthly wage of claimant's sex and
age group multiplied by disability
factors
Taxes on pollution sources and
automobiles
Claimants are free to pursue fund
and/or judicial remedies
       Black Lung Fund

       The Black Lung Benefits Act created a system to compensate miners .injured by coal dust
exposure.4  The program provides monthly payments and medical benefits to coal miners who
are totally disabled from black lung disease and monthly payments to their surviving dependents.
The program, initially administered  by the Social Security Administration, is currently administered
by the U.S. Department of Labor.

       According to the Act, the persons eligible for compensation are:
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       •      Present and former coal miners and any individual employed in or around
              coal mine and involved in the extraction, preparation, or transportation of
              coal who are totally disabled or who have died from the disease; and

       •      Dependents of present, former, and deceased coal miners.

       In order to receive compensation, eligible persons must file a claim with the Social
Security office or Department of Labor Black Lung district office. Claimants must prove
employment at mines, the existence of the disease, and total disability or death.  These offices
forward claims to the Office of Workers' Compensation Programs (OWCP) where the deputy
commissioner grants  a formal hearing. Claimants may appeal the decision by the deputy
commissioner to an administrative law judge.  Subsequent appeals can be filed with the Benefits
Review Board in the Department of Labor and the United States Court of Appeals.

     .  Miners or survivors who qualify receive monthly benefits at rate equal to 37.5 percent of
the monthly pay rate for federal GS-2 employees (approximately $387).  Payments increase by 50,
75, and 100 percent if the claimant has one, two, or three dependents, respectively.  Beneficiaries .
also receive medical treatment for the disease, including prescription drugs, office visits,
hospitalization, and chronic care services. Federal black lung benefits are reduced or "offset" by
the amount of a state or federal workers' compensation award received for the same disease.
Such offsets have reduced Trust Fund costs by approximately $20.1 million annually.6 A claimant
who has earnings in excess of a maximum allowable limit receives fewer benefits.7

       Once the Department of Labor decides to compensate a victim, it determines who will pay
for the cc  . nsation.  Through threatened c   ~tual court litigation, the Department obtains
compenpa  JD for particular injured parties fro.  coal mine operators or their insurance
compan1  s. The Black Lung Disability Fund provides compensation if a liable and  financially
viable party cannot be found. An excise tax on coal sales finances the Fund.

       The total costs of this program have been quite high. For example, in 1991, total
revenues received by the Fund totalled $879.5 million.  The total fund costs that year, however
were $947.6 million,  $892.5 million in compensation and $55.1 million in administrative costs (six
percent of total costs).  As  of December 1991, the Fund was $3.3 billion in debt to the federal
government.   In recent years, program costs have fallen due to the gradually declining number
of beneficiaries and prevention of overpayments through better tracking and collection
procedures.

       Japanese Pollution-Related Health Compensation Law

       The Pollution-Related Health Damage Compensation law compensates individuals who
live or work in pollution zones. The government established these zones on the basis of high
levels L/f air pollution and other specific health conditions designated as being pollution-related
(e.g., mercury poisoning).  The law, enacted in 1973, initially compensated two classes of victims:

       •       Class 1 victims could obtain compensation for certain diseases (e.g.,
               respiratory diseases) caused by high levels of air pollution in designated
               areas of the country; and
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       •      Class 2 victims could obtain compensation for diseases caused by specific
              pollution sources (e.g., mercury and cadmium), but only if they met
              stringent eligibility requirements.

In 1987, an amendment to this law  abolished all  Class 1 designations due to declining levels of air
pollution and the large numbers of claims experienced by the Fund.  Class 2 victims continue to
file claims, but represent only a small fraction of total pollution-related injury claims in the regular
judicial system.?  Class 1 claimants are free to pursue judicial remedies.10

       Currently, local governments, with oversight by the Japanese Environment Agency,
administer this compensation system.  Several pollution-related diseases have been identified by
the Japanese government as deserving compensation under Class 2:  mercury poisoning
(Minamata disease), cadmium poisoning (Itai-itai disease), and chronic  arsenic. In order to
receive compensation, a claimant must have contracted one of the above mentioned diseases in
his living or working zone.  Once a claim has been filed, a regional Health Damage Certification
Council verifies that an individual has a disease.  If a disease is verified, a victim must
demonstrate that he or she has lived or worked for a specified period of time in the designated
zone.  Claimants may appeal decisions to the prefectural governor or mayor, who will then appeal
to the Pollution-Related Health Damage Compensation Grievance Board.

       Depending on the degree of disability, claimants may receive compensation for:

       •      Medical care expenses;
       •      Disability compensation;
       •      Rehabilitation expenses;
       •      Survivors' benefits, and                        ,^
       •      Funen • expenses.

       To fund this administrative compensation system, regional Pollution-Related Health
Damage Compensation Associations collect monies from parties that emit specific pollutants (i.e.,
cadmium, mercury, and arsenic) into the air or water.  Revenues from a tax on the weight of
automobiles support the administrative expenses of this program.

       Critics of the Japanese law assert that the law excludes a large number of persons
suffering from atypical symptoms of the designated diseases. The number of claims approved
continues to decline, in part due to decreasing air pollution levels and certain measures the
government has taken to deny certifications.  Therefore, although the initial law sought to
provide broad relief for pollution victims, administrative difficulties have caused the government
to curtail its reach; most pollution-related claims must resort to toxic tort litigation through the
courts
4.     Administrative Compensation Options

       This section evaluates potential options for an administrative system to compensate
persons injured from L6P hazards. Given the wide range of potential compensation systems, this
section identifies and evaluates three generic approaches that vary in key dimensions:
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       Option 1:     A comprehensive federal compensation system;

       Option 2:     A state administered two-tiered compensation system; and

       Option 3:     A state fund of last resort.

Each option is evaluated against several criteria:  effectiveness in compensating injured persons
and reducing LBP hazards, cost, equ-'ty, political feasibility, and administrative ease.

       Option 1:  Comprehensive Federal Compensation System
                                                       1. Comprehensive Federal Compensation
                                                                    System
                                                    Effectiveness
                                                    Cost
                                                    Equity
                                                      olitical
                                                      asibility

                                                    Administrative
                                                    Ease
                                 Assures compensation for
                                 injured persons; decreases
                                 incentives to reduce LBP
                                 hazards.
                                 High costs to maintain
                                 administrative system and
                                 compensate injured persons.
                                 Parties taxed to fund the
                                 system may not be responsible
                                 for problem.
                                 Strong opposition due to high
                                 cost.
                                 Large administrative structure
                                 needed for claims
                                 management
       •Under this option, Congress would
establish a federal administrative system to
compensate persons injured by LBP and other
sources of lead in the environment. The system
could be administered by a federal agency such
as EPA, HUD, the Social Security
Administration, or another agency.
Administrative procedures would need to be
developed to receive and process claims, pay
compensation to  injured parties, and handle
appeals of claims when  necessary.   Congress
would establish a new federal tax (e.g., on lead
production and importation) as a dedicated
rf   . ue source for the  administrative
cc  ipensation system.

       •The administrative compensation system
would fully compensate claimants' reasonable
medical costs and a capped amount for loss of
potential future earnings. The cost for special
education and care of the injured persons would
also  be  included.  The system would also fund LBP reduction activities and temporary and
permanent relocation of injured parties as needed to prevent further LBP exposure.

        The system would apply a no-fault eligibility standard. Under this standard, injured
persons would be allowed to make claims regardless of who or what caused the lead injury.  The
injured  person would not be required to prove the source of the injury.

        The administrative compensation system would be designated as the mandatory and
exclusive forum for damage clairm>.  Under this system, no claims could be brought in the judicial
system,  all LBP damage cases would be handled by the administrative compensation system. In
effect, this administrative system would replace the liability system as the primary mechanism for
handling LBP damage claims.

        Given the potentially large numbers of persons exposed to LBP and other sources of lead
in the environment and the no-fault eligibility standard, a large pool of claimants would be eligible
October 20, 1993
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                                                                                     Page 16

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for recovery.  The system would require a large administrative structure to manage claims.
Funding needs for compensation and administration would be substantial because of the large
numbers of claimants and the broad range of compensable injuries.  In the current environment
of budget deficits and fiscal stringency, obtaining public support to fund this initiative would be
difficult.  While the system could be financed by a tax on lead production and importation or a
tax on sale of paint, petroleum, drinking water, or other products  that contribute or contributed
to lead in the environment, any new tax would be bitterly opposed by the affected industries.  In
addition, targeted taxes present problems of equity — present manufacturers or other taxpayers,
who may not have been responsible for the contai lination, would  be required to pay the bills.

       This option could decrease incentives for  rental property owners to reduce LBP hazards.
No claims could be brought in the courts because all LBP damage cases would be  handled by the
administrative compensation system. Therefore, owners of LBP housing units would no longer be
subject to potential liability for failing to reduce or abate LBP hazards.  Owners, however, might
be required to .reduce LBP  hazards under other types of options (e.g., by regulation).

       While the administrative system is the primary means to seek compensation, the judicial
review of claims determinations would provide a final opportunity for appeals.  Because a claim
against the fund is the only remedy for LBP and other lead injuries, judicial review of
administrative determinations of the federal compensation system  would be necessary to meet
constitutional requirements.  The judicial review could be narrow  in scope.   A court could
review the legal sufficiency of the claim determination and overturn the administrative decision
only if the agency was arbitrary and capricious or abused its discretion.  A compensation
determination would be upheld if it took into account all relevant facts and did not reflect any'
clear errors in judgment.
                                                             s
       Option 2: Two-tiered Compensation Sy:  em

       In order to compensate children, who are the most susceptible to LBP hazards, a two-
tiered compensation system could be established to cover the costs to care for children with
elevated blood levels (tier 1) and allow them to obtain compensation for additional damages
through the state liability system (tier 2).  Under  this system, federal legislation would establish
the requirements for an administrative compensation system, but states would be required to
implement the program, with federal financial and technical assistance.  A federal  agency would
be responsible for assuring that states comply with the minimum federal requirements.

       The administrative compensation system would provide full recovery for all of a child's
reasonable medical costs. The types of compensable medical costs would be uniform nationwide
so that a child's medical care does not depend on the state or location where the LBP hazard
occurred or the child resides. The system would also fund LBP hazard reduction activities and/or
temporary and permanent relocation of injured parties as necessary to prevent future LBP
exposure.  The fund would  recover costs, where  possible, from government and private health
insurance programs. Even if a national universal health care program is adopted,  this option
would provide an alternative and conceivably more equitable source of funding for medical costs
created by exposure to LBP (e.g., taxes on lead and lead products).  The administrative system
would need to establish procedures to prevent injured persons from recovering for the same
damages from more than one source.  The burden of such procedures may make this option
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                                                         Z. Two-tiered Compensation System
                                                     Effectiveness
                                                     Cost
                                                     Equity
                                                     Political
                                                     Feasibility

                                                     Administrative
                                                     Ease
                                 Assures at least limited
                                 administrative compensation
                                 (tier 1); retains incentives for
                                 hazard reduction because
                                 victims can sue for non-
                                 admmistratively compensable
                                 costs (tier 2).
                                 High costs to administer the
                                 system and compensate
                                 injuries.
                                 Parties taxed to fund the
                                 system may not be responsible
                                 for problem.
                                 Strong opposition due to high
                                 cost.
                                 Large administrative system
                                 needed for claims
                                 management
undesirable if a comprehensive natural health
care program is adopted.

       The system would apply a no-fault
eligibility standard similar to the standard in
Option 1.  Under this option, however, an
injured child or the guardian must demonstrate
that LBP caused  the injuries.  While limiting
compensation to  LBP injuries would reduce the
system's financial needs, some persons injured by
LBP would face difficulties in proving that LBP,
rather than other sources of lead  (e.g., soil
contaminated by  other sources of lead such as
gasoline emissions) caused their elevated blood
lead levels.

       The level of funding for this option could
be substantial, though lower than the first option
because of the more limited scope of coverage.
Given the  large number of children exposed to
LBP hazards, a large number of claimants would
still be eligible for medical costs.  While the cost
of this option could be  split between the federal government and states, obtaining public support
would be difficult because of the high cost. The potential revenue sources for this option (e.g.,
taxes on lead and lead-based products) would face strong indusL   ipposition.

       The system would also require a large administrative s  ucture to manage claims.  State,
rather than federal implementation of the LBP compensation system could provide some
administrative flexibility. This local control could  accommodate different state conditions and
needs.

       Through judicial actions under state liability laws, injured parties would be allowed to seek
recovery from responsible  parties for damages  not compensable under the administrative system
(see liability paper for further discussion of the liability system).  For example, children and their
guardians could be able to sue potentially responsible parties for damages  such as emotional
distress and lost potential future earnings not covered by the administrative compensation system.
The ability of injured parties to seek certain  compensation from responsible  parties provides
rental property owners  an incentive to reduce LBP hazards.

