11284 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules

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.

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 speechimpaired 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 § 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

§ 570.489(c) obsolete. Therefore, rather

than repeat the requirements for States

in the State CDBG regulations,

§ 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 (§ 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
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules 11285

general local government after closeout

of its grant from the State would not be

subject to the program income

requirements in § 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 § 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
11286 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules

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 previouslygenerated 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 § 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

§ 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 § 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 currentlyexisting 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

§ 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

§ 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

§ 570.489(c)(2). Concordant with the

proposed revision of § 570.489(c)

(described above), this proposed rule

would move the requirement to

§ 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 § 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 nonCDBG 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
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules 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

§ 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 § 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 quasigovernmental 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

§ 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 § 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 grantfunded 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
11288 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules

income to be repaid to a Statedesignated 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 § 570.513; however, HUD has never

created comparable regulations for the

State CDBG program. This proposed

rule would amend § 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 § 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 § 570.489(c)(2) and the

proposed § 570.489(e)(2)(v).

Use of Escrow Accounts for

Rehabilitation

Similarly, § 570.511 allows

Entitlement communities to establish

escrow accounts for funding loans and

grants for the rehabilitation of privatelyowned residential property. Again, HUD

has never created comparable

regulations for the State CDBG Program.

This proposed rule would amend

§ 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 § 570.511 as they apply

in the Entitlement program.

Paragraph (c) of § 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 § 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 § 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 (§ 570.611) in a

final rule published on November 9,

1995 (60 FR 56893). The amendments to

§ 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 § 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

§ 570.611 of the CDBG Entitlement

regulations.

The introductory discussion of

§ 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

§ 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 § 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
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules 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 § 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
11290 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules

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 incomegenerating 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.

Burden of collection frequency Number of respondents

Total hours

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:
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules 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:

§ 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:

§ 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:

§ 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

§ 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

§ 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
11292 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules

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 §§ 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

§ 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 § 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 incomefunded 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 § 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

§ 570.513.

(o) Use of escrow accounts for

rehabilitation of privately owned

residential property. The requirements

for States and units of general local
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules 11293

government regarding the use of escrow

accounts for rehabilitation of privately

owned residential property are in

§ 570.511.

5. Section 570.511 is revised to read

as follows:

§ 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 § 570.500(c), by a public

agency designated under § 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

§ 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 § 570.206) or

rehabilitation services costs under

§ 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 § 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:

§ 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
11294 Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules

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 § 570.200, if applicable, and

the specific provisions of either

§ 570.202 or § 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 §§ 570.910(b),

570.911, 570.912, or 570.913 (or, for

purposes of the State CDBG program,

under this section, §§ 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 oneyear 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
Federal Register / Vol. 62, No. 47 / Tuesday, March 11, 1997 / Proposed Rules 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