[Federal Register Volume 62, Number 47 (Tuesday, March 11, 1997)]
[Proposed Rules]
[Pages 11284-11295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6024]
[[Page 11283]]
_______________________________________________________________________
Part V
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 570
Community Development Block Grant Program for States; Revisions to
Program Income Requirements and Miscellaneous Amendments; Proposed Rule
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 /
Proposed Rules
[[Page 11284]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 570
[Docket No. FR-4067-P-01]
RIN 2506-AB82
Community Development Block Grant Program for States; Revisions
to Program Income Requirements and Miscellaneous Amendments; Notice of
Proposed Information Collection Requirements
AGENCY: Office of the Assistant Secretary for Community Planning and
Development, HUD.
ACTION: Proposed rule.
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SUMMARY: This rule contains proposed changes to several sections of the
regulations for the Community Development Block Grant (CDBG) Program
for States. This proposed rule would streamline and update the
regulations with regard to recent statutory changes, clarify the
program income requirements, and correct other identified deficiencies
in the State CDBG regulations. This proposed rule would also provide
States additional flexibility in their administration of the program.
DATES: Comments due date: May 12, 1997.
ADDRESSES: HUD invites interested persons to submit comments regarding
this proposed rule to the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410. Communications should refer
to the above docket number and title. Facsimile (FAX) comments are not
acceptable. A copy of each communication submitted will be available
for public inspection and copying between 7:30 a.m. and 5:30 p.m.
weekdays at the above address.
HUD also invites interested persons to submit comments on the
proposed information collection requirements in this proposed rule.
Comments must refer to the above docket number and title, and must be
sent to the Office of Information and Regulatory Affairs, Office of
Management and Budget, Attention: Desk Officer for HUD, Washington, DC
20503.
FOR FURTHER INFORMATION CONTACT: Steve Johnson, Assistant Director,
State & Small Cities Division, Room 7184, Department of Housing and
Urban Development, 451 Seventh Street, SW, Washington, DC 20410;
telephone number (202) 708-1322 (this number is not toll-free).
Hearing- or speech-impaired persons may access the number via TTY by
calling the Federal Information Relay Service at (800) 877-8339. FAX
inquiries (but not comments on the rule) may be sent to Mr. Johnson at
(202) 708-2575 (this number is not toll-free).
SUPPLEMENTARY INFORMATION
Background
This proposed rule would revise the regulations for the State
Community Development Block Grant Program (24 CFR part 570) to respond
to problems HUD has identified in the program, to implement a 1992
statutory change to the Housing and Community Development Act of 1974
(the Act) (42 U.S.C. 5301-5320), to implement changes resulting from
the Cash Management Improvement Act, and to provide additional
flexibility to States in implementing their programs. Specifically,
this rule contains: (1) Proposed changes to the requirements governing
Federal grant payments to States; (2) Various proposed changes to the
program income requirements, including the situations in which income
earned on grant funds must be remitted to the U.S. Treasury; (3) A
proposed change regarding revolving funds; (4) The proposed application
of the Entitlement regulations governing lump-sum drawdowns to the
State program; (5) The proposed application of the Entitlement
regulations governing the use of escrow accounts for rehabilitation of
residential properties to the State program; (6) A proposed change to
the conflict of interest requirements; (7) A proposed change regarding
use of CDBG funds outside the jurisdiction of the recipient; and (8) A
proposed change to the general provisions regarding a State's
administrative flexibility. Each of these proposed changes is described
below.
Federal Grant Payments
Section 570.489(c) of the State CDBG regulations describes the
requirements concerning Federal grant payments to States. Pursuant to
the Treasury Department's regulations in 31 CFR part 205, States and
units of general local government must minimize the elapsed time
between receipt of Federal funds and their disbursement for grant
activities. This regulation was based on the provisions of the
Intergovernmental Cooperation Act (31 U.S.C. 6503).
The Intergovernmental Cooperation Act has been superseded by the
Cash Management Improvement Act of 1990, as amended in 1992 (31 U.S.C.
3335, 6503), which made several fundamental changes to the manner of
Federal-State payments. The Treasury Department amended the
implementing regulations in 31 CFR part 205 on December 21, 1992 (57 FR
60676). Under the new regulations, States and the Treasury Department
enter into agreements covering all Federal programs over a certain
threshold funding level. Through these agreements, States select
specific payment techniques that are designed to prevent delays between
drawdown and disbursement of funds. For programs that are below the
threshold, States must use alternative procedures to prevent delays
between drawdown and disbursement of funds. In 1995, only two States'
CDBG allocations fell below the threshold.
Section Sec. 570.489(c)(2) of the State CDBG regulations provides
that interest earned by units of local government on funds held pending
disbursement is not program income, and they must generally return such
interest to the U.S. Treasury. The paragraph further provides, however,
that States generally do not have to return interest earned during the
time between receipt of funds and disbursement to local governments.
The December 21, 1992 amendments to 31 CFR part 205 render some of
Sec. 570.489(c) obsolete. Therefore, rather than repeat the
requirements for States in the State CDBG regulations, Sec. 570.489(c)
of this proposed rule would simply refer to the more detailed
requirements in 31 CFR part 205. However, this proposed rule would
retain the existing requirement that States ensure that units of local
government also minimize the time between receipt of CDBG funds and
their disbursement, by moving the provision to the program income
requirement section (Sec. 570.489(e)). This proposed move is further
discussed in the Program Income Requirements section of this preamble,
below.
Program Income Requirements
The proposed changes to the program income provisions that are
described in this section of the preamble respond to the amendments of
the Housing and Community Development Act of 1992 (the 1992 Act) (Pub.
L. 102-550, approved October 28, 1992; 106 Stat. 3672), HUD Inspector
General recommendations, and an opinion issued by the Comptroller
General of the United States.
Implementation of 1992 Statutory Amendments
The State CDBG regulations currently provide for several situations
in which program income received by a unit of
[[Page 11285]]
general local government after closeout of its grant from the State
would not be subject to the program income requirements in
Sec. 570.489(e). However, the 1992 Act amended section 104(j) of the
Housing and Community Development Act of 1974 (42 U.S.C. 5304(j)) to
provide that the use of program income must be governed by all normal
CDBG program requirements for as long as the program income exists.
(Another statutory change, along with several regulatory initiatives,
was reflected in the CDBG Program Economic Development Guidelines final
rule, published on January 5, 1995 (60 FR 1922)). At that time, HUD
noted that further regulatory changes were forthcoming to implement
fully the 1992 amendments to the Act. With this amendment in the 1992
Act regarding post-closeout program income, Congress intended to expand
the coverage of program requirements to all repayments that are
classified as program income. This amendment applies to all program
income generated by grants made by States from funds in Fiscal Year
(FY) 1993 and later.
A major problem that States face in implementing the statutory
amendment is that a community may continue to generate and use program
income long after the initially-funded activity is completed. States
generally close out grants to local governments upon completion of the
initially-funded activities, though closeouts may be conditioned upon
the satisfactory completion of certain other actions, such as
submission of an audit or fulfillment of job creation requirements.
This new statutory provision significantly extends States'
responsibilities in tracking program income. To provide as much
flexibility as possible within the constraints of the law, HUD proposes
to allow States to demonstrate compliance with this requirement in the
following ways:
(1) States may maintain contractual relationships with units of
general local government for as long as there is program income to be
tracked. Since, in some cases, receipt of program income by a local
government may be sporadic, a State could craft its contractual
agreements so that they terminate once a local government has exhausted
its program income, and re-activate upon receipt of new program income
at some future date.
(2) States may require local governments to obtain advance State
approval of a local plan to expend program income, in the absence of a
more formal contractual relationship. This arrangement may be well-
suited for States that presently use a ``conditional closeout''
process, in which a grant recipient has program income on hand at the
time of grant closeout or receives program income after closeout of the
grant that generated the program income.