        Option 3:  State Fund of Last Resort

        Another option for the administrative compensation system would  provide a moderate
level of  compensation to persons injured by LBP but who cannot obtain compensation through
state courts because either the rental property owner or other responsible parties are insolvent or
cannot be  identified or the property owner has demonstrated compliance with safe harbor
requirements that bar liability. Thus, this compensation system acts as a fund of last  resort for
those injured parties  who are unable to  recover damages from any responsible parties. Unlike
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                                                                                      Page 18

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                                                             3. State Fund of Last Resort
                                                      Effectiveness
Options 1 and 2, the federal government would
not have a role in the system.  States would
establish and administer this program.

       This system covers the same costs as
Option 2 plus a modest amount of lost earnings,
but may be less costly because the fund would
not provide compensation when a financially
viable liable party exists.  Thus, the number of
eligible parties would be limited, which would
reduce significantly the need for funding.

       Funds for this option would be raised at
the state level through taxes, assessments, or
other means.  Some state governments may be
able to find a dedicated source of revenues, such
as property or property transfer taxes, to finance
this activity.  In today's tight fiscal times,
however, finding the public resources to pay for
these costs will be difficult. States could  have
trouble financing a compensation  system  because
any taxes for funding would be strongly opposed
by those people or industries affected by the taxes. Because this option would be adopted at the
state level, the compensation available to injured persons and funding sources would vary from
state to state.
                                                      Cost
                                                      Equity
                                                      Political
                                                      Feasibility

                                                      Administrative
                                                      Ease
Ensures moderate
compensation, incentives Jo
reduce LBP hazards are
unaffected because owners
remain potentially liable under
state liability laws.
Modera : costs for
compensation and
administration.
Ensures some compensation
regardless of whether the
liable party is insolvent or has
safe harbor protection.
Opposition because of the
cost.
An administrative system
required to manage complex
system.
       Because the liability system would remain the primary mechanism fc   injured parti  s
seeking compensation, this option would not affect the incentives under liability law for rt atal
property owners to reduce LBP hazards.
       The exhibit below summarizes the evaluation of the three administrative compensation
options.
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                                 Administrative Compensation
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COMPARISON OF ADMINISTRATIVE COMPENSATION OPTIONS
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
Option 1:
Comprehensive Federal
Compensation System
Assures compensation for injured
persons; decreases incentives to
reduce LBP hazards
High costs to maintain
administrative system and
compensate injured persons
Parties taxed to fund the system may
not be responsible for problem
Strong opposition due to high cost
Large administrative structure
needed for claims management
Option 2:
Two-tiered Compensation System
Assures at least limited
administrative compensation (tier
1); retains incentives for hazard
reduction because victims can sue
for non-administratively
compensable costs (tier 2)
High costs to administer the system
and compensate injuries
Parties taxed to fund the systehi
may not be responsible for problem
Strong opposition due to high cost
Large administrative system needed
laims management
Option 3:
State Fund of Last Resort
Ensures moderate compensation;
incentives to reduce LBP hazards
are unaffected because owners
remain potentially liable under
state liability laws
Moderate costs for compensation
and administration
Ensures some compensation
regardless of whether the liable
party is insolvent or has safe harbor
protection
Opposition because of the cost
An administrative system is
required to manage complex system
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Page 20

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Endnotes

1. Meeting with insurance industry representatives at the National Center for Lead-Safe Housing,
August 26, 1993.

2. "A Study to Determine the Availability of Lead Liability Insurance for the Private Owners of
Low to Moderate Income Rental Housing," Jackson Anderson, National Center for Lead-Safe   •
Housing, May 1993, p. 17.

3. "Some Question Extent of Lead's Risk to Kids, Need to Remove Paint," Wall Street Journal,
September 16,  1993, p. 1.

4. 30 U.S.C. 901-945.

5. Pete S. Michaels, "Conundrum of Black Lung Appeals: Two Proposed Solutions," Journal of
Law Reform, Fall 1989, pp. 27 to 32.                              .

6. U.S.  Department of Labor, Annual Report on Administration of the Black Lung Benefits Act
During Calendar Year 1991, p. 5.

7. Ibid.

8. Ibid., p. 7.

9. Alice Stewart, "Japan's 1987 Amendment to the 1973 Pollution-Related He^'th Damage
Compensation Law:  Tort Reform and Administrative Compensation in Compa  tive Practice,"
Harvard International Law Journal,  Spring 1988.

10.  J. Gresser, K. Fujikura, and A Morishima, "The 1973 Law for the Compensation of
Pollution-Related Health Injury:  Theory and Practice," Environmental Law in Japan, 1981, p>
290.

11.  Alice Stewart, "Japan's 1987 Amendment to the 1973 Pollution-Related Health Damage
Compensation Law:  Tort Reform and Administrative Compensation in Comparative Practice,"
Harvard International Law Journal,  Spring 1988.

12.  5 U.S.C. 706.
October 20, 1993                Administrative Compensation                         Page 21

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REDUCING LEAD-BASED PAINT HAZARDS IN ECONOMICALLY DISTRESSED HOUSING
1.
Introduction
       Initiatives designed to address lead-based
paint (LBP) hazards in private housing, such as
requiring property owners to evaluate and
reduce LBP hazards in units occupied by young
children, may not effectively reach all types of
units throughout the stock.  Units experiencing
economic distress are one group that deserves
particular attention because requirements to
address LBP hazards can create economic
hardship for the owners of these units.  If efforts
to reduce LBP hazards in private housing fail to
consider the nature of this component of the
housing stock, the units most in need of
assistance to address this health hazard may be
overlooked.
                                                            Key Issues
                                                 What are economically distressed units?

                                                 What impact will LBP requirements have
                                                 on economically distressed units in the
                                                 absence of a subsidy for LBP reduction?

                                                 What are some potentially useful indicators
                                                 of economically distressed housing?

                                                 What are the current approaches used to
                                                 address LBP hazards in economically
                                                 distressed units7

                                                 What are some potential options for
                                                 addressing LBP hazards in economically
                                                 distressed units?
       This paper examines economically
distressed housing and the issues associated with
reducing LBP hazards in this portion of the
private housing stock.  While most of the other issue papers prepared for the T  v Force focus
on key sectors of the housing market (e.g., appraisal, financing, insurance, and li«  ility), this paper
concentrates on this important component of the private housing stock anc5  how the policies
needed to reduce LBP hazards among distressed units differ from the policies needed for units
not in.distress.  Because this paper focuses on issues and options specific to a portion of the
housing stock rather than a sector of the housing market, it overlaps with several other papers,
including the financing, hazard evaluation, and introductory papers. Where appropriate,
references to the other papers indicate where topics are covered in more detail.

       The reminder of this paper is organized as follows:

       Section 2:      Describes background information on economically distressed
                      private housing, including the nature of such housing, the
                      importance of subsidizing LBP hazard reduction in these units, the
                      methods of intervention, and  the involved parties.

       Section 3:      Reviews current and evolving approaches used by ''ederal, state, and
                      local governments to address LBP hazards in economically
                      distressed housing. It also discusses several important barriers that
                      limit these efforts.

       Section 4:      Considers several initiatives that could be taken to successfully
                      reduce LBP hazards in these units.
October 20, 1993
                        Economically Distressed Housing
Page 1

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2.     Background

       This background section first introduces the concept of an economically distressed unit
and then identifies the numbers and some basic characteristics of these owner-occupied and rental
units. Next, the section discusses how requiring owners of private housing to address LBP
hazards can negatively affect economically distressed units and the importance of subsidizing the
costs of meeting these requirements. To better understand the economically distressed
component of the private housing stock, the key players and intervention points for reaching
these units are described. Finally, the section discusses some potential ind'-^ators for identifying
units in economic distress.

       What Are Economically Distressed Units?

       The economic condition of a property affects an owner's ability to address the presence of
LBP hazards.  Properties that are stronger economically have a greater ability to cover the costs
associated with LBP hazard reduction than properties that are economically weaker. The housing
stock can be viewed as a continuum containing units that are economically viable, economically
distressed units, and units somewhere in between.  Many factors affect the economic condition of
properties and determining when units should be considered economically distressed is difficult.
This paper adopts one definition  of economic distress to provide a basis for discussing the issues
associated with addressing LBP hazards among units in poor economic condition. A more refined
definition of economic distress will need to be developed as specific proposals to respond to LBP
hazards in this portion of the housing stock are formulated.
       Economically amreaseu iiousiug, for the purpose of this paper, is defined r.  private
housing unit where the property owner cannot afford to correct physical conditions ti- ..t pose a
threat to the health and safety of the occupants of the unit, such as LBP hazards.1 These
owners do not have sufficient cash to make repairs nor the ability to repay a market-rate loan
covering the cost of the needed improvements.  Economically distressed housing includes
properties with a continuum of financial needs. Some property owners have such limited income
and resources that improvements, such as LBP hazard reduction, are financially infeasible without
assistance in paying a substantial portion of the costs.  Owners of other economically distressed
properties may able to afford these improvements with only a little financial assistance.

       In contrast, those units where the owner can afford to correct such conditions — either
from  existing financial resources, such as savings, rent increases, or market-rate financing ~ are
referred to as economically viable units. These property owners have a moderate to high ability
to pay for improvements.  (See the financing paper for a more detailed discussion about ways
owners can Finance LBP activities.)

       The circumstances that constitute economic distress vary between owner-occupied and
rental units.

       •       Owner-Occupied Units:  Economic distress is present when the
               homeowner has insufficient income, savings, or equity to cover the cost of
               correcting conditions that pose a health or safety threat, such as LBP
               hazards.
October 20, 1993               Economically Distressed Housing                        Page 2

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       •      Rental Units: Economic distress is present when a property owner lacks
              the rental income and equity to pay for a market-rate loan covering the
              cost to correct conditions that pose a health or safety threat, such as LBP
              hazards; or

              when units are occupied by low-income tenants2 and the cost to correct
              unsafe conditions would require rent increases that exceed what the
             -tenants'  can afford to pay for housing.

       One example of an economically distressed unit is a single family home owned by a couple
with two young children where one parent was laid off last year. The results of a recent blood
testing program at the local day care center showed that both children have elevated  blood lead
levels and a subsequent inspection of the house revealed several LBP hazards. The family cannot
pay the $8,000 necessary to abatement the hazards out of their savings and, with the loss of one
income, they cannot afford to borrow the money.

       Another example is a small apartment building in an urban neighborhood where most of
the tenants earn considerably less than the median income for the city.  A recent inspection of
the units and common areas found a number of LBP hazards throughout the property.  Due to
sharp increases in property taxes and insurance costs, the owner's financial reserves are dwindling
and monthly income barely covers operating costs.  Raising the rents for the 12 units in the
building is the  only way to cover the cost of repairs, but almost all of the tenants already pay
nearly 40 percent of their income for rent and utilities and can't afford to pay more.3 These
apartments are also considered economically distressed units.

       Economic distress is most often found in units occupied by, low-income renters am
homeowners.  These properties and residents  are much less  likely to be able to absorb the
financial costs of needed improvements, such as LBP abatement, than properties occupied by
middle- and upper-income households.  However, in some circumstances units occupied by
households with higher incomes can encounter economic distress.  For example, large financial
losses or high levels of debt could leave an upper-income homeowner unable to afford the LBP
abatement cost for his or her property.  Yet, unlike lower income households, upper-income
households generally have the option of moving to a lower cost property as a way of  mitigating
their economic distress. For moderate-income households — those with incomes near the median
income for their area ~ their ability to escape distress by moving to a less costly unit will depend
on area housing costs.  In high cost areas, moderate-income households, like low-income
households, often have few if any options in the private market to reduce their housing costs.

       Numbers of Economically Distressed Housing with LBP Hazards

       The number of economically distressed units with LBP hazards and the characteristics of
these units are difficult to determine.  Available data on the country's housing stock,  such as
decennial Census figures and American Housing Survey data,4 contain little information about the
economic condition of housing units. Estimates based on available data, however, can offer some
insights about these units.  Most estimates use low household income to indicate economic
distress.
October 20, 1993               Economically Distressed Housing                        Page 3

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       A recent report prepared by the Alliance to End Childhood Lead Poisoning and the
National Center for Lead-Safe Housing5 estimated that approximately 18 million of the country's
72 million occupied units likely to contain LBP (i.e., those built prior to 1978) are economically
distressed.  Of these 18 million units, roughly two-thirds (13 million) of these are owner-occupied
and one-third (5 million) are rental units (see Figure 1).  The report's findings also reveal that
among the units of greatest concern - those occupied by children under the age of six ~ the
number of rental units in distress (1.1 million) exceeds the number of owner-occupied units (0.9
million).

                                          Figure  1

                         Economically Distressed Housing by Tenure
                               Among Pre-1978 Units (millions)
              Owned, viable
                 33 C45
                                              Rented,  distressed w/chi Id < 6
                                                     1 1   O  5SO
                           Rented,  distressed
                              39  C5 4*0
                                                            Re/ited, viable
                                                            21    C29 29O
                    Owned,  distressed
                         12  C16 8XD
               Owned, distressed w/child -c 6yrs

                   09   C 1 3*}
       These estimates are based on the following assumptions about economic distress:

       •      All owner-occupied units where the household income is less than $20,000
              are considered economically distressed.

