10758 Federal Register / Vol. 60, No. 38 / Monday, February 27, 1995 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

Office of the Assistant Secretary for

Community Planning and

Development

24 CFR Part 570

[Docket No. R–95–1773; FR–3787–I–01]

RIN 2506–AB70

Section 111(a) of Housing and

Community Development Act of 1974;

Interpretive Rule

AGENCY: Office of the Assistant

Secretary for Community Planning and

Development, HUD.

ACTION: Interpretive rule.

SUMMARY: This interpretive rule sets

forth HUD’s interpretation of section

111(a) of the Housing and Community

Development Act of 1974 (the HCDA of

1974), as to whether this section’s

procedural protections apply when

HUD terminates a city’s Urban

Development Action Grant (UDAG)

agreement prior to final approval and

funds disbursement. The United States

Court of Appeals for the District of

Columbia Circuit instructed HUD to

provide a reasonable construction of

this statute. HUD determines that

section 111(a) does not mandate

procedural protections when a UDAG

grant is terminated prior to final

approval and funds disbursement.

EFFECTIVE DATE: February 27, 1995.

FOR FURTHER INFORMATION CONTACT: Roy

O. Priest, Director of the Office of

Economic Development, Department of

Housing and Urban Development, Room

7136, 451 Seventh Street, SW.,

Washington, DC 20410. Telephone

number (202) 708–2290. The TDD

number is (202) 708–2565. (These are

not toll-free telephone numbers).

SUPPLEMENTARY INFORMATION:

Background

The Urban Development Action Grant

(UDAG) program, which was enacted in

1977 under a Congressional amendment

to the Housing and Community

Development Act of 1974 (HCDA of

1974), was designed to encourage new

or increased private investment in cities

and urban counties experiencing severe

economic distress. The availability of

UDAG funds permitted local officials to

capitalize on opportunities to stimulate

economic development activity to aid in

economic recovery. UDAG funds,

awarded on a competitive basis, were

available to carry out projects in support

of a wide variety of economic

development activities that involved the

private sector. UDAG grants could be

used in the form of equity funding,

loans, interest subsidy, or other forms of

necessary financing. Although Congress

has not appropriated any new funds for

the UDAG program since Fiscal Year

1988, many grants preliminarily

approved by HUD pursuant to—or even

prior to—the last funding competition

still have not reached the final close-out

stage. The termination of the grant

agreements of recipients who fail to

submit acceptable evidentiary materials

or amendments to their grant

agreements will be subject to the

determination set forth herein regarding

the opportunity for a formal hearing

under section 111(a) of the HCDA of

1974.

Section 111 of the HCDA of 1974 is

entitled ‘‘Remedies for

Noncompliance,’’ and applies both to

the Community Development Block

Grant program created in 1974 and the

subsequently created UDAG program.

Section 111(a) provides as follows:

If the Secretary finds after reasonable

notice and opportunity for hearing that a

recipient of assistance under this title has

failed to comply substantially with any

provision of this title, the Secretary, until he

is satisfied that there is no longer any such

failure to comply, shall—

(1) terminate payments to the recipient

under this title, or

(2) reduce payments to the recipient under

this title by an amount equal to the amount

of such payments which were not expended

in accordance with this title, or

(3) limit the availability of payments under

this title to programs, projects, or activities

not affected by such failure to comply.

(This provision is codified at 42 U.S.C.

5311(a), and applicable regulations are

contained in 24 CFR 570.913, which

also describe the notice and hearing

proceedings.)

The United States Court of Appeals

for the District of Columbia Circuit

found that section 111(a) of the HCDA

of 1974 is unclear and ambiguous as to

whether HUD, before such time as any

grant funds have been disbursed, must

provide an opportunity for a formal

hearing to a city or urban county that

has a grant agreement with HUD under

the UDAG program, when HUD has

decided to terminate the grant

agreement due to failure to comply

substantially with the HCDA of 1974,

applicable regulations, or the grant

agreement itself. City of Kansas City,

Missouri v. HUD, 923 F.2d 188, 191

(D.C. Cir. 1991). The court also found

that the HCDA of 1974 contains an

implicit delegation of authority to HUD

to interpret the applicability of section

111 under these circumstances. Id. at

191–92.