(3) States may seek HUD approval of an alternative method for
demonstrating compliance. HUD intends that field offices, not
Headquarters, would grant such approval.
States may select different approaches for different types of grant
recipients. For example, a State that distributes some of its funds on
a formula basis and some on a competitive basis might select option
number 1, above, for those units of local government that receive
funding every year, and option number 2 for other grant recipients. A
State might also blend the first two options by requiring a plan for
the use of program income by local governments as part of its
contractual agreement with units of general local government.
Program income is a significant resource in the State CDBG program,
and it constitutes a major multiplier of the benefits that the CDBG
program provides to citizens and beneficiaries. For example, during
Fiscal Years 1992-1994, the cumulative amount of program income
received by all States averaged over $43.2 million per year; that is
more than double the average yearly allocation amount to States during
that period ($20.2 million). This represents only that portion of
program income that was returned to the States by units of general
local government. HUD has not previously required States to report on
program income retained at the local level. However, consistent with
the 1992 amendments, HUD now proposes in Sec. 570.489(e)(4) to require
States' annual performance reports to include the use of program income
held by local governments.
HUD recognizes that implementation of this statutory change may
significantly affect the reuse of a large dollar volume of income
retained by local governments. Because States have not previously
reported to HUD on locally-retained income (whether classified as
program income or as miscellaneous revenue), HUD cannot accurately
predict the financial implications of this proposed rule change. HUD
welcomes comments on the amount of income that will now be subject to
program income requirements, and on resulting effects on what such
funds are used for.
Continuing Applicability of Previous Regulations
In the last few years, there have been a succession of regulatory
changes to the State CDBG program income requirements. Presently,
States must administer multiple sets of requirements, each of which
applies to program income received during different time periods.
Program income received prior to December 9, 1992 was subject to the
requirements laid out in various policy memoranda issued subsequent to
the issuance of amended State CDBG regulations on April 8, 1982 (47 FR
15297). HUD formalized those policies in a final rule published in the
Federal Register on November 9, 1992 (57 FR 53397). Program income
generated from grants made by States with Fiscal Year 1993 and later
funds is subject to the 1992 statutory amendments as well as the
requirements of the November 9, 1992 final rule. Finally, the January
5, 1995 CDBG Program Economic Development Guidelines final rule (60 FR
1922) included an expanded list of revenues that are not considered
program income.
States have reported that tracking different requirements as they
apply to different funding years is complicated and time-consuming,
especially for program income retained at the local level. Repayments
of loans made from one grant to a given community may be subject to
different requirements than repayments of loans made from a subsequent
year's grant to the same community. This results in an increased
record-keeping burden on both the State and local governments. The
complexity and burden are compounded when program income is used to
make additional loans, which, in turn, generate more program income. It
is not clear to some States whether program income is subject to the
requirements in effect at the time the State awarded the initial grant
to the locality, or to the requirements in effect when the program
income is received.
To address this confusion, HUD is proposing to clarify the
continuing applicability of previous program income requirements to
program income retained by localities. (The problem does not occur with
program income returned to States for redistribution. Since State-held
program income is redistributed according to the method of distribution
in effect at the time that it is redistributed, such program income is
treated the same as a State's regular allocation of funds for that
year; this includes being subject to the same other CDBG program
requirements.) This proposed rule would provide that program income
that results from an activity funded from FY 1992 and earlier funds
remains subject to the requirements as they currently exist. The new
provision in this proposed rule
[[Page 11286]]
would apply to FY 1993 and later funds. If a local government
commingles program income from pre-1993 grants with program income from
a newer grant, the new provision in this proposed rule would apply to
all the program income, as the local government would not be able to
distinguish which income came from which grant.
Some States have reported that reducing the number of different
program income requirements would also simplify compliance with the
requirements. In response to these suggestions, this proposed rule
would provide an alternative to the ``continuing applicability''
provision described in the previous paragraph. States would have the
option of applying these new provisions to all program income held by
units of local government, regardless of the source year of the funding
that generated the program income. Subjecting all outstanding locally-
held program income to these proposed requirements would greatly
simplify the tracking of program income and would reduce confusion over
which set of requirements applies to which program income dollars.
However, the proposed requirements would be more restrictive.
Application of the new requirements to pre-FY 1993 funding could mean
that some funds would be reclassified as program income rather than
miscellaneous revenue, which could reduce local governments'
flexibility in expending such funds. Furthermore, applying the new
rules to previously-generated program income would probably require
amending the existing grant contracts with units of local government,
which would reduce any staff time savings resulting from simplified
tracking of program income.
However, the potential administrative benefits to States and local
governments may outweigh the negative impact of reduced local
flexibility in enough cases to justify this option. HUD particularly
welcomes comments on the practical implications of this option, on the
net savings of staff time resulting from the option, and the effects on
State grant recipients.
Miscellaneous Improvements and Updates
States have requested several clarifications of the program income
requirements, and HUD has discovered other areas that call for
regulatory redress. In substantially updating the program income
requirements contained in Sec. 570.489(e), HUD is proposing to
incorporate the following changes.
(1) Selling off loan portfolios in order to expedite the receipt of
program income. In order to maximize available financial resources,
communities are increasingly selling portfolios of loans on the
secondary market, or selling obligations secured by loan portfolios.
Several communities have recently requested HUD's approval to ``net
out'' of the proceeds from such sales the various legal and other costs
that are incurred when a grantee sells or securitizes a portfolio.
There are similarities between such situations and the currently-
allowed provision whereby costs incidental to the generation of program
income from the rental or use of CDBG-assisted real or personal
property may be netted out of the gross income received. Therefore,
this proposed rule would amend Sec. 570.489(e)(1) (vi) and (vii) to
allow legal and other costs associated with the sale or securitization
of CDBG-funded loans to be netted out before the amount of program
income is determined. This provision, however, would be limited to
costs that are not already eligible as general administrative costs of
either the State or the unit of general local government.
(2) $25,000 per year exception. Section 104(j) of the Act allows
the Secretary to exempt from the program income requirements amounts
that are so small that the tracking thereof would pose an
administrative burden. In the CDBG Program Economic Development
Guidelines final rule (January 5, 1995; 60 FR 1922), HUD raised this
threshold in Sec. 570.489(e)(2) from $10,000 to $25,000 per year per
unit of general local government. Some confusion apparently exists over
how to apply this threshold. This proposed rule would revise the
wording of this paragraph slightly to clarify that this threshold
applies only to program income retained by a unit of general local
government and its subrecipients; the threshold applies separately to
each unit of local government. As with the currently-existing rule,
this provision would not apply to program income that a unit of local
government earns but returns to the State.
(3) Remission of grant funds. This proposed rule would add
Sec. 570.489(e)(2)(v), listing certain types of interest earnings that
are not considered to be program income. Two of these provisions would
respond to HUD Inspector General findings and implement an opinion of
the Comptroller General of the United States that income generated by
an ineligible CDBG-assisted activity must be returned to the U.S.
Treasury. Since, in the context of the Comptroller General opinion,
eligibility includes meeting a national objective, this provision
should invoke a sharpened grantee focus on successful outcomes;
interest generated from CDBG-funded loans could only be kept by the
grantee when the assisted activities meet the national objective
requirements.
The third provision (at Sec. 570.489(e)(2)(v)(C)) requiring that
most interest earned by units of general local government on grant
advances (prior to disbursement of the funds for activities) be
returned to the U.S. Treasury, already appears in the State CDBG
regulations at Sec. 570.489(c)(2). Concordant with the proposed
revision of Sec. 570.489(c) (described above), this proposed rule would
move the requirement to Sec. 570.489(e)(2)(v) to complete the listing
of what is not program income. This proposed rule would simultaneously
update this provision to note that interest earned on escrow accounts,
unlike interest earned on lump sum drawdowns, must be returned to the
Treasury.