       •      All occupied rental units where household incomes are less than $20,000,
              housing costs are less than $500, and occupants pay more than 30 percent
              of their income for housing are also economically distressed.

While this definition of economic distress provides a useful estimate of the extent of economic
distress within the pre-1978 housing stock, these figures need to be interpreted with care.  Using
October20, 1993
Economically Distressed Housing
Page 4

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an income threshold of $20,000 makes this a conservative definition of economic distress because
in many areas some households with incomes above $20,000 are living in distressed units,
particularly in areas with high housing costs. With further research, this definition could
potentially be refined to take into account variations in income and housing costs across the
country.

       Presence of Physical Distress

       Economically distressed units may also be experiencing physical  distress. Physical
distressed can be examined at two levels:

       •      Substandard Units:  These units have physical deficiencies that would
              prevent them from meeting HUD's Housing Quality Standards for decent
              safe, and sanitary housing.  This represents a broad definition of physical
              distress.

       •      Physically Inadequate Units:  Physically inadequate units are a subset of
              substandard units and represent a more narrowly defined measure of
              physical distress.  These units have more extensive physical deficiencies and
              are considered physically inadequate under the American Housing Survey's
              definition of housing adequacy.

       A significant share of economically distressed units also experience some type of physical
distress (see Figure 2). An analysis of 1989 American Housing Survey data reveals that 63
percent of pre-1978 units that can be considered economically distressed are also substandard
using the  definition above.  The share of economically distressed units that are physically
inadequate is much lower ~ only 13 percent meet this definition of physical distress.  By contrast,
the proportion of all pre-1978 units that are inadequate is just 9 percent.

       Need for Subsidies

       An owner's inability to pay for necessary improvements is  the characteristic that separates
economically distressed units from economically viable units in the private housing stock.
Initiatives designed to increase LBP hazard evaluation and reduction in the private housing stock
will have few, if any, positive impacts on economically distressed units unless the actions include
some type of subsidy for these units.6  If the owners cannot pay for proper LBP hazard
reduction measures,  corrective measures either will not be taken or less expensive measures that
produce unreliable and unsafe results will be used.

       Requirements that landlords perform LBP  hazard evaluations and reductions  may cause
some owners of lower value properties to neglect these requirements or simply abandon the units
if there is no financial assistance in meeting these requirements.  Concerns about liability suits for
LBP damages by tenants are one reason owners  abandon properties.  State and local LBP laws, as
in Massachusetts, that allow tenants to withhold  rent if an owner does not abate LBP hazards can
also result in abandoned properties. If an owner cannot afford to abate units with  LBP hazards,
the lost rental income from these units can often push owners into default. A recent Wall Street
Journal article reported that abandonment of multifamily rental properties has  occurred in a
number of Massachusetts' cities when landlords could not obtain financing to remove the lead
October 20, 1993               Economically Distressed Housing                         Page 5

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                                          Figure!

                         Economically Distressed Units Experiencing
                                      Physical Distress
           Not  Physically Distressed
                     37*
         CSubstandard and  Inadequate}

                       1396
                               Physically  Distressed
                                        63*
                                 CSubstandard Only}

                                        50%
paint in their properties.7 "Wiieu this happens, tenants frequently are left without units, the LBP
hazards remain, and the properties often deteriorate beyond repair.  In some cases, local
governments can take possession of abandoned properties, address the LBP hazards, and return
the units to the private sector, but this process is generally very time consuming and expensive.

       Requiring LBP hazard reduction among units in the private stock and providing no
subsidy to distressed units may lead owners to avoid renting units to tenants, such as families with
children, that pose a liability threat  The same Wall Street Journal article reported that families
with children often have a difficult time finding rental housing in Massachusetts because the
State's LBP law requires testing and abatement when units are occupied by young children.
Despite a provision in the State law that makes it illegal to refuse to rent to such tenants because
the landlord may have to address LBP hazards in the unit, this discrimination still occurs.

       Another possible result when a subsidy to distressed units does not accompany
requirements to evaluate and reduce LBP hazards is that owners of these properties will select
poor quality hazard reduction methods. LBP program staff in several states report that owners
who cannot afford proper hazard reduction measures often try to do the work themselves or find
someone to do it at a low cost.  Such efforts often reduce the presence of LBP so that the unit
will pass many types of LBP hazard evaluations; however, the unit may actually have an even
higher presence of lead hazards because improper techniques often leave high levels of lead
contaminated dust in the unit.  Offering financial assistance to help pay for proper LBP hazard
reduction and requiring hazard evaluations that check lead dust levels can help avoid this
problem.
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Economically Distressed Housing
Page 6

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       Key Players

       To understand how measures to reduce LBP hazards in the private housing stock can
affect economically distressed units, it is important to know the different parties that have ties to
economically distressed units. The key players in the housing market that are affected by actions
aimed at economically distressed units include:

       •      homeowners.  Generally, properties that are economically distressed are of
            .  low or modest value to their owners and provide only limited equity. The
              owners themselves often have low incomes.

       •      Renters. Renters living in economically distressed units tend to occupy
              units with lower rents. As is the case for homeowners, these renters also
              tend  to have low incomes which prevent them from moving to units in
              better condition.

       •      Landlords. As with homeowners, landlords of economically distressed units
              are faced with lower property value and lower rental income. However,
              declining property values can create economic distress among higher value
              properties.

       •      Property Managers.  Owners of multifamiiy properties often hire
              companies to manage their properties. These firms generally handle the
              occupancy, maintenance, and financial operations of such properties.
              Because the managers work directly with tenants and are responsible for
              the physical condition of their properties, initiatives regarding LBP hazards
              will likely a  set managers as well as property owners.

       •      Lenders.  Lenders  hold mortgages for many economically distressed
              properties. The extent to which LBP hazard reduction initiatives affect
              owners' ability to pay their mortgages or resell their properties is of
              concern to lenders.

       •      Public Agencies. These agencies often assist owners of distressed private
              units by providing rehabilitation loans or financing assistance. Because
              owners of economically distressed units cannot finance LBP hazard
              evaluation and reduction on their own, public agencies likely will have to
              provide financial assistance.

       Addressing LBP Hazards in Economically Distressed Units

       The intervention points that represent promising opportunities for initiating LBP hazard
evaluation and reduction in distressed pre-1978 housing are much the same as the points for
economically viable units. They are as follows.

       •      Sale  of Property.  Currently, a number of requirements must be satisfied
              prior to the sale of a property — some imposed by lenders, some
              established by government authority. LBP evaluation and reduction could
October 20, 1993               Economically Distressed Housing                         Page 7

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              be another required action prior to the sale of a pre-1978 residential
              property.  Certified lead-safe properties could be exempt from this
              requirement. This type of intervention may create severe economic
              hardship for some owners and make it virtually impossible for owners to
              sell properties where hazard reduction costs exceed the value of the
              property.

       •      /Turnover of Rental Units. A state or local agency could establish a
              requirement that landlords have LBP evaluations performed by licensed
              inspectors and show the results to prospective tenants. Such a step would
              go beyond the notification requirements of Title X of the Housing and
              Community Development Act of 1992 which will take effect in October 28,
              1995. The Title X requirements simply specify that owners must provide
              prospective tenants with available information about the presence of LBP
              in the unit, but do not require a LBP inspection (see Federal Efforts to
              Address LBP Hazards in Distressed Housing in Section 3  of this paper).
              Under this type of intervention, once a unit has been inspected, the results
              would be valid for a specified number of years.  The agency would probably
              need to provide financial assistance to help pay for these activities to make
              this option feasible (see next option).

       •      Rehabilitation Work Supported with Public Funds.  Purchasers and
              existing owners of housing affordable to lower income households can
              already apply to publicly supported rehabilitation programs for financial
              assistance  for physiidi improvements to the property. Many of the
              properties eligible for assistance fit the definition of economically distressed
              housing. Requiring own rs who apply for this assistance to perform
              appropriate LBP hazard evaluation and reduction activities is another
              possible intervention point for addressing LBP hazards in distressed
              properties. Under Title X, after January 1995 local rehabilitation programs
              funded by almost any major  federal housing program must require LBP
              inspection and abatement for properties that receive more than $25,000 of
              assistance  per unit.  This provision and its requirements are discussed in
              more detail in Section 3 of this paper.

       •      Public Education. Property owners may also conduct hazard evaluation
              and reduction in response to public education materials explaining the
              importance of testing for and controlling LBP hazards. Public education
              combined  with financial assistance could lead many owners of distressed
              properties to evaluate and reduce LBP hazards in their properties.

       The issue paper on LBP risk assessment and inspection provides a more detailed
discussion of the first three intervention points.  The last intervention point is not a regular
activity in the housing market, but it is a method of reaching property owners that has been used
in efforts to address other environmental hazards such as radon.
October 20, 1993                Economically Distressed Housing                         Page 8

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       Identifying Economically Distressed Housing

       Because owners of economically distressed properties cannot afford LBP hazard
evaluation and  reduction costs, some form of subsidy must be provided to effectively address LBP
hazards in these properties.  To avoid subsidizing properties that can afford the cost of addressing
LBP hazards, it will be necessary to distinguish economically distressed units from those that can
afford the cost  of hazard evaluation and reduction.

       There is no perfect method for easily identifying a unit in economic distress. Analyzing a
property's physical condition and financial circumstances to ensure that owners applying for a
subsidy are needy is very time consuming  and often not practical. However, several potentially
useful indicators can help identify distressed properties:

       •      Age of unit;
       •      Cost burden;
       •      Household income; and
       •      Property value.

Some combination of these indicators could be used to target public funds to assist distressed
units. Among distressed  units, priority could be given  to assisting units occupied by households
with children in order to help those most vulnerable to LBP hazards first.

       Age of Unit

       Older properties are more likely than newer properties to have physical conditions that
pose a threat to the health and safety of the occupan's.  These properties also generally require
higher levels of -naintenance. The greater incidence  f inadequate conditions and the need for
more intensive  maintenance means older  properties frequently cost more to maintain than newer
properties.  In older units occupied by low-income households, the higher cost of maintenance
often exceeds what the occupant can afford to pay after other household expenses  and the
deficient conditions go unconnected.                           -     '  •   .

       Cost Burden

       In assessing ability to pay for housing, households where housing costs exceed 30 percent
of their income are generally classified as having a cost burden. When housing costs exceed this
level, the family is assumed to lack sufficient income to meet other basic needs.  Most federal
housing programs that help tenants pay their rents, such as the Section 8 Certificate program, use
this standard to determine how much tenants must pay and the amount of assistance to provide.
(See issue paper on tenant-based assistance for information about Section 8 rental  assistance.) If
a family's hou  ing costs already exceed 30 percent of household income,  then  that family often
cannot afford the additional cost of necessary improvements to their unit. This standard is a
better indicator of ability to  pay among low- and moderate-income households than it is for
middle- and upper-income households.
October 20, 1993               Economically Distressed Housing                        Page 9

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       Household Income

       Lower income households - those with incomes at or below 80 percent of the area
median household income — living in private housing units are more likely to experience
economic distress than middle- or upper-income households. With the exception of households
receiving tenant-based assistance, lower income households are more likely to have a housing cost
burden and live in units with deficiencies that pose a health and safety risk.  In areas where
housing costs are much higher than the national average (e.g., New York City, San Francisco),
using the low-fncome threshold as an indicator of economic distress is less effective because some
households with incomes at or somewhat above the area median income may also live in
economically distressed units.

       Property Value

       Properties with lower values frequently have deficient conditions that threaten the health
or safety of the occupants.  The presence of these deficient conditions is often one of the factors
contributing to the lower value of these properties.  Because lower value properties tend to be
owned or occupied by households with lower incomes, the cost of correcting the deficient
conditions often exceeds what the occupants can afford and therefore the unit is considered
economically distressed. The threshold for identifying lower value properties will vary by the
housing costs for an  area. An agreed upon threshold for identifying lower value properties does
not currently exist.  However, with additional analysis it may be possible to develop a standard .
threshold set at a specified percentage of area median property values for identifying lower value
properties.
3.     Current and Evolving Approaches to Addressing LBP Hazards in Distressed Housing

       Initiatives that can help address LBP hazards in distressed housing have been taken not
only at the federal level, but also by state and local governments. This section first describes
federal efforts regarding LBP hazards that affect distressed housing units. Next, this section
reviews state and local initiatives that help address LBP hazards in distressed housing. Finally, the
barriers to addressing LBP hazards in economically distressed housing are discussed.