The Interpretive Rule

Under its implied interpretive

authority as delegated by the HCDA of

1974, HUD interprets section 111(a) of

the HCDA of 1974 as not requiring HUD

to provide an opportunity for a hearing

to a recipient under the UDAG program

pertaining to the recipient’s failure to

comply substantially with any

provisions of the HCDA of 1974, the

regulations, or the grant agreement,

which results in the termination of a

grant agreement by HUD before final

grant approval and payment of the grant

funds to a recipient under its line of

credit.

HUD has consistently maintained this

interpretation of this section since the

inception of the UDAG program in 1977.

Accordingly, HUD has not voluntarily

offered an opportunity for a formal

section 111(a) hearing under the HCDA

of 1974 to any recipient before acting to

terminate a grant agreement. By judicial

direction, HUD has now reconsidered

the reasonableness of its construction of

the HCDA of 1974, and has concluded

that its long-standing interpretation

remains correct and reasonable.

It is HUD’s position that the reference

in the HCDA of 1974 to HUD’s

‘‘terminat[ion of] payments’’ to the

recipient due to the recipient’s failure to

comply substantially with the

provisions of Title I of the HCDA of

1974 means that the opportunity for a

hearing before HUD acts to terminate a

UDAG grant agreement shall be given to

a recipient only after such time as

funding has been finally approved and

released (i.e., after payments have been

made) to a recipient under its line of

credit. In other words, the actual

language of the statute has been

interpreted by HUD not to require a

formal hearing in order to effectuate

HUD’s termination of a grant agreement

prior to such time as the recipient

obtains from HUD an increase in the

amount of money available under its

line of credit. The primary basis for this

position is the simple logic that HUD

cannot possibly ‘‘terminate payments’’

that HUD has not yet made. Since

entitlement to the use of grant funds is

dependent upon satisfactory

performance by the recipient in

providing HUD with legally binding

commitments that comply with the

requirements of the grant agreement,

there is no need to impose the

procedural burden of a formal hearing

upon HUD in order to terminate a grant

agreement when the recipient, due to its

failure to submit acceptable and timely

legally binding commitments, has not

become entitled to the funds by having

its line of credit increased.
Federal Register / Vol. 60, No. 38 / Monday, February 27, 1995 / Rules and Regulations 10759

The use of the word ‘‘recipient’’ in the

HCDA of 1974 and the UDAG

regulations, beginning at 24 CFR

570.460(c), does not endow a grant

applicant who receives preliminary

grant approval with an unconditional

entitlement to payment of the grant

funds. Rather, the term ‘‘recipient’’ is

intended merely to describe cities and

urban counties that have entered into a

grant agreement with HUD under the

UDAG program. The term does not

signify any absolute right to, let alone

actual receipt of, the grant funds; it

merely evidences conditional authority

for the funds. Indeed, the regulations

specifically provide at § 570.460(c)(5)

that:

Preliminary approval does not become

final until legally binding commitments

between the recipient and the private and

public participating parties have been

submitted and approved by HUD. Release of

grant funds is contingent upon the recipient’s

meeting each and every condition set forth in

the grant agreement.

Approved legally binding commitments,

as required by the regulations and the

grant agreement, are the touchstone that

the project is fully financed and has met

all conditions necessary for it to move

forward to completion with the

assistance of the grant funds. In other

words, the recipient has no authority or

right to receive any grant money until

and unless it submits on a timely basis

acceptable legally binding commitments

that HUD approves.

Also supporting HUD’s position is the

fact that recipients knowingly invest in

a UDAG project at their peril with

regard to receiving federal grant funds

until legally binding commitments are

approved and their line of credit is

funded. Each recipient is afforded every

opportunity to know that its investment

in the project in connection with an

activity to be paid for, in whole or in

part, with grant funds may not be

recoverable if the recipient incurs costs

before HUD’s approval of the legally

binding commitments and the funding

of the recipient’s line of credit. The

regulations at 24 CFR 570.462(b)

specifically state that:

The recipient and participating parties may

voluntarily, at their own risk, and upon their

own credit and expense, incur costs as

authorized in paragraph (a) of this section,

but their authority to reimburse or to be

reimbursed out of grant funds shall be

governed by the provisions of the grant

agreement applicable to the payment of costs

and the release of funds by the Secretary.

The regulations, as well as the grant

agreement, thus make it clear that any

authorized costs incurred by a recipient

or by a participating party to the project

that is the subject of the grant shall be

incurred at the risk of the recipient or

other party, without any assurance of

reimbursement out of grant funds.