HUD issued comparable provisions in a final rule for the
Entitlement CDBG program, published on November 9, 1995 (60 FR 56893).
In responding to public comments in that rulemaking, HUD provided
guidance on the extent and applicability of these provisions. Readers
with a particular interest in these provisions may wish to read the
preamble to the November 9, 1995 final rule (60 FR 56892).
(4) Program income generated by loans to subrecipients. This
proposed rule would clarify, in Sec. 570.489(e)(2)(iv), that units of
general local government may receive program income from subrecipients,
while eliminating any double-counting of program income received
through that process. This proposed rule would classify such repayments
as ``transfer[s] of program income.'' If the funds used by a
subrecipient to make principal or interest payments on a CDBG loan it
received from a unit of general local government consist solely of
program income received by the subrecipient, no amount of those
payments to the grantee represents ``new income'' to the grantee's CDBG
program as a whole. If, however, the subrecipient uses non-CDBG funds
to make the principal or interest payments, those payments to the local
government are ``new income'' to the CDBG program; this proposed rule
would not affect the treatment of such payments. HUD added a similar
provision to the Entitlement program regulations in the November 9,
1995 final rule (60 FR 56893).
(5) Program income retained at the local level. Section 104(j) of
the Act
[[Page 11287]]
allows a State to require that a unit of general local government pay
the State any income to be used by the State to fund additional
eligible community development activities, except that the State must
waive this requirement to the extent that such income is applied to
``continue the activity from which such income is derived.''
HUD gives States the flexibility to define the phrase ``continue
the activity from which such income is derived.'' HUD is aware of
situations in which States found that a unit of local government failed
to use program income in accordance with other program requirements, or
was not making any efforts to expend its program income to continue the
activity. HUD does not believe that Congress intended the above
provision to override other programmatic requirements to the extent
that a community must be allowed to retain the program income in
egregious cases. This proposed rule, in Sec. 570.489(e)(3)(ii)(A),
would clarify that a State's definition of what constitutes
``continuing the activity from which such income is derived'' can
include consideration of whether the program income is not being used
(or is unlikely to be used) to continue the activity in a timely manner
or in accordance with other program requirements.
In some situations, a State may determine that a unit of local
government will use program income to continue the activity from which
the income is derived, but that the amount of program income on hand
exceeds projected cash needs for the near future. For example,
community Y has a demand for about two housing rehabilitation loans per
month, but has enough program income on hand to fund 10 average-sized
loans. A State could require the unit of local government to return
some or all the program income to the State's CDBG program income
account until such time as it is needed by the local government. The
State could disburse these funds to other units of general local
government in the meantime rather than drawing funds from its line of
credit.
When the local government needs its program income, the State could
disburse the funds from the program account, or as necessary draw an
equivalent amount from the State's line of credit for disbursal to the
local government. This would increase the effective ``buying power'' of
a State's CDBG funds, because the funds would be expended sooner. The
reduced interest losses to the U.S. Treasury would be a potential side
benefit, as States would need to draw funds from their line of credit
somewhat less frequently. States would have the flexibility to define
the time period over which cash needs for program income would be
projected, and the appropriate level of program income that could be
retained in the local government's own program account.
(6) State administrative costs. States may include program income
in the base of funds against which they may deduct $100,000 plus up to
2 percent for State administrative costs. This is easily done for
program income that is returned to the State, as those funds are
already in the State's hands. States may find it more difficult to
claim a portion of locally-held program income within their
administrative costs allowance. Therefore, this proposed rule would
provide, in Sec. 570.489(e)(3)(ii), that a State could require a unit
of general local government to return, for the State's use, up to 2
percent of program income retained at the local level.
Revolving Loan Funds
Revolving funds are typically established and administered in the
following manner. A loan is made with CDBG funds (e.g., to a business
to expand). Payments on that loan (i.e., principal, interest, or both)
constitute program income that is credited as CDBG program income on
the local government's books and held in an account independent of
other program accounts. The program income in that account, including
interest earned on the funds while on deposit pending their reuse,
becomes the source of financing for additional loans of the same type.
Hence, the term ``revolving fund'' has been used to describe such a
fund. Revolving funds are used most frequently in connection with
housing rehabilitation and economic development projects that involve
loans.
A number of States have found regional revolving loan funds to be
an efficient means of collecting and redistributing program income held
at the local level. Such loan funds are often operated by a non-or
quasi-governmental organization that administers programs as a
subrecipient of the local government(s) to which HUD awarded grants.
(Since these regional entities are usually not units of general local
government, they may not directly receive CDBG funding.) Any program
income they administer still belongs to the unit(s) of general local
government whose grant(s) generated the program income. Successive
reuses of program income must continue to be traceable back to
individual localities' grants. This presents a problem if a regional
loan fund is administering program income generated by multiple
communities' grants.
Regional loan fund operators may wish to use program income to fund
activities anywhere in their service area, regardless of which
community the program income belongs to. However, while units of
general local government may use CDBG funds for activities outside
their jurisdictional boundaries, each such community must determine
that it is meeting its community development needs by doing so. It may
be difficult for community A to reasonably conclude that its citizens
benefit by having its program income used for an activity in community
B, 60 miles away.
Despite these problems, HUD supports efforts to establish regional
loan funds. Economies of scale can often be achieved in the
administration of such programs. Regional economic development efforts
may be more cognizant of the regional nature of rural economies, and
better positioned to act accordingly. Assessing the benefits of
individual economic development projects may also make sense from a
regional perspective, as employees of businesses in rural communities
frequently commute from residences in other communities.
To provide flexibility, the present State CDBG regulations in
Sec. 570.489(f)(2) offer three options regarding revolving loan funds.
First, States may make awards to combinations of governments. Under
such an arrangement, program income can be reused within the
jurisdiction of any of the participating local governments. Second, if
both the activities and the regional entity that carries out the
activities qualify under section 105(a)(15) of the Act, repayments
generated from these activities are not within the definition of
``program income,'' and so are not subject to program requirements.
Third, a State may itself operate a statewide revolving fund to
redistribute to units of general local government program income
returned to the State.
This proposed rule, in Sec. 570.489(f)(2), would expand upon this
third option by allowing a State to operate one or more revolving funds
on a regional or statewide basis. Providing that the State determines
that the program income will not be used to continue the same activity,
a State can presently require program income generated from grant-
funded activities to be returned to the State. With the proposed
change, a State could, in essence, designate a regional revolving loan
fund as a ``State'' revolving fund. A State could, pursuant to this
proposal, require such program
[[Page 11288]]
income to be repaid to a State-designated regional revolving fund. The
State could then contract with a regional entity to administer the fund
(including the distribution of program income to local governments) on
behalf of the State. Because the program income belongs to the State,
the regional entity could, under the auspices of the State and its
method of distribution, distribute it to any other eligible unit of
local government covered by the regional revolving fund. The community
whose initial grant generated the program income would have no further
responsibility for the reuse of the program income. Subsequent
repayments of program income would belong to the State, rather than
belonging to a unit of local government, and the regional fund entity
could award the funds, on behalf of the State, to units of general
local government anywhere within the region. Any State choosing this
approach would, of course, need to describe its process in the method
of distribution contained in its consolidated plan.