       Federal Efforts to Address LBP in Distressed Housing

       The primary focus of Title X and the federal LBP initiatives has been on addressing LBP
hazards in publicly-owned and federally-assisted units (see Appendix for summary of Title X
requirements pertaining to these units).  Attention has been  concentrated on these properties
because the federal government is directly involved, has a clear responsibility, and the ability to
directly influence policy through federal statutes and regulations. While these units have received
particular attention, the federal government has also taken steps that affect the private housing
stock and economically distressed units within that stock.

       Lead-Based Paint Abatement  Grant Program

       HUD has established a Lead-Based Paint Abatement Grant Program which funds states
and local governments to undertake LBP demonstration projects aimed at reducing LBP hazards
in low- and moderate-income private housing.  The program  was first authorized by Congress as
October 20, 1993               Economically Distressed Housing                       Page 10

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part of the Department of Veterans Affairs, Housing and Urban Development and Independent
Agencies Appropriations Act of 1992 in October 1991.  Title X modified certain aspects of the
program and authorized funding for additional years. In 1992, approximately $46.5 million was
awarded to ten grantees.  They are:

                 States                              Localities

              ^California                          Alameda County, CA
              Massachusetts                       Baltimore, MD
              Minnesota                          Boston, MA
              New Jersey                         Cleveland, OH
              Rhode Island
              Wisconsin

       While the primary objective of the program is to help states and localities reduce LBP
hazards in private units serving needy families, it also seeks to systematically assess various hazard
reduction and  abatement methods in an effort to identify lower cost techniques for addressing
LBP hazards.  For example, the State of Minnesota has used its grant funds to establish a
program that addresses LBP hazards by combining intensive cleaning, controls to reduce LBP
hazards, and training for occupants on ways they can reduce the chance that children in the unit
will be exposed to LBP hazards.  HUD has asked the National Center for Lead-Safe Housing to
evaluate the cost and effectiveness of the various hazard reduction techniques employed by
grantees.

       Further, the grant program seeks to expand local capacity for LBP hazard reduction by
providing a stimulus for states to enact LBP legislation and supporting the development of the
LBP testing and hazard reduction industries in their areas.  HUD has set aside   separate pool
funds to make grants to 15 states to fund efforts to establish lead-based paint certification  .
programs for contractors that provide testing and abatement services.

       Addressing LBP Hazards During Rehabilitation

       Title X, Section 1012 formally established LBP hazard evaluation and reduction as an
eligible activity for rehabilitation programs supported with funds from major federal housing
programs. Because  most of the funds  awarded through federally-supported rehabilitation
programs for private housing assist economically distressed units, this action will help owners of
distressed housing pay for LBP hazard evaluation and reduction.  However, these funds are also
used to address many other important rehabilitation needs and these needs far exceed the funds
available.

       In addition, Section 1012 requires that after January 1, 1995, all  units r^eiving more than
$25,000 per unit in federal rehabilitation funds must abate LBP hazards. Proj cities receiving less
than $25,000 in assistance must reduce such hazards. While guidelines for abatement and hazard
reduction must be spelled out in detail in new regulations, the requirements of Title X represent
a major federal commitment to LBP hazard reduction.

       Allowing federal housing funds to be used to address LBP hazards provides a means to
respond to LBP hazards, but expenditures for LBP activities are likely to reduce the amount of
October 20, 1993               Economically Distressed Housing                        Page 11

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 funds available to address other rehabilitation needs.  Once the new requirements go into effect,
 states and local housing rehabilitation agencies will lose their discretion over the priority assigned
 to LBP activities. In areas where affordable housing is in critically short supply, these agencies
 will be forced to choose lead-safe housing over creating additional affordable units.  Some of
 these agencies are concerned that they are being required to supply a higher quality df affordable
 housing than demanded by many tenants. For example, many needy households in distressed
 neighborhoods do not have young children and need an affordable unit more than a lead-safe
 unit.

        Disclosure of Potential LBP Hazards to Potential Purchasers and Renters

        Title X, Section 1018 requires the disclosure of LBP and known LBP hazards in
 residential property transactions occurring on or after October 28, 1995.  Affected transactions
. include the purchase, sale, or lease of units built prior to 1978. As discussed in the introductory
 paper,  sellers or landlords participating in affected transactions must provide purchasers and
 renters with a lead hazard information pamphlet and disclose the presence of any known LBP or
 LBP hazard. In addition, sellers must allow purchasers the opportunity to conduct a LBP hazard •
 evaluation and include a Lead Warning Statement in the sales contract.

        These provisions will affect the entire private housing stock, including economically
 distressed units.  LBP observers report that these requirements will prompt some owners of
 distressed housing to seek assistance through available programs to evaluate and address LBP
 hazards in their property. They also express concern that the extremely limited availability of
 subsidies to help owners of distressed properties will lead to the problems of abandonment, use of
 unsafe haiaid reduction techniques, and discrimination against tenants with young children.

        Proposed Federal Trust Fund for LBP Abatement

        Congress is currently-considering two bills (H.R. 2479 and S. 1347) to create a Lead-Based
 Paint Hazard Abatement Trust Fund which would be used to provide grants for LBP hazard
 evaluation and reduction activities to states and local governments. Recipients could use grant
 funds for LBP hazard evaluation and reduction, testing blood-lead levels in young children, and
 initiatives to train, certify, and monitor workers performing LBP activities.  The funds could be
 used by states to provide services  directly or provide financial assistance to owners enabling them
 to procure services from the private sector.  The Trust Fund would be capitalized by a new excise
 tax on  lead "removed" from a U.S. smelter and lead or lead products imported into the United
 States.

        The proposed grants for LBP hazard evaluation and abatement must be used to assist
 units occupied by families with children and units affordable to lower income families.  Thus, the
 Trust Fund would provide states with financial resources that could be used to assist owners of
 economically distressed housing with the cost of LBP hazard evaluation and reduction.

        State and Local Initiatives

        While many states and local governments have passed laws concerning LBP, relatively few
 have taken steps to finance LBP hazard reduction in economically distressed housing.   Current
 initiatives to help owners cover the cost of LBP hazard reduction include:
 October 20, 1993                Economically Distressed Housing                       Page 12

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       •      Low-interest loans;
       •      Grants; and
       •      Tax credits.

'The issue paper focusing on financing mechanisms also provides useful information about these
 forms of assistance.

       Low-Interest Loans

       Low-interest LBP loan programs can help owners of economically distressed properties
 finance the cost of hazard evaluation and reduction.  These programs offer loans at interest rates
 well below the rates a private lender would charge and often let borrowers spread  the payments
 out over a longer period of time. The lower interest rate and favorable terms keep monthly
 payments at a level affordable to lower and moderate-income families.

       These programs  are designed  to serve owners who cannot afford market rate financing to
 have their property fixed.  The public entity sponsoring the program either makes the loans
 directly or a private lender originates the loans and the sponsor buys them from the lender at a
 price that includes a fee for making the loan.  Most programs offer loans only to single family
 homeowners, however, some also issue these loans to multifamily property owners.

       Massachusetts offers low-interest loans for LBP abatement to single-family homeowners
 through its "Get the Lead Out" program.  The program targets loans to owners with incomes
 b^low a threshold adjusted for family size. For example, a two-person household with an income
 i t 3r below $39,600 is eligible for a five-percent loan to cover the cost reducing LBP hazards in
 their home. The program also offers no-interest loans for income^ek'gible homeowners who  have
 a lead poisoned child and cannot afford additional debt.8 Loans up to $15,000 are available  and
 carry a maximum term of 15 years.  To receive a loan through the Massachusetts program, eligible
 borrowers must have a licensed inspector examine the home and  determine the extent of LBP
 hazards present. A licensed contractor must then perform the work required and a proper follow-
 up inspection  of the work must be obtained.

       Massachusetts raised $11  million for its loan program through the sale of $10 million in
 tax-exempt bonds and state funds from the savings achieved under the State's recently enacted
 Savings Bank  Reform legislation. State funds are used to help reduce the interest rate on these
 loans to five percent.  The monthly payments made by borrowers are used repay tax-exempt
 bondholders.

       Since the program started in March 1992, approximately 50 low-interest loans have been
 made to single family homeowners. State agency staff believe use of the program will increase as
 homeowners become more educated about the effectiveness of ha.ard reduction methods and as
 the local market begins  to value lead-safe homes.  Homeowners often have doubts about the
 effectiveness of abatement due to widely publicized stories where lead poisoning has occurred
 even after LBP abatement was done. Also,  because  abatement work currently does not add  any
 value to a property in the local market, economically distressed homeowners are more likely  to
 use their discretionary resources to make improvements that will  increase  the value of their
 property.  State agency staff report that their general rehabilitation programs offering reduced
 interest loans  comparable  to the LBP loans have a much higher volume of activity.
 October 20, 1993              Economically Distressed Housing                       Page 13

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       Grants

       States and local governments have also used grants as well as deferred payment and
forgivable loans, which in essence are grants, to address LBP hazards in economically distressed
housing. In some programs, this assistance is reserved for critical cases (e.g., a family ihat has a
lead poisoned child and cannot afford the cost of fixing the unit). Generally, however, these
funds are used to assist owners who are low-income themselves or whose properties are
affordable to low-income tenants.

       One example is the forgivable loan program developed by the State of Maryland.  Under
this program, owners of single-family or multifamily properties can apply for no-interest forgivable
loans of up to $15,000 per unit to cover the cost of making the property lead-safe.  Loans to  - .  .
homeowners are forgivable over a five-year period, while multifamily loans are forgiven over a 15-
year period. Rental units must be occupied by very low-income families, and for owner-occupied
units, the owner must be either a very low-income or a low-income family with .young children or
a pregnant woman. Inspections and the use of licensed contractors are required. Like the
Massachusetts low-interest loan program,  an initial and follow-up inspection is required and all
activities must be performed by licensed providers. The program is currently funded by the state's
LBP grant from HUD.

       The program has  provided $4 million to 500 units since it started in 1986. Activity has
risen as the  program has  matured.  In 1992, 150 units were assisted.  Staff expect to serve 400 to
500 units in 1993 and are working to find a long term source of funds for the program to replace
the HUD grant money.

       Tax Credits for LBP Abatement

       Another method of assisting property owners is to offer to reduce their taxes in return for
taking appropriate measures to control LBP hazards in their property.  Tax credits for LBP
abatement provide a dollar-for-dollar reduction in a taxpayer's liability for the cost of abatement
up to the maximum allowable credit amount.  They are designed to help offset the cost of
reducing LBP hazards and provide an incentive to use proper hazard reduction techniques rather
than cheaper, less reliable, or less effective methods.

       The State of Massachusetts instituted a tax credit for LBP abatement in 1988.  Currently,
Massachusetts residents can receive credit of up to $1,000 per unit for  LBP abatement costs.  The
State legislature is considering a proposal to raise the value  of the credit to $2,500.

       Like the State's loan program, a unit must have an initial inspection to examine the extent
of LBP hazards and a follow-up  inspection to confirm that the  required work .was done. The
inspections and abatement work must be  done by licensed providers. Property owners of any
income can  apply for the credit,  however, it can be claimed only for allowable abatement costs
and  does not cover the cost of inspections.  The credit can be used for single-family or multifamily
units.  If a recipient is unable to use the full value of the credit awarded, the unused portion of
the credit may be carried over for up to five years. For example, if a homeowner qualified for a
$1,000 credit under the program in 1992 but had a 1992 tax liability of only $800, the remaining
$200 of the credit could be applied against the owner's tax liability in later years, but would have
to be used before 1997.
October 20, 1993               Economically Distressed Housing                        Page 14

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       Use of the Massachusetts credit started slowly, but has grown in recent years.  In 1991,
nearly 2,000 taxpayers applied for and received the credit. However, some observers note that
the tax credit provides a viable incentive only for a limited pool of property owners.  The credit is
attractive to owners who can afford to pay the cost of abatement and who have sizeable State tax
liability. Many owners in Massachusetts, however, have lost significant equity in their property
due to the decline of the real estate market in the Northeast and are having trouble getting the /
financing necessary to have the work done. The tax credit doesn't help these owners because,
without a loanr they can't pay to have the work done. (See  financing paper for a discussion of
owners who could afford abatement if private financing were available.) Similarly, low-income
owners with little or no tax obligation are not able to take advantage of the credit.

       •The Massachusetts tax credit, as currently structured, does not help owners of
economically distressed properties because it fails to provide up-front financial assistance needed
to reduce the cost of abatement for  the owner.  One modification to the tax credit legislation
under consideration would make the credit assignable to other parties. - This change,  if
implemented, would allow property owners to sell the credit and use the proceeds to reduce the
cost of LBP hazard reduction.  Such a change may help the owners of some economically
distressed properties, but these owners would still be required to pay for any costs not covered by
the value of the tax credit.

       Most LBP tax credit recipients appear to be  single-family homeowners and thus far few
rental property owners in Massachusetts have taken  advantage of the credit.  Some observers
speculate that the credit is too  small relative to the cost of the repairs  to provide enough of an
incentive fcr landlords to participate. If the value of the credit is raised to $2,500, more owners
may use the tax credit, however, Massachusetts policy-makers believe this change also would make
a substantial public subsidy available to owners who  can afford to'pay for LBP hazard reductio  .