Accordingly, every reasonable effort

should be made by a recipient to submit

acceptable evidentiary materials in

order that the grant funds contingently

set aside at the time of preliminary

approval of the grant may expeditiously

be provided to the project and not

remain dormant and unavailable for use

by HUD. HUD’s experience clearly

indicates that the primary cause of

recipients’ failure to comply with the

provisions of the HCDA of 1974, the

regulations, and the grant agreement has

been their failure to submit satisfactory

legally binding commitments to HUD

within the time agreed under their grant

agreements.

The fact that termination of grants is

more likely to occur before

disbursement of the funds, rather than

after, does not serve to alter HUD’s

determination in this interpretive rule.

A potential practical effect cannot undo

HUD’s reasonable interpretation of

Congress’ chosen statutory language,

made in light of the overall program

operation discussed above. Moreover,

even as to practical considerations,

there have been, to date, more than 263

terminations of grants for cause before

the legally binding commitments have

been approved and the recipient’s line

of credit funded. Requiring a formal

hearing prior to termination would thus

be extremely burdensome upon HUD’s

limited resources.

While HUD determines that recipients

lack a formal hearing right under section

111(a) prior to final approval of the

grant, it is significant that HUD

nevertheless provides extensive notice

and opportunities to resolve the

problems. HUD consistently makes

every effort to resolve problems that a

recipient is experiencing in its attempt

to comply with requirements of the

HCDA of 1974, the regulations, or the

grant agreement before giving final

notice of termination to the recipient.

Efforts include an invitation to the

recipient’s representatives to meet with

HUD officials to discuss the issues and

attempt to correct the problems that may

be causing noncompliance. It has been

HUD’s practice to afford a recipient

every reasonable opportunity to comply

substantially with the requirements of

the HCDA of 1974, the regulations, and

the grant agreement. Only after HUD has

exhausted all available means to resolve

the issues has it been compelled to

advise the recipient that its failure to

correct the default may result in

termination of a grant agreement by

HUD. Often a recipient has responded

favorably to HUD’s efforts to assist in

clearing the noncompliance and the

project has been timely funded.

If HUD’s attempts to work with the

recipient to resolve the issues ultimately

do not succeed, HUD will provide the

recipient a written notice of its intention

to terminate the grant agreement at least

35 days before taking action to terminate

the grant agreement. Often this period of

time is extended by HUD to provide

additional opportunities to the recipient

to remedy the noncompliance. Thus,

recipients are not, in fact, deprived of

procedural protection at the stage when,

according to the U.S. Court of Appeals

for the District of Columbia Circuit, it is

arguably most needed. City of Kansas

City, Missouri v. HUD, 923 F.2d 188,

193 (D.C. Cir. 1991). To the contrary,

HUD provides extensive notice and

opportunities to resolve the dispute,

albeit not through a formal hearing.

Accordingly, this interpretive rule

sets forth HUD’s determination that,

before such time as the UDAG grant has

received final approval by HUD and the

grant funds have been paid to the

recipient under its line of credit, the

HCDA of 1974 does not require that a

UDAG recipient be entitled to an

opportunity for a hearing concerning the

recipient’s failure to comply

substantially with any provision of the

HCDA of 1974, the regulations, or the

grant agreement that HUD has decided

to terminate. In addition, it has been

determined that an opportunity for a

hearing will be available to a recipient

with regard to the termination of a grant

that has been partially funded, but only

with regard to the grant funds covered

by legally binding commitments that

HUD approved before the termination of

a grant (or part of a grant) due to the

failure of a recipient to comply

substantially with any provision of the

HCDA of 1974, the regulations, or the

grant agreement.

This interpretive rule shall not apply

to recipients who have received grants

in states under the jurisdiction of the

U.S. Court of Appeals for the First

Circuit. In City of Boston v. HUD, 898

F.2d 828 (1st Cir. 1990), the court held

that the recipient City of Boston was

entitled to notice and opportunity for a

hearing prior to termination of its UDAG

grant, even though the City of Boston

had not received final approval by HUD

for its grant, let alone received any

disbursement of funds.

Authority: 42 U.S.C. 3535(d).

Dated: February 17, 1995.

Andrew Cuomo,

Assistant Secretary for Community Planning

and Development.

[FR Doc. 95–4745 Filed 2–24–95; 8:45 am]

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