Lump Sum Drawdowns
Section 104(h) of the Act allows units of local government to make
lump sum drawdowns of CDBG funds to establish revolving loan funds for
property rehabilitation activities. Paragraph (2) of that section
requires HUD to establish standards governing lump sum drawdowns. Such
standards exist in the CDBG Entitlement program regulations in
Sec. 570.513; however, HUD has never created comparable regulations for
the State CDBG program. This proposed rule would amend Sec. 570.513 so
that its requirements could apply both to the Entitlement CDBG program
and the State CDBG program; certain adaptations would be necessary to
recognize the States' review and determination responsibilities, which
HUD itself fulfills in the Entitlement program. With this proposed
rule, HUD does not intend to make any substantive changes to the
requirements of Sec. 570.513 as they apply in the Entitlement program.
HUD reminds States that use of lump sum drawdowns is limited to the
rehabilitation of privately-owned properties. This can include
residential, commercial, and industrial properties; however, this would
not include other forms of economic development assistance. Interest
earned on lump sum drawdowns is classified as program income, and so is
not subject to the return-of-interest provision in the existing
Sec. 570.489(c)(2) and the proposed Sec. 570.489(e)(2)(v).
Use of Escrow Accounts for Rehabilitation
Similarly, Sec. 570.511 allows Entitlement communities to establish
escrow accounts for funding loans and grants for the rehabilitation of
privately-owned residential property. Again, HUD has never created
comparable regulations for the State CDBG Program. This proposed rule
would amend Sec. 570.511 so that its requirements could apply both to
the Entitlement CDBG program and the State CDBG program, including
appropriate adaptations respecting the role of States. With this
proposed rule, HUD does not intend to make any substantive changes to
the requirements of Sec. 570.511 as they apply in the Entitlement
program.
Paragraph (c) of Sec. 570.511 of the Entitlement regulations
concerns remedies for noncompliance. That paragraph gives HUD the
authority to require a recipient to discontinue the use of escrow
accounts. As adapted to apply to the State CDBG program in this
proposed rule, the paragraph would indicate that States have authority
under Sec. 570.492(b) to discontinue a local government's use of escrow
accounts if a State determines that a unit of general local government
has failed to use an escrow account in accordance with Sec. 570.511.
The escrow accounts provision is more limited in applicability than
the lump sum drawdown provision; escrow accounts may be utilized only
for the rehabilitation of primarily residential privately-owned
properties. Furthermore, interest earned on grant funds placed in
escrow accounts is not program income; it must be returned to the U.S.
Treasury.
Conflict of Interest Provisions
HUD recently amended the conflict of interest provisions in the
Entitlement program regulations (Sec. 570.611) in a final rule
published on November 9, 1995 (60 FR 56893). The amendments to
Sec. 570.611 in the November 9, 1995 final rule were in response to
public comments HUD received on the conflict of interest requirements
during the course of the rulemaking.
The State CDBG conflict of interest provisions in Sec. 570.489(h)
date from a November 9, 1992 final rule (57 FR 53397). In today's
proposed rule, HUD would make minor changes to these provisions to make
them consistent with Sec. 570.611 of the CDBG Entitlement regulations.
The introductory discussion of Sec. 570.489(h)(2) describes the
general principle concerning conflicts of interest as applicable
``[e]xcept for eligible administrative or personnel costs.'' HUD
deleted this introduction from the Entitlement program regulations in
the November 9, 1995 final rule, based on public comments that
expressed confusion over the phrase. Several commenters described
potentially troublesome situations that could arise from the inclusion
of the phrase. HUD is not aware of any problems that have arisen in the
State CDBG program as a result of the present wording. However, to
promote consistency of regulatory approach between the two programs,
this proposed rule would delete the reference to administrative or
personnel costs from the regulations for the State program. HUD
specifically requests comments from interested parties on what effect
(if any) this deletion would have on the program. Commenters may wish
to read the preamble to the November 9, 1995 final rule for further
discussion of this issue (60 FR 56901).
This proposed rule would make several other wording changes in
Sec. 570.489(h)(2) concerning prohibited conflicts of interest. These
changes would eliminate a redundant phrase, eliminate confusion over
what sort of benefit a person might receive in a contract that would be
nonfinancial in nature, and clarify that family ties of greatest
concern are those with immediate family members.
Spending Funds Outside the Jurisdiction of the Recipient
This portion of the proposed rule would revise Sec. 570.486(b).
Under the existing regulations, CDBG-funded activities may serve
beneficiaries living outside the jurisdiction of the unit of general
local government if the unit of government determines that the activity
is meeting its needs under the Act. Two emerging trends suggest that
further regulation in this area is appropriate. In both situations,
citizens may not be aware that funds that were supposed to benefit one
community are being spent to benefit another.
First, States and units of general local government are
increasingly using regional organizations to administer revolving loan
funds on behalf of local governments. These regional entities, which
may administer grants from multiple localities, often seek the
flexibility to use program income generated from these grants anywhere
within their service area, regardless of which community's grant
generated the program income. This presents a problem. Local
governments cannot completely abdicate to regional entities their
responsibility to ensure that program income generated from their
[[Page 11289]]
grant is used to meet the community's needs.
Second, HUD is aware of a number of situations in which States
awarded or planned to award a grant to one community, but the benefits
of the activities would occur in a different community or throughout a
much larger area. In some cases, one small community would receive a
grant for an activity that would be carried out on a regional or even
statewide basis. In other cases, suburban communities would receive
funding for projects, and the principal benefit would accrue to a
nearby Entitlement community. HUD does not believe it is appropriate
for one community to serve as a ``flag of convenience'' grant recipient
when only a small portion of the benefits will accrue to residents of
that jurisdiction. In such situations, the more appropriate approach is
for a State to make a grant to a ``combination of governments,'' as is
specifically provided for in the Act. In situations involving
activities located in Entitlement communities, HUD believes it is
appropriate for Entitlement communities to participate in funding such
projects commensurate with the benefits their citizens receive.
This proposed rule would add to the existing regulations a
requirement that reasonable benefits must accrue to residents within
the jurisdiction of the grant recipient. Since HUD is aware that
activities located outside a State grant recipient's jurisdiction may
indeed provide substantial benefits to the citizens within the
jurisdiction, this proposed rule would not prohibit such activities.
The rule would simply require that the State grant recipient consider
whom the funds will benefit; in making a determination that such a
project meets the community's needs, the community should ensure that
the benefits to its residents are sufficient to justify the project.
HUD would not question the determination (or the State's acceptance
thereof) unless it is clearly unreasonable. This proposed rule would
not limit the amount or percentage of funds that may assist such an
activity, and should not affect joint efforts by cities and counties to
benefit their residents. The recipient would be responsible for
determining the reasonableness of the benefits in such cases. A
parallel change was recently finalized in the CDBG Entitlement
regulations, in the November 9, 1995 final rule (60 FR 56892).
State Authority to Impose Additional Provisions
This proposed rule would add a new provision to reinforce States'
administrative flexibility. This new provision would authorize States
to apply to participating units of general local government additional
requirements or requirements that are more restrictive than those
established by HUD. Such authority is implicit in the States' ability
to administer the CDBG program, but HUD has never explicitly stated
this in the regulations. States cannot impose any additional
requirements that would be plainly inconsistent with the Act or with
other statutory or regulatory provisions that apply to the State CDBG
program. HUD proposes this provision in association with several of
today's other proposed changes to portray more clearly State
responsibilities and authority.
Findings and Certifications
Paperwork Reduction Act Statement
The information collection requirements in Sec. 570.489(e)(4) of
this proposed rule have been submitted to the Office of Management and
Budget (OMB) for review under section 3507(d) of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)) and 5 CFR 1320.11. An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection displays a valid
control number.
As required under 5 CFR 1320.8(d)(1), HUD and OMB are seeking
comments from members of the public and affected agencies concerning
the proposed collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond; including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses. Interested persons are
invited to submit comments according to the instructions in the Dates
and Addresses sections in the preamble of this proposed rule.