       Barriers to Addressing LBP Hazards in Distressed Housing

       Several barriers limit current efforts to address LBP  hazards in economically distressed
housing.  They include:

       •      Limited availability of public resources;
       •      The competing  housing needs of distressed housing residents;
       •      The high cost of LBP hazard reduction;  and
       •      The added cost  of local rehabilitation requirements.

Each of these is discussed below.

       Limited Availability of Public Resources

       The costs of identifying and reducing LBP hazards in economically distressed housing are
significant.  Using public funds to help owners of these  properties cover even a portion of this
cost would require a sizeable investment. In an era  of fiscal belt-tightening at the state and local
levels and the growing public mandate to reduce the federal government's deficit, finding the
public resources to pay for  these costs will be difficult.  The proposed federal LBP Abatement
Trust Fund could help overcome this barrier.
October 20, 1993                Economically Distressed Housing                       Page 15

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       Competing Housing Needs of Distressed Housing Residents

       Residents of economically distressed units frequently face conditions beyond LBP hazards
that threaten the health and safety of their families. Examples of these conditions include
inadequate heating systems, incomplete plumbing, and deteriorating roofs.  Eliminating the LBP
hazards in these units without addressing these other hazards would fail to protect the health and
safety of the families.  Correcting other deficiencies in economically distressed units at the time of
hazard reduction will require additional subsidy and, assuming a limited level of public resources
for this work, will reduce the number of distressed units that can be treated for LBP.  Because
efforts to address lead hazards in distressed housing are often  viewed as competing for the same
public resources that would be used to help meet other housing needs, organizations and
constituencies working to improve conditions in affordable or  distressed housing do  not always
support LBP initiatives.

       High Cost of Hazard Reduction

       The high per unit cost of hazard abatement limits the  number of economically distressed
units that can be assisted with available public resources.  The use of less extensive treatment
measures, such  as interim controls, would mean more units could be made safe in the short-run.
Critics of interim controls oppose their use arguing that these measures simply delay the cost of
properly abating the unit, are often ineffective in reducing hazards, and require ongoing
monitoring, which can be costly. Identifying lower cost methods of effectively reducing LBP
hazards would greatly increase the number of economically distressed  units that could be assisted
with available resources.  The Department of Housing and Urban Development (FUD) and the
Environmental  FiOicCtion Agency (EPA) are currently supporting research on eff  i e low-cost
methods. As discussed above, HUD is also conducting an evaluation of the first rt  *nd of grants
awarded through the Lead-Based Paint Abatement Grant Program discussed above  that will look
at the cost-effectiveness of various hazard  reduction techniques used by grantees.

       Added Cost of Local Rehabilitation Requirements

       Local building codes and ordinances frequently require that when improvements are made
to a unit, it must be brought up to local building standards. These local building standards may
require improvements that exceed the level of work necessary for LBP hazard reduction. LBP
hazard reduction activities often trigger these local  rehabilitation requirements, further increasing
the costs of LBP hazard reduction.  For economically distressed units, these additional costs
increase the amount of subsidy  required and reduce the number of units that potentially could be
served.
4.     Options for Economically Distressed Housing

       The need for public investment to address LBP hazards in economically distressed housing
is clear.  This section describes several options for assisting owners of economically distressed
housing to help highlight the advantages and considerations associated with different approaches
and to provide a starting point for developing recommended actions aimed at this portion of the
housing stock.  These options are presented primarily for purposes of illustration and may not
include the full range of possible actions worthy of consideration.
October 20, 1993               Economically Distressed Housing                       Page 16

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       The four options discussed below explore different ways that federal, state, and local
governments could help reduce LBP hazards in these units.  In most cases the options could be
implemented by any level of government.  While these options focus on steps that governments at
different levels can take regarding LBP hazards, they represent a variety of approaches and do
not automatically assume that government needs to be the primary actor or provider of services.
These options are not mutually exclusive.
           Options for Addressing LBP Hazards in Economically Distressed Housing

     Option 1.   Make block grants for LBP hazard reduction in economically distressed units
                to state or local governments.

     Option 2.   Provide low-interest loans and grants for LBP hazard reduction to owners of
                economically distressed housing.

     Option 3.   Contract with private firms or nonprofit organizations to provide LBP hazard
                evaluation and reduction services for economically distressed properties.

     Option 4.   Offer a  tax credit for LBP hazard reduction in economically distressed units.
                                                      1. Block Grants for LBP Hazard Reduction
       Option 1:  Federal block grant for LBP
hazard reduction. A federally funded block
,T,rant for LBP haznu reduction would allow
state and local governments to design programs
that address their particular needs.  Block grants
offer flexibility, local control, and various
investment options designed to meet community
needs.  To ensure that grant funds are used to
assist owners of economically distressed
properties, the block grant could impose
targeting requirements. For example, grantees
could be required  to target funds for LBP
hazard evaluation  and reduction to  units with
rents affordable to low-income households, to
properties in certain neighborhoods, or to
households with prescribed incomes.

       The basic structure could be modeled
after the popular Community Development
Block Grant (CDBG) program.  Reporting and
monitoring systems that parallel CDBG procedures could be adopted.  New procedures would be
needed for monitoring grantees to ensure that local programs meet certain minimum standards for
LBP hazard evaluation and reduction.

       A variation of this option could more explicitly take into account the presence of the
CDBG program.  Rather than create an entirely new program,  additional funds could be added to
                                                    Effectiveness
                                                    Cost
                                                    Equity


                                                    Political
                                                   .Feasibility

                                                    Administrative
                                                    Ease
High impact; grantees could
design initiatives tailored to
local conditions
Likely to be expensive;
Congress could control costs
through its appropriation
process.
Targeting can help assure that
low-income families are served.
Politically difficult to raise
needed resources.
Could use administrative
structure similar to existing
programs; would require
monitoring of grantees.
October 20, 1993
                               Economically Distressed Housing
                   Page 17

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the CDBG program. These funds could either be fungible with other CDBG program resources
or dedicated to LBP hazard assessment and reduction. Adding LBP hazard reduction into the
CDBG framework would take advantage of the exiting administrative structure, knowledgeable
staff, and well established financial and procedural mechanisms.

       Congress could control the cost of this option through the appropriation process.
However, given the  large number of units that might require assistance and the desire of each
state and local-government to receive a meaningful share of the funds, this option could be quite
expensive. In the current environment of budget deficits and fiscal stringency, it will be difficult
to obtain public support for a new initiative that requires significant resources, particularly if the
program is targeted  narrowly to distressed housing.

       A block grant may be more politically acceptable if there is a dedicated revenue source..
An excise tax on lead or products linked to lead contamination (e.g. paint, petroleum) could
provide the needed  revenue. The proceeds from such a tax could be contributed to a trust fund
and used to finance  the block grant for LBP initiatives.  While a dedicated tax is attractive, it
would  be politically  difficult to implement. Any new tax would be opposed by affected industries
and consumers.  In addition, targeted taxes present problems of equity - present manufacturers
and other parties, but  not necessarily former polluters, are asked to pay the bills.

       To make this option more attractive to lawmakers, it could be structured to leverage local
resources, both public and private. Grantees could be required to provide matching funds equal
to a certain percentage of the grant amount.  In addition,  bonus funds could be provided to
grantees that raise funds or resources from private sources.
       Option 2:  State and local low-interest
loans ai.d grants to owners of economically
distressed units. An option for increasing LBP
hazard reduction in economically distressed units
would be to encourage state and local funding
for low-interest loans and grants to owners of
these properties. Financing would be provided
to the owner who would purchase LBP hazard
evaluation and reduction services from private
providers. Financing could be tailored to ability
to pay:  low-interest loans would be available to
owners with the capacity to repay some of the
LBP hazard reduction costs, while grants and
deferred payment loans (i.e., loans paid at the
time of sale or deferred until some other period)
would i>e reserved for those with little or no
ability 10 pay.  Owners receiving assistance would
be required to use licensed contractors for these
services.
                       2. State and Local Low-Interest Loans and
                             Grants for Distressed Units
                     Effectiveness

                     Cost



                     Equity
                     Political
                     Feasibility


                     Administrative
                     Ease
Moderately high.
Could be high cost; cost
controlled by level of state and
local funding.
Can be targeted to assist low-
income households; level of
outreach to ethnic minorities
will affect their participation.
Politically difficult to raise
revenue money in a time of
fiscal constraint.
States and local governments
already operate similar
programs.
        Funds for this option would be raised at the state and local level through taxes,
assessments, or other means. Some state and local governments may be able to find a dedicated
source of revenues such as property transfer taxes to finance this activity.  An excise or polluter
October 20, 1993
Economically Distressed Housing
                   Page 18

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tax (e.g., on lead or lead products), however, would be difficult to implement at the state or local
level. While this option permits each jurisdiction to decide on the relative importance and
desirability of financing lead-related assessments and repairs, it could place a disproportionate
share of the costs on places with the most problems and least ability to pay:  large urban areas
with relatively distressed housing and high levels  of lead contamination.

       The feasibility of this approach is enhanced if combined  with a compatible federal
initiative such as the federal block grant discussed in Option 1.  The federal initiative could
require state and local matching funds, thus providing  an incentive to the cities and states to
develop complimentary initiatives.

       This option can easily be targeted to units serving low-income families with young children
and other priority units. Activities to publicize the program to minority homeowners and
landlords whose properties serve minority households will increase the likelihood that these units
will benefit from the program.

       Programs to provide these types  of assistance would be relatively easy for state and local
governments to initiate and administer.  Many states and localities operate housing rehabilitation
programs for owner-occupied and rental properties that could be used as models.  Some technical
assistance and training would  be required to help the staff of state and local governments to
incorporate appropriate standards and procedures into their current underwriting standards, work
specifications, and  inspection  procedures.

       The federal government, as opposed to states and localities,  could finance and operate a -
direct'   ,1 and grant program although recent practice has been to support state and local efforts
to assist  ousing in distress. Such an effort would face major administrative and political hurdles.
Administratively, HUO or another federal agency would have to develop a costly new system for
loan and grant origination and servicing.  Many states  and localities already have comparable types
of programs in-place. In addition, income and housing costs differ widely across the country,
making it difficult to design a system for targeting assistance to distressed units that would work
well throughout the nation. States and local governments can tailor their programs to respond to
local conditions and therefore allocate funds to distressed units  more effectively.

       Option 3:  Award competitive contracts to reduce LBP  hazards in economically
distressed units.  This option establishes a program to hire contractors to perform LBP
evaluation and reduction in economically distressed units.  Regional contracts to provide these
services would be awarded competitively to private companies or nonprofit organizations.
Contractors would seek clients (investors or homeowners) and perform risk assessment and hazard
reduction services  at no cost to them.

       As a way of targeting  economically distressed units, the services purchased from these
providers could be made available to units that meet criteria specified in the contracts, such as
occupancy by low-income families with children, rents  below a set standards, etc. From the point
of view of homeowners and investors the services would be free, thus providing an incentive to
seek out the contractors.

       This approach, depending upon the level of funding, offers the potential of reaching a
sizeable number of units.  However, the administering agency's  ability to ensure quality work will
October 20, 1993                Economically Distressed Housing                        Page 19

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                                                        3. Competitive Contracts to Reduce LBP
                                                       Hazards in Economically Distressed Units
                                                     Effectiveness
                                                     Cost
                                                     Equity


                                                     Political
                                                     Feasibility
                                                     Administrative
                                                     Ease
                                   Moderate; may offer incentive
                                   for volume not quality.
                                   Depends on level of
                                   appropriations; seeks to control
                                   costs through competition, tout
                                   government not consumer sets
                                   prices.
                                   Can be targeted through
                                   contracts and monitoring.  '
                                   Appropriation of funds will be
                                   a problem; reliance on private
                                   sector for services is attractive
                                   to some lawmakers; uses .
                                   competition to control costs.
                                   Controlling for quality will add
                                   to administrative burden;
                                   requires careful monitoring of
                                   contractor performance to
                                   avoid corruption and abuse.
significantly influence program effectiveness.
Reliable follow-up inspections will be needed to
assure that the abatement work is performed
properly. In addition, contracts must be
structured so that contractors are not tempted to
achieve high productivity at the expense of
quality work. As discussed in Section 2, poor
quality hazard reduction work often fails to
reduce LBP hazards and can actually make them
Averse.

       This program seeks to control costs
through  the competitive bidding process.  If a
sufficient number of qualified LBP contractor
submit bids to provide these services, the
administering agency could effectively obtain a
competitive price for this work.  If there is
insufficient  competition, costs could be  excessive.
Presumably, economies of scale could be
achieved if volumes of work are sufficiently high.

