Federal Register / Vol. 73, No. 202 / Friday, October 17, 2008 / Proposed Rules 61757 

the respondent may wish to provide; 

and 

(6) That if a complaint is issued under 

§ 30.85, the respondent may request a 

hearing before an administrative law 

judge in accordance with § 30.95. 

(b) Obligation to preserve documents. 

Upon receipt of the prepenalty notice, 

the respondent is required to preserve 

and maintain all documents or data, 

including electronically stored data, 

within his or her possession or control 

that may relate to the violations alleged 

in the prepenalty notice. The 

Department shall also preserve such 

documents or data upon the issuance of 

the prepenalty notice. 

8. Revise § 30.75 to read as follows: 

§ 30.75 Response to prepenalty notice. 

(a) The response shall be in a format 

prescribed in the prepenalty notice. The 

response shall address the factors set 

forth in § 30.80 and include any 

arguments opposing the imposition of a 

civil money penalty that the respondent 

may wish to present. 

(b) In any case where respondent 

seeks to raise ability to pay as an 

affirmative defense or argument in 

mitigation, the respondent shall provide 

documentary evidence as part of its 

response. 

9. Revise § 30.80 to read as follows: 

§ 30.80 Factors in determining amount of 

civil money penalty. 

After determining that a respondent 

has committed a violation as described 

in Subpart B of this part that subjects 

the respondent to liability under this 

part, the officials designated in subpart 

B of this part shall consider the 

following factors to determine the 

amount of penalty to seek against a 

respondent, if any. 

(a) The gravity of the offense; 

(b) Any history of prior offenses; 

(c) The ability to pay the penalty, 

which ability shall be presumed unless 

specifically raised as an affirmative 

defense or mitigating factor by the 

respondent; 

(d) The injury to the public; 

(e) Any benefits received by the 

violator; 

(f) The extent of potential benefit to 

other persons; 

(g) Deterrence of future violations; 

(h) The degree of the violator’s 

culpability; 

(i) With respect to Urban Homestead 

violations under § 30.30, the 

expenditures made by the violator in 

connection with any gross profit 

derived; and 

(j) Such other matters as justice may 

require. 

(k) In addition to the above factors, 

with respect to violations under 

§§ 30.45, 30.55, 30.60, and 30.68, the 

Assistant Secretary for Housing— 

Federal Housing Commissioner, or his 

or her designee, or the Assistant 

Secretary for Public and Indian 

Housing, or his or her designee, shall 

also consider: 

(1) Any injury to tenants; and/or 

(2) Any injury to lot owners. 

(l) HUD may consider the factors 

listed in paragraphs (a) through (k) of 

this section to determine the 

appropriateness of imposing a penalty 

under § 30.35(c)(2); however, HUD 

cannot change the amount of the 

penalty under § 30.35(c)(2). 

10. In § 30.85, revise paragraphs (b) 

introductory text, (c), and (d) and add 

paragraph (e) to read as follows: 

§ 30.85 Complaint. 

* * * * * 

(b) If a determination is made to seek 

a civil money penalty, government 

counsel shall issue a complaint to the 

respondent on behalf of the officials 

listed at subpart B of this part or the 

Mortgagee Review Board for violations 

under § 30.35. The complaint shall be 

served upon respondent and 

simultaneously filed with the Office of 

Administrative Law Judges, and shall 

state the following: 

* * * * * 

(c) A copy of this part and of 24 CFR 

part 26, subpart B, shall be included 

with the complaint. 

(d) Service of the complaint. The 

complaint shall be served on the 

respondent by first class mail, personal 

delivery, or other means. 

(e) Before taking an action under 

§§ 30.35 for violation of 12 U.S.C. 

§ 1735f–14(b)(1)(D) or (F), 30.36, or 

30.50 for violation of 12 U.S.C. 

1723i(b)(1)(G) or (I), the Secretary shall 

inform the Attorney General of the 

United States, which may be 

accomplished by providing a copy of 

the complaint. The Secretary shall 

include in the body of the complaint a 

statement confirming that this action 

was taken. 

11. In § 30.90, revise paragraph (a), 

redesignate paragraph (b) as (c), and 

revise the new paragraph (b) to read as 

follows: 

§ 30.90 Response to the complaint. 

(a) Request for a hearing. If the 

respondent desires a hearing before an 

administrative law judge, the 

respondent shall submit a request for a 

hearing to HUD and the Office of 

Administrative Law Judges no later than 

15 days following receipt of the 

complaint, as required by statute. This 

mandated period cannot be extended. 