This document also provides the following information:
Title of Proposal: Revisions to State CDBG Program Income
Requirements and Miscellaneous Amendments.
OMB Control Number: HUD is seeking OMB approval for the information
collection requirements identified in this proposed rule. OMB will
assign a control number for these State CDBG program information
collection requirements upon granting approval. This proposed
information collection would be in addition to the information
collection requirements presently contained in the consolidated plan
and covered under control number 2506-0117.
Description of the Need for the Information and Proposed Use: This
rule proposes to revise the program income requirements governing the
State CDBG program, along with miscellaneous other changes.
Form Numbers: Not applicable. No forms are required by HUD in the
State CDBG program.
Members of Affected Public: States, units of general local
government.
Estimation of the Total Number of Hours Needed to Prepare the
Information Collection including Number of Respondents, Frequency of
Response, and Hours of Response:
Changes in State CDBG requirements affect both State and local
government staff. State staff review reports submitted by local
governments, make on-site compliance reviews, and report to HUD on the
uses of CDBG funds. Local government staff collect information to
demonstrate compliance with program requirements and report to the
State on the use of funds.
Two proposed changes in this rule would affect the amount of time
spent by States and local governments in administering CDBG funds:
locally-held program income subject to all CDBG requirements for as
long as it exists; and States reporting on locally-held program income
in their Consolidated Plan Reports. Several factors determine the
burden that these proposed changes would impose on States and local
governments. Housing rehabilitation and economic development activities
are more likely to generate program income than are public facilities
or public service activities. Activities that provide loans are more
likely to generate program income than are activities providing grants
or forgivable loans. The number, size, rate, and terms of loans made
determine the amount of program income generated per year.
Some States require locally-retained program income to be used in
compliance with some or all CDBG program income requirements, whether
or not HUD's regulations require such compliance. In those States, the
proposed rule will result in little or no additional local compliance
burden. However, additional staff time will be needed by the States
themselves to
[[Page 11290]]
report to HUD on the use of such program income.
The following figures represent additional increments of time and
cost beyond those normally involved in the State CDBG program. In
developing these estimates, HUD consulted with a representative sample
of States; the figures represent a melding of HUD estimates with
States' estimates to produce a national average.
All States together fund about 3,000 grants per year, consisting of
about 11,000 activities. However, only about 20 percent of these
activities are of types that are likely to generate income. As noted
above, many of those income-generating activities are either not
subject to program income requirements, or are already subject to
program income requirements and will see no change under the proposed
rule. Thus, HUD believes the number of State grants that will be
subject to additional recordkeeping and reporting efforts is a
relatively small portion of all State grants.
States make new grant awards to units of local government every
year; however, States' grant contracts with units of general local
government usually remain in force for several years. The burden
estimates shown for local governments thus represent the net burden
increase over the duration of its contractual relationship with the
State, rather than annual figures. The burden estimates for States are
average annual figures.
----------------------------------------------------------------------------------------------------------------
Number of Total hours
Burden of collection frequency respondents per response Total hours
----------------------------------------------------------------------------------------------------------------
Local recordkeeping and reporting to state on program income:
Ongoing..................................................... 550 60 33,000
State recordkeeping and reporting on program income:
Annually.................................................... 49 80 3,920
-----------------------------------------------
Total..................................................... 599 .............. 36,920
----------------------------------------------------------------------------------------------------------------
Executive Order 12866
The Office of Management and Budget (OMB) reviewed this proposed
rule under Executive Order 12866, Regulatory Planning and Review,
issued by the President on September 30, 1993. OMB determined that this
proposed rule is a ``significant regulatory action,'' as defined in
section 3(f) of the Order (although not economically significant, as
provided in section 3(f)(1) of the Order). Any changes made in this
rule subsequent to its submission to OMB are identified in the docket
file, which is available for public inspection between 7:30 a.m. and
5:30 p.m. in the Office of the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969. The Finding of No Significant Impact is available for
public inspection during regular business hours in the Office of the
Rules Docket Clerk, Office of General Counsel, Room 10276, Department
of Housing and Urban Development, 451 Seventh Street, SW, Washington,
DC 20410.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this proposed rule before publication and
by approving it certifies that this proposed rule does not have a
significant economic impact on a substantial number of small entities.
The proposed rule is limited to the effecting of relatively minor
procedural amendments that would update the State CDBG regulations to
recognize statutory amendments and clarify the regulations to address
past confusion.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive order 12612, Federalism, has determined that the policies
contained in this proposed rule will not have substantial direct
effects on States or their political subdivisions, or the relationship
between the Federal Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
As a result, the proposed rule is not subject to review under the
order. The proposed rule is limited to making relatively minor
procedural amendments that would update the State CDBG regulations to
recognize statutory amendments and clarify the regulations to address
past confusion. In general, this proposed rule would provide more
flexibility and clarity in the regulations for States and units of
general local government.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this proposed rule does
not have potential for significant impact on family formation,
maintenance, and general well-being, and, thus, is not subject to
review under the order. No significant change in existing HUD policies
or programs will result from promulgation of this proposed rule, as
those policies and programs relate to family concerns.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub.
L. 104-4, approved March 22, 1995; 109 Stat. 48) establishes
requirements for Federal agencies to assess the effects of their
regulatory actions on State, local, and tribal governments and the
private sector. This proposed rule would not impose any Federal
mandates on any State, local, or tribal governments, or on the private
sector within the meaning of the UMRA. The provisions of this proposed
rule would primarily clarify program procedures or provide States
additional flexibility in administering block grant funds.
List of Subjects in 24 CFR Part 570
Administrative practice and procedure, American Samoa, Community
development block grants, Grant programs--education, Grant programs--
housing and community development, Guam, Indians, Lead poisoning, Loan
programs--housing and community development, Low and moderate income
housing, New communities, Northern Mariana Islands, Pacific Islands
Trust Territory, Pockets of poverty, Puerto Rico, Reporting and
recordkeeping requirements, Small cities, Student aid, Virgin Islands.
Accordingly, for the reasons stated in the preamble, 24 CFR part
570 is proposed to be amended as follows:
[[Page 11291]]
PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS
1. The authority citation for part 570 continues to read as
follows:
Authority: 42 U.S.C. 3535(d) and 5300-5320.
2. Section 570.480 is amended by adding a new paragraph (e) to read
as follows:
Sec. 570.480 General.
* * * * *
(e) A State may, in its administration of the program, apply
additional or more restrictive provisions to units of general local
government participating in the State's program, providing that such
provisions are not plainly inconsistent with the Act or other statutory
or regulatory provisions applicable to the State CDBG program.
3. Section 570.486 is amended by revising paragraph (b) to read as
follows:
Sec. 570.486 Local government requirements.
* * * * *
(b) Activities serving beneficiaries outside the jurisdiction of
the unit of general local government. CDBG-funded activities may serve
beneficiaries outside the jurisdiction of the unit of general local
government that receives the grant, provided that reasonable benefits
from the activity will accrue to residents within the jurisdiction of
the grant recipient, and provided that the unit of general local
government determines that the activity is meeting its needs in
accordance with section 106(d)(2)(D) of the Act (42 U.S.C.
5306(d)(2)(D)).
4. Section 570.489 is amended by:
a. Revising paragraph (c);
b. Revising paragraph (e);
c. Revising the first sentence of paragraph (f)(2);
d. Revising paragraphs (h)(2) and (h)(3);
e. Adding a new paragraph (n); and
f. Adding a new paragraph (o); to read as follows:
Sec. 570.489 Program administrative requirements.
* * * * *
(c) Federal grant payments. The State's requests for payment, and
the Federal Government's payments upon such requests, must comply with
31 CFR part 205. The State must use procedures to minimize the time
elapsing between the transfer of grant funds and disbursement of funds
by the State to units of general local government. Units of general
local government must also use procedures to minimize the time elapsing
between the transfer of funds by the State and disbursement for CDBG
activities.