         Care could be taken to prevent
contractors  from avoiding units with deficient or
unusual  conditions because these unit require
greater wor1., 'hereby increasing costs and lowering profit. If tl •  v -xurs, units in poorer
condition, wl < ;h are often occupied by  households with the low X incomes, may be underserved.
This problem could be mitigated b carefully structuring the contracts with providers.  For
example, the program could be structured with incentives that encourage work on certain units
and not  on  others or focused on particular income groups, housing type, or housing conditions.
The program could incorporate a sliding scale reimbursement schedule that provides higher fees
for units occupied by very low-income households with children and lower fees for other units.
Alternatively, fees could be structured to encourage abatement in units requiring the most work
before addressing units with less extensive LBP hazards.

       As with other options, obtaining the resources to fund the program poses a considerable
obstacle. To the extent states and local governments receive  federal support for LBP hazard
reduction, such as block grants, they could allocate a portion of this money to fund this type of
program. Using private firms and nonprofit organizations to perform the work and relying on
competition to control costs are both politically popular measures.

       To implement this type of program,  a procurement process for evaluating bids for
prospective providers and making awards would need to be developed.  Because the quality of the
contractors' work is critical to effectively reducing LBP hazards in the units served, strong
measures to ensure quality work will be needed, such as certificates of lead-safe housing issued by
an independent entity. This oversight will add to the administrative burden of the program. The
administering agency would also need to develop and maintain a system for allocating program
services  to economically distressed units and areas. Given the importance of local oversight, this
type of program would be most appropriately initiated at the state or local level.
October 20,  1993
Economically Distressed Housing
                                                                                       Page 20

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       Option 4:  Assignable tax credits for
LBP hazard reduction in economically
distressed units. A fourth option for assisting
economically distressed units is to offer a tax
credit for LBP hazard reductions costs to owners
of these properties.  The tax credit would be
available to both homeowners and owners of
rental properties.  The credit could be targeted
toward economically distressed properties by
requiring  that units receiving the credit remain
occupied  by low-income households (or low-
income .households with children) for a specified
period of time after the unit is made lead-safe.

       The tax credit would be assignable so a
property owner could sell it to raise funds to pay
hazard reduction costs.  Without assignability,
the program would have limited impact, since
most owners  of distressed properties would lack
the up-front resources to pay for the costs or
risk assessments and hazard reduction.
                       4. Assignable Tax Credits for LBP Hazard
                       Reduction in Economically Distressed Units
                     Effectiveness
                     Cost
                     Equity
                     Political
                     Feasibility
                     Administrative
                     Ease
Size of credit is a key factor;
larger credit will be more
effective, but raises costs to
government.
Cost will depend on actual use
and size of credit allowed.
Will not help many low-income
homeowners; will benefit some
owners who would have made
improvements without credit
Politically difficult to raise
revenue; relies on private
sector for services and gives
owners a tax break, both are
currently popular.
Requires monitoring
compliance with targeting
requirements and quality of
services.
       The maximum per unit tax credit would
be set by federal or state legislators.  The size of
the credit will d:   ~tly affect owner participation in the program and therefore its effectiveness.
In genera), if crec ^ are small, costs will be lower, but so will the^participation rate. Unless the
credit ca\ ers most of the total hazard reduction  .»sts, owners of distressed housing generally will
be unable to pay the remaining costs and therefore cannot take advantage of the credit.

       In addition, tax credits may not be effective for economically distressed owner-occupied
units. The owners of these units often have low-income and limited tax liabilities, which reduce
the value of the credit to them. While the credits could be sold, potential investors in tax credits
may find the transaction costs too high and the benefits too low and therefore will not be
attracted to the investment  opportunity.

       The politically attractive aspects of this option are its reliance on the private sector to
provide the services and offer tax benefits to owners and investors. The tax credit will face
opposition,  however, because it reduces to revenue of the authorizing government entity at a time
when many governments are encountering budget shortfalls.  Programs offering smaller credits
will be politically more feasible than large credits because of their lower cost. _

       To implement this option, the administering agency will need a system for allocating the
credits, assuming there are caps on the'total amount of credit to be made available.  The agency
will also need to monitor units receiving the credit to ensure that they comply with the targeting
requirements for the program.  Finally, like Options  1, 2 and 3 above, the administering agency
will need to monitor the performance of LBP inspection and hazard reduction providers.

       The exhibit on the following page  summarizes the evaluation of the options.
October 20, 1993
Economically Distressed Housing
                    Page 21

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 o
 o-
 Kj
 a,
i

Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
COMPARISON OF
Option 1:
Block Grants for LBP
Hazard Reduction
High impact; grantees
could design initiatives
tailored to local
conditions.
Likely to be expensive;
Congress could control
costs through its
appropriation process.
Targeting can help
assure that low-income
families are served.
Politically difficult to
raise needed resources.
Could use
administrative
structure similar to
existing programs;
would require
monitoring of grantees.
ECONOMICALLY DISTRESSED HOUSING OPTIONS
Option 2:
State and Local Low-
Interest Loans and
Grants for Distressed
Units
Moderate''- !iigh.
Could be high cost;
cost controlled by
level of state and
local funding.
Can be targeted to
assist low-income
households; level of
outreach ' >nic
minorities w affect
their participation.
Politically difficult to
raise revenue money
in a time of fiscal
constraint.
States and local
governments already
operate similar
programs.
Option 3:
Competitive Contracts to
Reduce LBP Hazards in
Economically Distressed Units
Moderate; may offer incentive
for volume not quality.
Depends on level of
appropriations; seeks to
control costs through
competition, but government
not consumer sets prices.
Can be targeted through
contracts and monitoring.
Appropriation of funds will be
a problem; reliance on private
sector for services is attractive
to some lawmakers; uses
competition to control costs.
Controlling for quality will
add to administrative burden;
requires careful .monitoring of
contractor performance to
avoid corruption and abuse.
Option 4:
Assignable Tax Credits for
LBP Hazard Reduction in
Economically Distressed Units
Size of credit is a key factor;
larger credit will be more
effective, but raises costs to
government.
Cost will depend on actual
use and size of credit allowed.
Will not help many low-
income homeowners; will
benefit some owners who
would have made
improvements without credit.
Politically difficult to raise
revenue; relies on private
sector for services and gives
owners a tax break, both are
currently popular.
Requires monitoring
compliance with targeting
requirements and quality of
services.
 Kj

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                                      APPENDIX
TITLE X REQUIREMENTS
FOR PUBLIC AND FEDERALLY-SUPPORTED HOUSING
IVpe of Project
Public Housing
Federally-Owned
Units: Pre-1960
Federally-Owned
Units: 1960-1978
Project-Based
Federal Assistance:
Pre-1960
Project-Based
Federal Assistance:
1960-1978
Federal
Rehabilitation
Funds: > $25,000
per unit
Federal
Rehabilitation
Funds: < $25,000
per unit
Risk
Assessment
Optional;
HUD
funding
available
N/A
N/A
Yes
Yes
Not
Required
Not
Required
Inspection
Yes
Yes
Yes
N/A
N/A
Yes, if work it,
i kely to
disturb
painted
surfaces
Yes, if work is
likely to
disturb
painted
surfaces
Interim
Controls
Optional;
HUD
funding
available
N/A
N/A
Required
Required
N/A
N/A
Abatement
Yes
Yes
No:
disclosure
only
Not
Required
Not
Required
Full-
Abatement
Reduction of
hazards
Comments

For non-DoD units,
subject to availability of
appropriated funds.
For non-DoD units,
subject to availability of
appropriated funds.
Risk assessments must
be completed by 1996.
Risk assessments
phased in based on
schedule set in law.
Regulations are likely to
require full abatement
from all surfaces.
Regulations are likely to
require abatement from
surfaces that are
deteriorated, friction,
impact, and chewable,
but not from non-
accessible or intact
surfaces.
October 20, 1993
Economically Distressed Housing
Page 23

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Endnotes

1. The term economic distress should not be confused with financial distress.  Financially distress
commonly refers to cases where the owner cannot meet the property's existing financial obligations.
An owner that can no longer make the property's mortgage payments has a financially distressed unit.
An owner  that cannot  afford to replace the  unit's badly aged electrical wiring, which poses  a
significant fire hazard, has an economically distressed unit.

2. For this discussion, "low-income household" (in this case tenants) carries the same meaning as the
term used in federal housing programs.  This term refers to households whose income is equal to or
less than the income  of a family earning 80 percent of the median income for that area of the
country.  The Department of Housing and Urban Development annually calculates this income
threshold by family size for cities and counties throughout the country.

3. When landlords evaluate a prospective tenant's ability to pay, a common rule of thumb many use
is that the rent for a unit generally should not be greater than 30 to 35 percent of household income.
When rents exceed this threshold, tenants often have difficulty making rent payments.

4. The American Housing  Survey is a  nationwide survey of the housing stock and its occupants
conducted  every  two  years by  the  Census  Bureau and the Department of Housing and Urban
Development.

5. A Framework for Action to Make Private Housing Lead-Safe, Alliance to End Childhood Lead
Poisoning and National Center for Lead-Safe Housing, June 1993. The report's results are based on
an analysis of 1991 American Housing Surve*   fa.

6.  Rental units where the tenant receives a public subsidy in  the form of tenant-b  sed rental
assistance are discussed in a separate paper and therefore are not addressed in  this pap -r.

7. "Dogma  in Doubt:  Some 'Question Extent of Lead's  Risk to Kids and Need to Remove Paint,"
Wall Street Journal, September 16, 1993, p. 1.

8. This loan is forgivable if the borrower retains ownership of the property for 15 years.  Forgivable
loans are discussed below and in the financing paper.
October 20, 1993                Economically Distressed Housing                       Page 24

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             LEAD-BASED PAINT HAZARD EVALUATION AND REDUCTION
                      IN TENANT-BASED ASSISTANCE PROGRAMS
1.
Introduction
       This paper is one in a series of documents
that highlights needs and opportunities for
evaluating and reducing  lead-based paint (LBP)
hazards in privately-owned housing. It focuses on
a segment of the housing stock that is not
considered federally-assisted housing under Title
X, but that is occupied by tenants who are
assisted through federal  rental subsidy programs.
Under a variety of tenant-based assistance (TEA)
programs, the federal government currently assists
approximately 1.275 million low-income
households that rent a broad range of privately-
owned housing.
                                                          Key Issues
                                            •  W..at is tenant-based assistance (TEA)?

                                            •  Who receives TBA, and for what kinds of
                                              housing?

                                            •  What LBP activities does HUD currently
                                              require under its TBA programs?

                                            •  What are some potential options to foster
                                              LBP evaluation and reduction in TBA
                                              programs?
       Developing an appropriate policy for TBA
programs is particularly problematic because TBA
units have elements of both private and publicly-assisted housing.  Units occupied by TBA
participants can be viewed strictly as private rental housing because the owner receives no
financing, insurance, or long-range commitment that would encourage or permit expenditures for -
evaluating or reducing LBP hazards. On the other hand, the units are inspected and approved by
local housing program administrators  ad owners receive federal funds on behalf of eligible
tenants. Beca ise TBA is not included as federal assistance, Title X does not require LBP hazard
evaluation or reduction in these units, even though federal funds are being used to help pay rent
to their owners.  This situation raises the question of what obligations or programs should exist
for lead-safety in units receiving TBA

       The remainder of this paper is organized as follows:
       Section 2:
       Section 3:
       Section 4:
2.     Background
              Discusses the TBA programs operated by the U.S. Department of
              Housing and Urban Development (HUD).  It focuses on program
              design and implementation elements important to LBP policies.

              Describes HUD's Housing Quality Standards (HQS) and the LBP
              hazard reduction requirements established for TBA programs. It
              also examines the educational efforts currently underway to inform
              program participants about the dangers of LBP.

              Explores options for strengthening or enhancing LBP evaluation
              and reduction activities in TBA programs.
       This section first briefly describes HUD's TBA programs and then identifies certain
program policies and procedural elements that are key to designing LBP hazard evaluation and
reduction policies.
October 20, 1993
                           Tenant-Based Assistance
Page 1

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        What is Tenant-Based Assistance?

        TEA programs are rental subsidy programs that rely upon the privately-owned housing
 stock as the source of housing.  Rather than providing funds to develop assisted projects (such as
 public housing or privately-owned subsidized projects), TBA programs provide a rental subsidy
 that helps to make existing privately-owned housing affordable to low-income households.1

        TBA programs are designed to take advantage of the private market relationship between
 property owners  and tenants and to place a high value on tenant choice and mobility.  Eligible
 tenants are issued "certificates" (also referred to as Vouchers" or "coupons'  under various forms of
 the program).  With this certificate in hand, a household searches for and selects a unit it hopes
 to rent.  The certificate holder then requests that the program administrator, generally a Public
 Housing Authority (PHA), approve the lease for the unit.  If the  unit meets basic program
• requirements related to housing quality and cost (discussed in detail later in this paper), the
 program administrator enters into a contract with the property owner and commits federal funds
 to pay the difference between the amount the family can afford to pay2 and the rent the owner
 charges.
                                                                   Table 1
                                                         Number of Units Currently Funded
                                                          Under Section 8 TBA Programs


                                                                     Number     Percent

                                                     Family Units       981,175     77%

                                                      ik erly Units       293,250     23%

                                                     Total            1,275,000    100%
       The largest federally-funded TBA program
is the Section 8 Existing Housing Program, which
includes Section 8 Rental Certificates and Section
8 Rental Vouchers.3 The Rental Certificate
Program has been active since 1974; the Rental
Voucher Program was implemented in the 1980s.
These two programs currently assist approximately
1.5 million households (see Table \).   The
recently-enacted (1991) HOME Program also
permits TBA as an eligible activity, but few
Participating Jurisdictions are using the program
yet.5  In addition to renters, the Section 8
programs also can assist low-income homeowners
who occupy units purchased under a cooperative
form of ownership.