(b) Answer. In any case in which the 

respondent has requested a hearing, the 

respondent shall serve upon HUD and 

file with the Office of Administrative 

Law Judges a written answer to the 

complaint within 30 days of receipt of 

the complaint, unless such time is 

extended by the administrative law 

judge for good cause. The answer shall 

include the admission or denial of each 

allegation of liability made in the 

complaint; any defense on which the 

respondent intends to rely; any reasons 

why the civil money penalty should be 

less than the amount sought in the 

complaint, based on the factors listed at 

§ 30.80; and the name, address, and 

telephone number of the person who 

will act as the respondent’s 

representative, if any. 

* * * * * 

12. Revise § 30.95 to read: 

§ 30.95 Hearings. 

Hearings under this part shall be 

conducted in accordance with the 

procedures applicable to hearings in 

accordance with the Administrative 

Procedure Act, set forth in 24 CFR part 

26. 

13. Revise § 30.100 to read as follows: 

§ 30.100 Settlement of a civil money 

penalty action. 

The officials listed at subpart B of this 

part, or their designees (or the 

Mortgagee Review Board, or designee, 

for violations under § 30.35), are 

authorized to enter into settlement 

agreements resolving civil money 

penalty actions that may be brought 

under part 30. 

Dated: September 23, 2008. 

Roy A. Bernardi, 

Deputy Secretary. 

[FR Doc. E8–24574 Filed 10–16–08; 8:45 am] 

BILLING CODE 4210–67–P 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 570 

[Docket No. FR–5181–P–01] 

RIN 2506–AC22 

State Community Development Block 

Grant Program: Administrative Rule 

Changes 

AGENCY: Office of the Assistant 

Secretary for Community Planning and 

Development, HUD. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

make changes to several sections of the 

regulations for the Community 


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61758 Federal Register / Vol. 73, No. 202 / Friday, October 17, 2008 / Proposed Rules 

Development Block Grant (CDBG) 

program for states (State CDBG). This 

proposed rule would streamline and 

update the regulations to reflect 

statutory changes, clarify the program 

income requirements, provide other 

clarifications to the State CDBG 

regulations, and make a conforming 

change to the regulations applicable to 

the CDBG Entitlement program. This 

proposed rule would also provide states 

additional flexibility in their 

administration of the program. 

DATES: Comment Due Date: December 

16, 2008. 

ADDRESSES: Interested persons are 

invited to submit comments regarding 

this proposed rule to the Regulations 

Division, Office of General Counsel, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Room 10276, Washington, DC 20410– 

0500. Communications must refer to the 

above docket number and title. There 

are two methods for submitting public 

comments. All submissions must refer 

to the above docket number and title. 

1. Submission of Comments by Mail. 

Comments may be submitted by mail to 

the Regulations Division, Office of 

General Counsel, Department of 

Housing and Urban Development, 451 

Seventh Street, SW., Room 10276, 

Washington, DC 20410–0500. 

2. Electronic Submission of 

Comments. Interested persons may 

submit comments electronically through 

the Federal eRulemaking Portal at 

http://www.regulations.gov. HUD 

strongly encourages commenters to 

submit comments electronically. 

Electronic submission of comments 

allows the commenter maximum time to 

prepare and submit a comment, ensures 

timely receipt by HUD, and enables 

HUD to make them immediately 

available to the public. Comments 

submitted electronically through the 

http://www.regulations.gov Web site can 

be viewed by other commenters and 

interested members of the public. 

Commenters should follow the 

instructions provided on that site to 

submit comments electronically. 

Note: To receive consideration as public 

comments, comments must be submitted 

through one of the two methods specified 

above. Again, all submissions must refer to 

the docket number and title of the rule. 

No Facsimile Comments. Facsimile 

(FAX) comments are not acceptable. 

Public Inspection of Public 

Comments. All properly submitted 

comments and communications 

submitted to HUD will be available for 

public inspection and copying between 

8 a.m. and 5 p.m. weekdays at the above 

address. Due to security measures at the 

HUD Headquarters building, an advance 

appointment to review the public 

comments must be scheduled by calling 

the Regulations Division at 202–708– 

3055 (this is not a toll-free number). 

Individuals with speech or hearing 

impairments may access this number 

via TTY by calling the Federal 

Information Relay Service at 800–877– 

8339. Copies of all comments submitted 

are available for inspection and 

downloading at http:// 

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Steven Higginbotham, Community 

Planning and Development Specialist, 

Office of Community Planning and 

Development, Department of Housing 

and Urban Development, 451 Seventh 

Street, SW., Room 7184, Washington, 

DC 20410; telephone number 202–708– 

1322 (this number is not toll-free). 

Individuals with speech or hearing 

impairments may access this number 

through TTY by calling the toll-free 

Federal Information Relay Service at 

800–877–8339. FAX inquiries (but not 

comments on this proposed rule) may 

be sent to Mr. Higginbotham at 202– 

401–2044 (this is not a toll-free 

number). 