* * * * *
(e) Program income. (1) For the purposes of this subpart, ``program
income'' is defined as gross income received by a State, a unit of
general local government, or a subrecipient of a unit of general local
government that was generated from the use of CDBG funds, except as
provided in paragraph (e)(2) of this section. When income is generated
by an activity that is only partially assisted with CDBG funds, the
income must be prorated to reflect the percentage of CDBG funds used
(e.g., a single loan supported by CDBG funds and other funds; a single
parcel of land purchased with CDBG funds and other funds). Program
income includes, but is not limited to, the following:
(i) Proceeds from the disposition by sale or long term lease of
real property purchased or improved with CDBG funds;
(ii) Proceeds from the disposition of equipment purchased with CDBG
funds;
(iii) Gross income from the use or rental of real or personal
property acquired by the unit of general local government or a
subrecipient of a unit of general local government with CDBG funds,
less the costs incidental to the generation of the income;
(iv) Gross income from the use or rental of real property, owned by
the unit of general local government or a subrecipient of a unit of
general local government, that was constructed or improved with CDBG
funds, less the costs incidental to the generation of the income;
(v) Payments of principal and interest on loans made using CDBG
funds, except as provided in paragraph (e)(2)(iv) of this section;
(vi) Proceeds from the sale of loans made with CDBG funds, less
legal and other costs associated with the sale of loans that are not
otherwise eligible under sections 105(a)(13) or 106(d)(3)(A) of the Act
(42 U.S.C. 5305(a)(13), 5306(d)(3)(A));
(vii) Proceeds from the sale of obligations secured by loans made
with CDBG funds, less legal and other costs associated with the sale of
obligations that are not otherwise eligible under sections 105(a)(13)
or 106(d)(3)(A) of the Act (42 U.S.C. 5305(a)(13), 5306(d)(3)(A));
(viii) Interest earned on funds held in a revolving fund account;
(ix) Interest earned on program income pending disposition of the
income;
(x) Funds collected through special assessments made against
properties owned and occupied by households not of low and moderate
income, if the special assessments are used to recover all or part of
the CDBG portion of a public improvement; and
(xi) Gross income paid to a unit of general local government or
subrecipient from the ownership interest in a for-profit entity
acquired in return for the provision of CDBG assistance.
(2) ``Program income'' does not include the following:
(i) Any income received by a unit of general local government and
its subrecipients during a twelve-month period, provided that the total
of such income is less than $25,000. (This provision does not apply to
funds paid to the State for redistribution to other units of local
government.)
(ii) Amounts generated by activities that are eligible under
section 105(a)(15) of the Act (42 U.S.C. 5305(a)(15)) and are carried
out by an entity under the authority of section 105(a)(15) of the Act;
(iii) Amounts generated by activities that are financed by a loan
guaranteed under section 108 of the Act (42 U.S.C. 5308) and meet one
or more of the public benefit criteria specified in
Sec. 570.482(f)(3)(v), or are carried out in conjunction with a grant
under section 108(q) of the Act (42 U.S.C. 5308(q)) in an area
determined by HUD to meet the eligibility requirements for designation
as an Empowerment Zone or Enterprise Community pursuant to either 24
CFR part 597, subpart B or 7 CFR part 25, subpart B (as applicable).
Such exclusion does not apply if CDBG funds are used to repay the
guaranteed loan. When such a guaranteed loan is partially repaid with
CDBG funds, the amount generated must be prorated to reflect the
percentage of CDBG funds used. Amounts generated by activities financed
with loans guaranteed under section 108 of the Act (42 U.S.C. 5308)
that are not defined as ``program income'' will be treated as
miscellaneous revenue and will not be subject to any of the
requirements of this part. However, such treatment does not affect the
right of the Secretary to require the Section 108 borrower to pledge
such amounts as security for the guaranteed loan. The determination
whether such amounts constitute program income is governed by the
provisions of the contract required at Sec. 570.705(b)(1).
(iv) Payments of principal and interest made by a subrecipient to a
unit of general local government, toward a loan from the local
government to the subrecipient, when program income received by the
subrecipient is being
[[Page 11292]]
used for such payments. (By making such payments, the subrecipient is
deemed to have transferred program income to the unit of general local
government.)
(v) Interest earned on the following; such interest must be
remitted to HUD for transmittal to the U.S. Treasury, and will not be
reallocated under section 106 (c) or (d) of the Act (42 U.S.C. 5306
(c), (d)):
(A) Interest earned on loans or other forms of assistance provided
with CDBG funds that are used for activities determined by HUD either
to be ineligible or to fail to meet a national objective in accordance
with the requirements of Secs. 570.482 or 570.483, or section 105(a) of
the Act (42 U.S.C. 5305(a)), or that fail substantially to meet any
other requirement of this subpart or the Act;
(B) Interest earned on the investment of amounts reimbursed to the
CDBG program account prior to the use of the reimbursed funds for
eligible purposes; and
(C) Interest earned by units of general local government on grant
funds before disbursement of the funds for activities, except that the
unit of general local government may keep interest payments of up to
$100 per year for administrative expenses and may deduct service
charges for escrow accounts pursuant to paragraph (o) of this section.
(Interest earned on lump sum deposits pursuant to paragraph (n) of this
section is not subject to the provisions of paragraph (e)(2)(v)(C) of
this section.)
(3) (i) Program income paid to the State. Except as described in
paragraph (e)(3)(ii)(A) of this section, the State may require the unit
of general local government that receives or will receive program
income to return the program income to the State. Program income that
is paid to the State is treated as additional CDBG funds subject to the
requirements of this subpart. Except for program income retained and
used by the State for administrative costs under Sec. 570.489(a),
program income paid to the State must be distributed to units of
general local government in accordance with the method of distribution
in the action plan under 24 CFR part 91 that is in effect at the time
the program income is distributed. To the maximum extent feasible, the
State must distribute program income before it makes additional
withdrawals from the Treasury, except as provided in paragraph (f) of
this section.
(ii) Program income retained by a unit of general local government.
The State may permit the unit of general local government that receives
or will receive program income to retain the program income. In any
case in which the State allows the unit of general local government to
retain program income, the State may require the unit of local
government to pay to the State an amount not to exceed 2 percent of the
program income received, for use by the State in accordance with
Sec. 570.489(a).
(A) The State must permit the unit of general local government to
retain the program income if the program income will be used to
continue the activity from which it was derived.
(1) The State will determine when an activity will be considered to
be continued. In making such a determination, the State may consider
whether the unit of local government is or will be unable to comply
with the requirements of paragraph (e)(3)(ii) of this section or other
requirements of this part, and whether the program income-funded
activity is unlikely to be completed within a reasonable time period.
(2) When the State determines that the program income will be used
to continue the activity from which it was derived, but that the amount
of program income held by the unit of local government exceeds
projected cash needs for the near future, the State may require the
local government to return all or part of the program income to the
State's line of credit until such time as the program income is needed
by the unit of general local government.
(B) Program income that is received and retained by the unit of
general local government is treated as additional CDBG funds and is
subject to all applicable requirements of this subpart for the duration
of the program income's existence. The State has the option of
selecting its approach for demonstrating compliance by units of local
government with this paragraph (e)(ii)(B). The three approaches from
which the State may select are:
(1) Maintaining contractual relationships with units of local
government for the duration of the existence of the program income.
(2) Requiring advance State approval of either a State grant
recipient's plan for the use of program income, or of each use of
program income by grant recipients.
(3) With prior HUD approval, other approaches that demonstrate that
the State will ensure compliance with the requirements of this subpart
by units of local government.