       As demonstrated in Table 1, the Section 8 TBA programs overwhelmingly serve families,
rather than elderly households. Historically, elderly households have been served more through
HUD's project-based assistance programs. Because the Section 8 TBA programs serve a large
number of low income households with children, reducing hazards in these units could
significantly benefit the population at greatest risk for LBP exposure.

       Key Aspects of Program Design and Administration

       Program Administration

       HUD allocates funding for the Section 8 programs to PHAs through an Annual
Contributions Contract.  HUD distributes HOME assistance in the form of "block grants" to state
or local Participating Jurisdictions (PJs), which are generally community development agencies.
PJs have discretion to use HOME funds for a variety of purposes, one of which is TBA.  Both
Section 8 and HOME impose program requirements that address participant eligibility, housing
quality, and housing availability. These three topics are discussed below.
 October 20, 1993                    Tenant-Based Assistance                             Page 2

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       Eligible Households

       TBA assistance is limited to "low-income" households. To receive Section 8 assistance
households generally must have incomes at or below 50 percent of the area median income, which
is the Section 8 Very Low Income Limit.  Households eligible for the HOME TBA program may
have incomes at or below 80 percent of the area median income, which is the Section 8 Low
Income limit. In practice, program participant incomes are significantly lower than the maximums
on average, due largely to mandatory federal  preferences that affect participant selection.  These
federal preferences stipulate that households  living in substandard housing, involuntarily displaced
and homeless households, and those paying more than SO percent of income for rent arc most in
need of assistance and should therefore be assisted before other households.6 These households
tend to have incomes much lower than the Section 8 low- and very low-income limits.

       Housing Quality Standards

       Units approved for TBA participants must meet HUD's Section 8 Housing Quality
Standards (HQS). The standards are intended to be a minimum threshold. PHAs have some
latitude to impose more  stringent standards based upon community norms as  long as those
increased standards do not unduly restrict the housing stock available to low-income households.

       The HQS standards recognize the limited purchasing power of program participants by
addressing only basic health and safety issues.  These issues generally  pertain  to the adequacy and
safety of building systems, such as heat and plumbing, and structural components, such as roofs
and foundations. The LBP component (described in more detail in Section 3 of this paper)
requires:

       •      Correction of defective paint in units occupied by children under the ?<*e of
              seven; and

       •      Testing of chewable surfaces and, if LBP is found, abatement  of units
              occupied  by a child with an elevated blood lead level (EBL).

       Many participants in TBA units lease  "in place," using the subsidy primarily to help pay for
their current housing units.  Housing conditions for those who lease in place  may improve
marginally under a TBA program since owners are often willing to complete minimal repairs to
pass HQS, rather than have a tenant leave. Other participants use  TBA assistance to help pay
for new housing in a more convenient location or in better condition.

       Housing Availability

       TBA programs are designed to make "modest," but standard housing available to low-
income households.  While in theory TBA participants are able to exercise choice ic the
marketplace, in practice  the available housing is limited significantly by the amount of subsidy
provided.

       Although the subsidies are calculated  differently for Certificates, Vouchers, and HOME
TBA, all are based on the Section 8 Fair Market Rent (FMR).7  An FMR schedule is published
by HUD annually for each locality. The FMR is intended to represent the cost of housing,
including utilities, at the  45th percentile of rents paid by all recent movers to standard housing.
Thus, in most jurisdictions the housing available to TBA program participants is at the bottom
end of the standard  housing market, even with the subsidy.
October 20, 1993                   Tenant-Based Assistance                            Page 3

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       In addition to limitations on subsidy imposed by the FMRs, TEA programs impose a "rent
reasonableness" requirement. The "rent reasonableness" test corrects for neighborhood market
conditions that are not reflected in FMRs which are established for large geographic areas.
Program administrators must determine that the rent charged for a particular unit is reasonable,
when compared to comparable unassisted units, (i.e., units that do not receive a subsidy).  In
"soft" markets (high vacancy rates, low rents) and in less desirable neighborhoods this requirement
effectively establishes a maximum rent below the FMR. The rent reasonableness requirement is
significant because if lead-safe housing does not command a higher rent in the marketplace, the
rent reasonableness requirement will prevent program administrators from  paying a premium for a
lead-safe unit.  Currently, the presence or absence of LBP is not a major determinant of rental
price in the marketplace. In general, rental prices are determined primarily by location and size
of the unit and this general trend has been confirmed with respect to LBP issues in at  least one
study.  (The appraisal paper discusses similar issues for housing sales.)

       Because the methodology used to compute FMRs uses Standard Metropolitan Statistical
Area (SMSA) wide statistics, FMRs in some jurisdictions are generous, while those in others are
woefully inadequate. Not surprisingly, owners in jurisdictions with generous FMRs4end to find
the program attractive and households in these areas have less difficulty locating an appropriate
unit than those in areas with low FMRs.

       Even  in communities with relatively low FMRs, TEA program  participants have more
purchasing power than non-assisted low-income households. Owners may be reluctant to rent to
TBA households, however, balking at the prospect of dealing with federal red-tape and HQS
requirements unless the market is soft enough to make those tradeoffs worthwhile. Thus, both
the quality and the quantity of housing available to TBA  program participants varies widely from
community to community.

3.     Current and Evolving Approaches to /' Jdressing Lead Issues  in TBA Programs

       TBA programs currently address LBP hazards in two important ways.  The first involves
imposing minimum HQS that pertain to LBP hazards.  The second involves educating tenants
about LBP hazards.  This section explores each of these issues in turn.

       Administration of Housing Quality Standards

       All units placed  under a TBA contract must meet HQS. Local housing program
administrators are required to inspect each unit proposed for participation in a TBA program.
An owner whose unit initially fails the HQS inspection is given an opportunity to correct the
deficiencies.   If the owner fails do so, the certificate holder must look elsewhere or forego
assistance.  Units under a TBA contract are inspected at  least annually and in response to
complaints from either the property owner or the tenant.

       With  respect to  LBP, HQS requires owners to:

       •      Correct any defective (i.e., cracking, chipping, peeling, scaling, or flaking)
              paint; and

       •      Test chewable surfaces in any unit occupied (or proposed to be occupied)
              by a child under the age of seven with an  elevated blood lead level  (EBL).
              If LBP is found, it must be abated. Parents are encouraged but not
              required to have children tested.
October 20, 1993                   Tenant-Based Assistance                            Page 4

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This policy addresses the housing that presents the greatest risk (units with defective paint
surfaces) and targets the most vulnerable children (those who already have an EBL), but does not
address LBP hazard evaluation, reduction, or poison prevention in a comprehensive way.

       Compliance with HQS has been a chronic problem in the Section 8 program.  In
communities where housing quality is a problem, units available to TEA users often barely meet
the standards and often fall below the standards during occupancy by the tenant.  HUD
monitoring activities as well as Inspector General and General Accounting Office reports have "
found significant compliance problems, many related to defective paint.10

       Where FMRs are generous in relation to a particular housing market, program
administrators have some leverage in encouraging owners to comply with HQS on an ongoing
basis. Rather than lose a Section 8 tenant because the unit does not meet HQS, owners in areas
with generous FMRs may be willing  to make needed repairs and program administrators could
then approve higher rents.  However, rent reasonableness rules can make this difficult.  Similarly,
when the market is soft, tenants have more options and can  be more demanding. In tight
markets, however, aggressive enforcement of HQS often means that participants have difficulty
using TBA subsidies because owners can rent the unit to unsubsidized households without making
improvements.  Thus, imposing additional requirements related to LBP, for example inspections
or even interim controls (without additional incentives or compensation) may worsen the housing
plight of low-income families most at risk, particularly in tight markets.

       As noted above, the TBA subsidy mechanism is not designed to encourage property
owners to make property improvements and program users often have little leverage with owners.
Even so, some property improvements are initiated  through TBA Programs.  Nationwide HUD
estimated in 1978, the most recent year for which the-x  are published data, that property
improvements undertaken to qualify units for TBA ass'-^ance averaged  $284/unit.11

       -.Current Tenant Education Efforts

       Under both Section 8 and  HOME programs, participants receive a briefing at the time
they are issued a certificate.  The required briefing is extensive, covering program eligibility and
recertification requirements, subsidy  calculations, housing quality standards, fair housing rules, and
procedural issues  associated with searching for and leasing a unit. As part of this briefing
program participants receive a copy of HUD's brochure "Watch Out for Lead-Based Paint." This
document explains LBP hazards and encourages parents to have their children's blood tested.

       Although no research  has been found to support it, anecdotal information suggests that
this briefing has limited effect in heightening awareness or encouraging participants to take action
- testing children or searching for a  lead-safe unit.  PHA staff often are not knowledgeable about
LBP issues and do not give the subject great emphasis.  The typical TBA program participant is
unlikely to be an educated consumer with sufficient information to put pressure on an owner with
respect to environmental issues. Lead-safe housing may not be -. priority for applicants who have
waited months (more often years) to receive assistance.

4.      Options for Addressing  Lead Issues in TBA Programs

       This section explores four options for dealing with LBP issues in TBA programs. The first
focuses on hazard evaluation, the second on tenant awareness, and the  last two on hazard
reduction.  Each option is measured against the criteria of effectiveness, cost, equity, political
feasibility, and administrative ease.
October 20, 1993                   Tenant-Based Assistance                            Page 5

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                           Options for Addressing LBP in TBA Programs

              Hazard Evaluation

                Option 1.  Require hazard evaluation for units in the TBA program

              Tenant Education

              x Option 2.  Improve tenant awareness of lead-safe housing choices.

              Hazard Reduction

                Option 3.  Create a market for lead-safe housing by paying a premium
                          rent under TBA program rules

                Option 4.  Provide financing for hazard reduction
As noted in the options, below, any changes in the Section 8 Existing Housing Programs can have
serious implications for the availability of housing for low income households, particularly
households with children.  In addition, since the Housing Quality Standards are used as a
minimum measure of quality in many publicly assisted housing programs, changes in these
standards (e.g. to  require abatement or interim controls), will affect units that are not even part of
the Section 8 and other tenant based assistance programs. For example, both the Community
Development Block Grant (CDBG) *•  -Tarn  and HOME, two large federal programs that fund
low income housing, use HQS as a it  uLum property standard.  Incorporating more stringent
rules into JHQS could affec t the costs of these programs and participation by  property owners.
        Option 1: Require hazard evaluations
for units in the TBA program.  Hazard
evaluations, risk  assessments or inspections,
could be required for pre-1978 units
participating in a TBA program.  This option
could be imposed for all pre-1978 TBA units
or just for those units occupied by households
with children. Evaluations in the form of full
risk assessments  could be required at the time
of initial lease.  Subsequent reviews could be
incorporated into the annual Housing Quality
Standard inspections and the results of the
evaluations could be made available to
tenants. The current policy requiring
correction of any defective (i.e. cracking,
chipping, peeling, scaling,  or flaking) paint
would continue.  However, providing the
results of the hazard evaluation to all tenants
— even those in  units without obvious defects
— would alert them to any future hazards.
               1. Require Hazard Evaluation for Units in TBA
                               Program
             Effectiveness    Informs -households and land-lords
                           about hazards; does not ensure
                           hazard reduction.
             Cost           Low government costs; property
                           owners must pay for hazard
                           evaluation.
             Equity         May limit housing available under
                           TBA program in tight markets.
                           Targeting evaluation to units with
                           children may create discrimination
                           against them. •'
             Political        Requires Congressional action; likely
             Feasibility      to face opposition from property
                           owners, TBA program administrators,
                           and possibly low-income housing
                           advocates.
             Administrative   Administrative framework exists;
             Ease           requires additional staff and training.
October 20, 1993
Tenant-Based Assistance
Page 6

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       This option would be effective in identifying LBP hazards and informing both landlords
and tenants.  Unless combined with a mechanism for paying for LBP abatement or interim
controls, it will not necessarily lead to reduced lead paint hazards in the housing stock.

       This option, as well as the others in this paper, has the potential of focusing attention on
the population most at risk: low income households with children.  However, in tight housing
markets, where owners have many options for renting their units, landlords may refuse to
participate in the Section 8 and other TEA programs if they must meet more stringent criteria
than the rest of the housing market.  In addition, targeting the hazard evaluations only to units
wjth children may have the unintended effect of discriminating against these households.

       This option requires amending federal statutes for the Section 8 Existing Housing Program
as well as guidelines for locally funded TEA programs. The changes are likely to be opposed by
property owners who fear government red tape and regulations and by program administrators
who will object to the costs of implementation.  Low income housing advocates also  may object,
fearing that any additional rules and regulations will steer property owners away from
participating in TEA programs. Nonetheless, in  comparison to options that require costly
abatement or hazard reduction, this option might be an appealing compromise to owners and
tenants  as well as advocates for lead-safe housing.

       While the administrative framework for inspecting TEA units is already in place, initiating
lead hazard evaluations for all TEA units would  require both additional staff training and staff
time, adding costs to the administration  of TEA  programs.
                                                      2. Improve Tenant Awareness of Lead-Safe
                                                                Housing Choices
       Option 2: Improve tenant awareness of
1"', .^-safe housing choices.  This option focuses on
ec  mating consumers. While tenants now receive
a notice describing the potential hazards  of LBP,
they may not have sufficient information  about
how to find lead- safe housing units. Public
agencies that administer TEA programs could
provide lead awareness counselling to households
with children and refer them to units that are
lead-safe.

       This strategy would be most effective in
reducing exposure to hazards in soft markets.  In
tight housing markets, however, households may
have difficulty finding any affordable unit, no less
one that is lead-safe.

       An education program can help tenants
understand the issues and make more informed
choices.   Such a program would be relatively         """"""""""""™~™""~™~""""""~"""~™
inexpensive to implement and administer. TEA
programs  already employ counselors and  administrative staff who screen and educate applicants.
While these counselors would require additional training to help them implement a LBP
education program, the costs are low compared to the costs of hazard evaluations and  hazard
reduction.
                                                    Effectiveness
                                                    Cost

                                                    Equity
                                                    Political
                                                    Feasibility
                                                    Administrative
                                                    Ease
Most effective m soft
markets; in tight markets,
lead-safe housing may not be
available.
Low costs.
Could focus on  low-income
households with children, the
group most needing
assistance.
Probably feasible; property
owners, however, may fear
that increased awareness may
increase LBP litigation.
Administrative framework
exists; requires additional
training^
October 20, 1993
                                   Tenant-Based Assistance
                    Page 7

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       An education program focused on households seeking TBA would reach households most
at risk for lead poisoning: low income households with children.  Because the costs are low and
the programs can be focused on those who most need assistance,  an education program is likely to
be politically acceptable. Some landlords, however, may object believing that increased awareness
may also induce litigation.
       Option 3:  Create a market for lead-safe
housing by paving a premium rent under TBA
program rules.  TBA programs could permit
property owners to receive higher rents for units
that are considered lead safe.  The Section 8
Existing Program could develop a definition of
lead-safe housing and determine how much
additional rent would be paid  for units meeting
the standard.  The differential could be based on
the cost of interim controls or full abatement,
depending upon how much the government would
be willing to pay in additional rent and how much
lead reduction owners would be willing to
undertake in exchange for the premium rent.
State  and locally funded TBA programs could
develop their own rent incentives.

       This option is most viable in housing
markets with a generous supply of lead-safe units
and r'  lively  "soft" housing   rket. In such
marke >, low income tenanti   re more likely to
f'nd modest cost units that meet HQS and are
lead safe.
                  3.  Create a market for lead-safe housing by
                  paying a premium rent under TBA program
                                 rules.
                 Effectiveness



                 Cost


                 Equity
                 Political
                 Feasibility
                 Administrative
                 Ease
Strong incentive for property
owners to reduce hazards-to
participate in TBA programs.
Costly to increase TBA levels
and administer program.
Could focus on low-income
households with children, the
group most needing
assistance.
Requires new legislation;
high cost and shift in TBA
program structure limit
political feasibility.
Requires new management
controls and tying assistance
to particular units for certain
period of time; units would
require hazard evaluations
       In tight housing markets and/or markets with an older housing stock this option may have
limited value. In these markets the supply of existing, modestly priced lead-safe units will be
limited and even premium TBA payments will be unlikely to induce the needed improvements.
Tenants receiving tenant-based rental assistance are free to move, subject only to the terms of
their lease.  When they move, they take their rental assistance with them to a new unit.
Assuming that lead safe units do not command more rent in the private market than those with
lead hazards, owners may not be able to recoup their investments in hazard mitigation once a
tenant moves. Additionally, property owners may not have the up-front cash to make the needed
repairs nor be able to borrow the necessary funds.  This difficulty could be overcome by tying
TBA subsidies to particular units for some period of time — presumably long enough to pay for
the costs incurred by the landlord for hazard reduction. This adjustment would, however, change
the nature of TBA programs: the freedom of choice offered to tenants.

       From a housing perspective, the cost of this option could be quite considerable. Every
dollar added to the allowable rent of a low income tenant participating in a TBA program is a
dollar spent by the government. While cost could be contained by limiting eligibility to low
income households with children, this group is a sizable percentage of all households receiving
TBA.

       Legislation would be required to implement this option.  The potentially high housing
subsidy costs would be unattractive to many lawmakers. In addition, any changes to TBA
October 20, 1993
Tenant-Based Assistance
                    PageS

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programs which tie the rental assistance to specific units in order to guarantee owners a rent
premium would be closely debated.

       This option could be accommodated within the existing TEA administrative structure but
it would require new management controls and costs.  Program administrators would have to
separately track lead safe units, their rents, and their occupants. Properties would require
inspections to assure that they meet lead safe standards.
       Option 4:  Provide Financing for Hazard
Redaction.  Rather than pay for hazard mitigation
through increased rents, government subsidized
low interest loans and/or grants could finance
needed improvements.  Units receiving TEA
rental assistance would be required to meet
minimum standards for lead safety, through either
full abatement or interim controls. Owners would
be offered the financing needed to pay for
improvements, such as paint removal and
encapsulation. This option could be directed to
any unit receiving TEA or only to units with
children.  In exchange for the financial assistance,
owners could  be required to keep lead-safe units
available for occupancy by households who
receive tenant-based rental assistance.
                    4. Provide financing for hazard reduction
                  Effectiveness
                  Cost
                  Equity
                  Political
                  Feasibility

                  Administrative
                  Ease
Subsidized financing,
combined with mandatory
abatement or interim
controls, could be effective.
Lack of significant subsidies,
however, could limit
housing available for TEA.
Costly to subsidize financing
and administer.
Could focus on low-income
households with children,
the group most needing
assistance.
Cost would limit  feasibility.

May require tailoring
f .^oicing to particular
pi yt erties.
       Th'v ^ption offers an effective mechanism
for reducing l^ad hazards.  It combines the carrot
arc! stick:  financial assistance and a requirement
to make TEA units lead safe. Rather than just
require a risk assessment or inspection as in  Option 1, this approach seeks to reduce hazards.

       Cost will be a considerable issue.  Most properties participating in TEA programs have
limited cash flow and therefore will require either grants or very low interest rate loans.
Therefore, costs to the government will be high.  On the other hand, this option can be carefully
targeted to units occupied by low income households, and if desired, households with children.
For example, only units with children might be eligible to receive financial assistance and owners
could be required to rent to families when the property turns over. Program administrators,
through their underwriting, can also decide how much subsidy is required and carefully tailor
financing to meet the cash flow needs of the property.  This case-by-case review, however,  would
increase administrative costs.

       Combining requirements  for action with financing is politically attractive to property
owners, but not necessarily to legislators who must decide how to raise funds for the program.

       The exhibit on the following page summarizes the evaluation of the four options.
October 20, 1993
Tenant-Based Assistance
                    Page 9

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COMPARISON OF LEAD-BASED PAINT EVALUATION AND REDUCTION IN TENANT-BASED ASSISTANCE PROGRAMS
Criteria
Effectiveness
Cost
Equity
Political Feasibility
Administrative Ease
Option 1:
Require Hazard Evaluation*
for Units in TBA Program
Informs households and land-
lords about hazards; does not
ensure hazard reduction.
Low government costs;
property owners must pay for
hazard evaluation.
May limit housing available
under TBA program in tight
markets. Targeting evaluation
to units with children may
create discrimination against
them.
Requires Congressional
action; likely to face
opposition from property
owners, TBA program
administrators, and possibly
low-income housing advocates.
Administrative framework
exists; requires additional staff
and training.
Option 2:
Improve T:r-mt \wareness of
Lead-Safe I.1" as .ig Choices
Most effects . >ft markets;
in tight market:, .ead-safe
housing may not be available.
Low costs.
Could focus on low-income
households with children, the
group most needing
assistance.
Probably feasible; property
owners, however, may fear
that increased awareness may
increase LBP litigation.
Administrative framework
exists; requires additional
training.
Option 3:
Create a Market for Lead-
Safe Housing by Paving a
Premium rent Under TBA
Program Rules
Strong incentive for property
owners to reduce hazards to
participate in TBA programs.
I
Costly to increase TBA levels
and administer program.
Could focus on low-income
households with children, the
group most needing
assistance.
Requires new legislation; high
cost and shift in TBA
program structure limit
political feasibility.
Requires new management
controls and tying assistance
to particular units for certain
period of time; units would
require hazard evaluations.
Option 4:
Provide Financing for
Hazard Reduction
Subsidized financing,
combined with mandatory
abatement or interim controls,
could be effective. Lack of
significant subsidies, however,
could limit housing available
for TBA.
Costly to subsidize financing
and administer.
Could focus on low-income
households with children, the
group most needing
assistance.
Cost would limit feasibility.
May require tailoring
financing to particular
properties.
Wober 20, 1993
d Assistance
0

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Endnotes

1. Two programs that are technically established as TEA in fact function like project-based
assistance, where the subsidy is provided directly to the project, rather than to a household.
These two project-based certificate programs are:

       (1)     The Section 8 Moderate Rehabilitation Program, which was created in 1979.
              Although the program is administered by public housing authorities (PHAs) as part
              jof the Section 8 Existing Housing Program (TEA), it provides long-term subsidies
              to owners that undertake repairs and permits rents up to 120 percent (and on an
              exception basis) up to 144 percent of the fair market rent (FMR) to cover the cost
              of repairs.  At present funding for  this  program is limited to funding Single Room
       ;       Occupancy (SRO) projects for the homeless.

       (2)     Project-Based Certificates.  A PHA may set aside a portion of its certificate
              allocation for project-based assistance.  Under this program, the PHA can make a
              two to five year commitment to an owner who is willing to undertake rehabilitation
              or new construction.

Assistance provided under these two programs is currently classified as TEA and  therefore is not
subject to the same federal LBP requirements as project-based assistance.

2. Formulas for determining how much a family can afford to pay for rent vary by program.  All of
the programs presume, however, that 30 percent of monthly  adjusted household income is an
affordable amount for a household to pay.  The formulas are not discussed in this paper because
their slight differenr  , have no bearing on the LBP issues under consideration.

3. The Section 8 Existing H< nising Program is sometimes confused with the Section 8 Substantial
Rehabilitation  and New Construction Programs. These latter programs are federally assisted,
project based subsidy programs. Owners of substantial rehabilitation and new construction
projects receive rent subsidies for units in specific projects. Tenants are not free, as they are in
the existing housing program, to carry their rental assistance  with them to other units.

4. A PHA may designate a limited portion of its Rental Certificate funding to provide "Project-
Based Certificates."

5. TEA is also  an eligible activity under Community Development Block Grants if the grantee
works through a nonprofit organization. Activity under this program is very limited.

6. PHAs  and PJs have some  latitude about how the mandatory federal preferences are
implemented.  This flexibility is related primarily to establishing priorities among preference
holders   Additional information about the mandatory federal preferences can be found in the
regulations at 24 CFR Par- 215.

7. The Rental  Certificate Program limits the rents owners may charge to the FMR, with some
exceptions. The Rental Voucher Program does not limit the amount the owner may charge, but
establishes a Payment  Standard based upon the FMRs that in effect, requires households who
select a unit that rents above the FMR to pay more than 30 percent of their adjusted income for
the unit.  The  HOME Program can use either method.
October 20, 1993                   Tenant-Based Assistance                           Page 11

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8. Deborah Ann Ford, Michele Gilligan, The Effect of Lead Paint Abatement Laws on Rental
Property Values," Journal of the American Real Estate & Urban Economics Association, Spring
1988.

9. See 24 CFR 882.102 for regulatory requirements.

10. A 1989 audit by the Inspector General, Extent of Compliance with HUD's Housing Quality
Standards  (89-TS-103-0001), found that almost half of the units occupied by Section 8 voucher
holders did not meet minimum Housing Quality Standards. Despite the high HQS failure rate,
most units were found to be structurally sound and livable.

11. From the November 1978  Nationwide Evaluation of the Existing Housing Program.  Most
landlords reported making only minor repairs such as electrical, storm windows, painting and
plaster work, and rebuilding of broken  outside stairs.
October 20, 1993                   Tenant-Based Assistance                           Page 12

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