(C) The provisions of paragraph (e)(3)(ii)(B) of this section apply
to all activities funded with funds from fiscal year (FY) 1993 and
later. All activities funded with FY 1992 and earlier funds are subject
to Sec. 570.489(e)(3)(ii) as it existed immediately before [INSERT
EFFECTIVE DATE OF FINAL RULE]. At its option, a State may apply the
provisions of paragraph (e)(3)(ii)(B) of this section to FY 1992 and
earlier funds.
(D) The State must require units of general local government, to
the maximum extent feasible, to disburse program income that is subject
to the requirements of this subpart before requesting additional funds
from the State for activities, except as provided in paragraphs (f),
(n), and (o) of this section.
(4) The State must report on the receipt and use of all program
income (whether retained by units of local government or paid to the
State) in its annual performance and evaluation report.
(f) * * *
(2) The State may establish one or more revolving funds to
distribute funds to units of general local government throughout a
State or a region of the State to carry out specific, identified
activities. * * *
* * * * *
(h) * * *
(2) Conflicts prohibited. The general rule is that no persons
described in paragraph (h)(3) of this section, who exercise or have
exercised any functions or responsibilities with respect to CDBG
activities assisted under this subpart or who are in a position to
participate in a decisionmaking process or gain inside information with
regard to such activities, may obtain a financial interest or benefit
from the activity, or have a financial interest in any contract,
subcontract, or agreement with respect thereto, or the proceeds
thereunder, either for themselves or for those with whom they have
immediate family or business ties, during their tenure or for one year
thereafter.
(3) Persons covered. The conflict of interest provisions in
paragraph (h)(2) of this section apply to any person who is an
employee, agent, consultant, officer, or elected official or appointed
official of the State, or of a unit of general local government, or of
any designated public agencies, or subrecipients that are receiving
funds under this part.
* * * * *
(n) Lump sum drawdowns. The requirements for States and units of
general local government regarding lump sum drawdowns to finance
property rehabilitation activities are in Sec. 570.513.
(o) Use of escrow accounts for rehabilitation of privately owned
residential property. The requirements for States and units of general
local
[[Page 11293]]
government regarding the use of escrow accounts for rehabilitation of
privately owned residential property are in Sec. 570.511.
5. Section 570.511 is revised to read as follows:
Sec. 570.511 Use of escrow accounts for rehabilitation of privately
owned residential property.
(a) Limitations. A recipient may withdraw funds (or, as applicable,
a State may allow units of general local government to withdraw funds)
from its letter of credit for immediate deposit into an escrow account
for use in funding loans and grants for the rehabilitation of privately
owned residential property. The following limitations apply to the use
of escrow accounts for residential rehabilitation loans grants closed
after September 7, 1990. (For the State CDBG program, the following
limitations apply to the use of escrow accounts for residential
rehabilitation loans and grants closed after [INSERT EFFECTIVE DATE OF
FINAL RULE]):
(1) The use of escrow accounts under this section is limited to
loans and grants for the rehabilitation of primarily residential
properties containing no more than four dwelling units (and accessory
neighborhood-scale nonresidential space within the same structure, if
any, e.g., a store front below a dwelling unit).
(2) An escrow account must not be used unless the contract between
the property owner and the contractor selected to do the rehabilitation
work specifically provides that payment to the contractor shall be made
through an escrow account. No deposit to the escrow account can be made
until after the contract has been executed between the property owner
and the rehabilitation contractor.
(i) For the CDBG Entitlement program, the escrow account must be
maintained by the recipient, by a subrecipient as defined in
Sec. 570.500(c), by a public agency designated under Sec. 570.501(a),
or by an agent under a procurement contract governed by the
requirements of 24 CFR 85.36.
(ii) For the State CDBG program, the escrow account must be
maintained by the unit of general local government, by an agent under a
procurement contract governed by the requirements of Sec. 570.489(g),
or by a nonprofit entity authorized under section 105(a)(15) of the Act
(42 U.S.C. 5305(a)(15)).
(3) All funds withdrawn under this section must be deposited into
one interest earning account with a financial institution. Separate
bank accounts may not be established for individual loans and grants.
(4) The amount of funds deposited into an escrow account must be
limited to the amount expected to be disbursed within 10 working days
from the date of deposit. If the escrow account, for whatever reason,
at any time contains funds exceeding 10 days' cash needs, the recipient
must immediately transfer (or, as applicable, the State must ensure
that a unit of general local government immediately transfers) the
excess funds to its program account. In the program account, the excess
funds must be treated as funds erroneously drawn in accordance with the
requirements of U.S. Treasury Financial Manual, paragraph 6-2075.30.
(5) Funds deposited into an escrow account must be used only to pay
the actual costs of rehabilitation incurred by the owner under the
contract with a private contractor. Other eligible costs related to the
rehabilitation loan or grant, e.g., the recipient's (or, as applicable,
the unit of general local government's) administrative costs (as
defined for the Entitlement CDBG program under Sec. 570.206) or
rehabilitation services costs under Sec. 570.202(b)(9) if applicable,
are not permissible uses of escrowed funds. Such other eligible
rehabilitation costs must be paid under normal CDBG payment procedures
(e.g., from withdrawals of grant funds under the recipient's (or
State's, as applicable) letter of credit with the Treasury).
(b) Interest. Interest earned on escrow accounts established in
accordance with this section, less any service charges for the account,
must be remitted to HUD (for transmittal to the U.S. Treasury) at least
quarterly but not more frequently than monthly. Interest earned on
escrow accounts is not required to be remitted to HUD to the extent the
interest is attributable to the investment of program income.
(c) Remedies for noncompliance. If HUD determines that a recipient
has failed (or, as applicable, if a State determines that a unit of
general local government has failed) to use an escrow account in
accordance with this section, HUD may, in addition to imposing any
other sanctions provided for under this part, require the recipient to
discontinue the use of escrow accounts, in whole or in part (or, as
applicable, the State may, under the authority of Sec. 570.492(b),
require the unit of general local government to discontinue the use of
escrow accounts, in whole or in part).
6. Section 570.513 is revised to read as follows:
Sec. 570.513 Lump sum drawdown for financing of property
rehabilitation activities.
Subject to the conditions prescribed in this section (and section
104(h) of the Act (42 U.S.C. 5304(h), as applicable)), recipients may
draw down funds (or, as applicable, States may allow units of general
local government to draw down funds) from the letter of credit in a
lump sum to establish a rehabilitation fund in one or more private
financial institutions for the purpose of financing the rehabilitation
of privately owned properties. The fund may be used in conjunction with
various rehabilitation financing techniques, including loans, interest
subsidies, loan guarantees, loan reserves, or such other uses as may be
approved by HUD consistent with the objectives of this section. The
fund may also be used for making grants, but only for the purpose of
leveraging non-CDBG funds for the rehabilitation of the same property.
(a) Limitation on drawdown of grant funds. (1) The funds that a
recipient deposits (or, as applicable, that a State allows a unit of
general local government to deposit) to a rehabilitation fund must not
exceed the grant amount that the recipient (or State, as applicable)
reasonably expects will be required, together with anticipated program
income from interest and loan repayments, for the rehabilitation
activities during the period specified in the agreement with the
financial institution(s) (described in paragraph (b)(2) of this
section), based on:
(i) Prior level of rehabilitation activity; or
(ii) Rehabilitation staffing and management capacity during the
period specified in the agreement to undertake activities; or
(iii) For purposes of the State CDBG program only, estimated demand
for rehabilitation activity.
(2) No grant funds may be deposited under this section solely for
the purpose of investment, notwithstanding that the interest or other
income is to be used for the rehabilitation activities.
(3) The recipient's (or, as applicable, the unit of general local
government's) rehabilitation program administrative costs and the
administrative costs of the financial institution may not be funded
through lump sum drawdown. Such costs must be paid from periodic letter
of credit withdrawals in accordance with standard procedures or from
program income, other than program income generated by the lump sum
deposit.
(b) Standards to be met. The following standards apply to all lump
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sum drawdowns of CDBG funds for rehabilitation:
(1) Eligible rehabilitation activities. The rehabilitation fund
must be used to finance the rehabilitation of privately owned
properties (including the acquisition of properties for rehabilitation)
eligible under the general policies in Sec. 570.200, if applicable, and
the specific provisions of either Sec. 570.202 or Sec. 570.203, if
applicable; or, for purposes of the State CDBG program, as eligible
under section 105 (a)(4), (a)(5), (a)(14), (a)(15) or (a)(17) of the
Act (42 U.S.C. 5305(a)).
(2) Requirements for agreement. The recipient (or unit of general
local government, as applicable) must execute a written agreement with
one or more private financial institutions for the operation of the
rehabilitation fund. The agreement must specify the obligations and
responsibilities of the parties, the terms and conditions on which CDBG
funds are to be deposited and used or returned, the anticipated level
of rehabilitation activities by the financial institution, the rate of
interest and other benefits to be provided by the financial institution
in return for the lump sum deposit, and such other terms as are
necessary for compliance with the provisions of this section. Except
for purposes of the State CDBG program, upon execution of the
agreement, the recipient must provide a copy to the HUD field office
for its records and use in monitoring; the recipient must also provide
to HUD any modifications made during the term of the agreement. For
purposes of the State CDBG program, a State may require State approval
of any local agreement or modification.
(3) Period to undertake activities. The agreement must be fully
executed before the lump sum deposit is made. Except for purposes of
the State CDBG program, the agreement must provide that the
rehabilitation fund may only be used for authorized activities during a
period of no more than two years. For purposes of the State CDBG
program, States may set maximum time limits on the duration of lump sum
drawdown agreements, but in no case can an agreement remain in effect
after the date that a grant to a unit of general local government is
closed out; the agreement must specify the time period for which the
agreement is in effect.
(4) Time limit on use of deposited funds. (This paragraph (b)(4) of
this section does not apply to the State CDBG program). Use of the
deposited funds for rehabilitation financing assistance must start
(e.g., first loan must be made, subsidized or guaranteed) within 45
days of the deposit. In addition, substantial disbursements from the
fund must occur within 180 days of the receipt of the deposit. (Where
CDBG funds are used as a guarantee, the funds that must be
substantially disbursed are the guaranteed funds.) For a recipient with
an agreement specifying two years to undertake activities, the
disbursement of 25 percent of the fund (deposit plus any interest
earned) within 180 days will be regarded as meeting this requirement.
If a recipient with an agreement specifying two years to undertake
activities determines that it has had substantial disbursement from the
fund within the 180 days although it had not met this 25 percent
threshold, the justification for the recipient's determination must be
included in the program file. If a recipient does not start using the
funds within 45 days, or substantial disbursement from such fund does
not occur within 180 days, the recipient may be required by HUD to
return all or part of the deposited funds to the recipient's letter of
credit.
(5) Program activity. Recipients (or States, as applicable) must
review the level of program activity under each agreement on a yearly
basis. If activity is substantially below that anticipated, the
recipient must return program funds to its letter of credit (or the
State must require that the unit of general local government return
program funds to the State's letter of credit, as applicable).
(6) Termination of agreement. (i) In the case of substantial
failure by a private financial institution to comply with the terms of
a lump sum drawdown agreement under the Entitlement CDBG program, the
recipient must terminate its agreement, provide written justification
for the action, withdraw all unobligated deposited funds from the
private financial institution, and return the funds to the recipient's
letter of credit.
(ii) For purposes of the State CDBG program, a State must develop
and implement standards to ensure that, in cases of substantial failure
by a private financial institution or a unit of general local
government to comply with the terms of a lump sum drawdown agreement,
all unobligated deposited funds will be withdrawn from the private
financial institution and returned to the State's letter of credit.
(7) Return of unused deposits. At the end of the period specified
in the agreement for undertaking activities, all unobligated deposited
funds must be returned to the recipient's (or State's, as applicable)
letter of credit unless the recipient (or unit of general local
government, as applicable) enters into a new agreement conforming to
the requirements of this section. In addition, the recipient (or State,
as applicable) must reserve the right to withdraw any unobligated
deposited funds as required by HUD (or, for purposes of the State CDBG
program, as determined by HUD or the State) in the exercise of
corrective or remedial actions authorized under Secs. 570.910(b),
570.911, 570.912, or 570.913 (or, for purposes of the State CDBG
program, under this section, Secs. 570.492, 570.493, 570.495, or
570.496).
(8) Rehabilitation loans made with non-CDBG funds. If the deposited
funds or program income derived from deposited funds are used to
subsidize or guarantee repayment of rehabilitation loans made with non-
CDBG funds, or to provide a supplemental loan or grant to the borrower
of the non-CDBG funds, the rehabilitation activities are considered to
be CDBG-assisted activities subject to the requirements applicable to
such activities, except that repayment of non-CDBG funds is not treated
as program income.
(9) Provision of consideration. In consideration for the lump sum
deposit by the recipient (or unit of general local government, as
applicable) in a private financial institution, the deposit must result
in appropriate benefits in support of the recipient's (or, as
applicable, unit of general local government's) rehabilitation program.
Minimum requirements for such benefits are:
(i) Recipients (or units of general local government, as
applicable) must require the financial institution to pay interest on
the lump sum deposit.
(A) The interest rate paid by the financial institution cannot be
lower than three points below the rate on one-year Treasury obligations
at constant maturity.
(B) When an agreement sets a fixed interest rate for the entire
term of the agreement, the rate should be based on the rate at the time
the agreement is executed.
(C) The agreement may provide for an interest rate that would
fluctuate periodically during the term of the agreement, but the
established rate cannot be lower than three points below the rate on
one-year Treasury obligations at constant maturity.
(ii) In addition to the payment of interest, the financial
institution must provide at least one of the following benefits:
(A) Leverage of the deposited funds so that the financial
institution commits private funds for the loans in the rehabilitation
program in an amount substantially in excess of the amount of the lump
sum deposit;
(B) Commitment of private funds by the financial institution for
[[Page 11295]]
rehabilitation loans at below market interest rates, at higher than
normal risk, or with longer than normal repayment periods; or
(C) Provision of administrative services in support of the
rehabilitation program by the participating financial institution at no
cost or at lower than actual cost.
(c) Program income. Interest earned on lump sum deposits and
payments on loans made from such deposits are program income and,
during the period of the agreement, must be used for rehabilitation
activities under the provisions of this section.
(d) Outstanding findings. Notwithstanding any other provision of
this section, a recipient may not enter into a new agreement (or, as
applicable, a State may not allow a unit of general local government to
enter into a new agreement) during any period of time in which an audit
or monitoring finding on a previous lump sum drawdown agreement remains
unresolved.
(e) Prior notification. (This paragraph (e) of this section does
not apply to the State CDBG program.) The recipient must submit written
notification to the HUD field office of the amount of funds to be
deposited with a private financial institution, before making the
deposit under the provisions of this section.
(f) Recordkeeping requirements. (This paragraph (f) of this section
does not apply to the State CDBG program.) The recipient must maintain
in its files a copy of the written agreement and related documents
establishing conformance with this section and concerning performance
by a financial institution in accordance with the agreement.
Dated: March 5, 1997.
Howard Glaser,
Acting Assistant Secretary for Community Planning and Development.
[FR Doc. 97-6024 Filed 3-10-97; 8:45 am]
BILLING CODE 4210-29-P