SUPPLEMENTARY INFORMATION: 

I. Background 

This proposed rule would revise the 

regulations for the CDBG program for 

states (State CDBG) in 24 CFR part 570, 

subpart I, to respond to issues HUD has 

identified in the program, to conform 

the regulations to current statutory 

requirements concerning program 

income, and to provide additional 

flexibility to states in implementing 

their programs. 

Specifically, this proposed rule would 

revise requirements related to the 

following matters: (1) Interest on federal 

grant payments to states; (2) program 

income, including the situations in 

which income earned on grant funds 

must be remitted to the Department of 

the Treasury; (3) flexibility for a state to 

use up to 3 percent of its allocation, 

program income, and recaptured funds 

for state administrative expenses and 

technical assistance; (4) revolving funds; 

(5) the use of CDBG funds outside the 

jurisdiction of the recipient; (6) states’ 

administrative flexibility to impose 

additional requirements on recipients; 

(7) allowability of costs incurred by 

states prior to execution of a grant 

agreement; (8) audits; (9) states’ 

disbursement of grant funds to units of 

general local government only; (10) 

applicability of cost principles and the 

requirement for prior approval of certain 

costs by HUD; (11) fiscal controls and 

administrative procedures; (12) 

exclusion from program income of 

amounts generated by certain activities 

financed with section 108 loan 

guarantees; and (13) reporting. HUD is 

also requesting public comments on 

whether HUD should promulgate State 

CDBG regulations that mirror existing 

CDBG Entitlement program regulations 

(24 CFR part 570, subpart J) on lumpsum drawdowns and the use of escrow 

accounts for rehabilitation of residential 

properties. 

II. This Proposed Rule 

Each of the proposed changes is 

described below. 

A. Interest on Federal Grant Payments 

to States 

Section 570.489(c) of the current 

regulations describes the requirements 

concerning federal grant payments to 

states. Section 570.489(c)(1) provides 

that states and units of general local 

government must minimize the elapsed 

time between receipt of federal funds 

from the state’s line of credit and their 

disbursement for grant activities. 

Section 570.489(c)(2) provides that 

interest earned by units of general local 

government on funds held pending 

disbursement is not program income 

and must generally be returned to the 

Department of the Treasury. It further 

provides that states generally do not 

have to return interest earned during the 

time between receipt of funds and 

disbursement to local governments. 

These provisions of the State CDBG 

regulations were based in part on the 

Intergovernmental Cooperation Act (31 

U.S.C. 6503) and pre-1993 

implementing regulations at 31 CFR part 

205. 

The Cash Management Improvement 

Act of 1990 (CMIA) (31 U.S.C. 3335, 

6503), as amended in 1992, made 

several fundamental changes to the 

manner in which payments between 

federal and state governments are made. 

The Treasury Department’s regulations 

implementing the CMIA are located in 

31 CFR part 205. Under the current 

regulations, states and the Treasury 

Department enter into agreements 

covering all federal programs over a 

certain funding level. Through these 

agreements, states select payment 

techniques that are designed to prevent 

delays between drawdown and 

disbursement of funds, and the 

agreements provide for the calculation 

at stated interest rates of states’ net 

interest liabilities to the federal 

government. For programs whose 

funding levels are below the applicable 

threshold or otherwise not subject to an 

agreement, states and federal agencies 


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must comply with subpart B of 31 CFR 

part 205, which provides requirements 

for minimizing the time between 

drawdown and disbursement of funds. 

The current requirements at 31 CFR 

part 205 render some aspects of 

§ 570.489(c) obsolete. Therefore, rather 

than repeat the requirements for states 

in the State CDBG regulations, this 

proposed rule would revise § 570.489(c) 

by cross-referencing the requirements in 

31 CFR part 205. This proposed rule 

would retain the existing requirement 

that units of general local government 

minimize the time between receipt of 

CDBG funds and their disbursement, 

and would clarify that the state is 

required to ensure that units of local 

government are in compliance with this 

requirement. 

B. Program Income Requirements 

The proposed changes to the program 

income provisions that are described in 

this section respond to the amendments 

made by the Housing and Community 

Development Act of 1992 (the 1992 Act) 

(Pub. L. 102–550, approved October 28, 

1992) and an opinion issued by the 

Comptroller General of the United 

States. 

1. Implementation of 1992 Statutory 

Amendments 

The existing State CDBG regulations 

provide in § 570.489(e)(3)(ii)(B) that 

program income received by a unit of 

general local government after closeout 

of its grant from the state is generally 

not subject to the program income 

requirements in § 570.489(e). However, 

the 1992 Act amended section 104(j) (42 

U.S.C. 5304(j)) of the Housing and 

Community Development Act of 1974 

(the Act) to provide that the use of 

program income is governed by CDBG 

program requirements for as long as 

program income remains. 

Several regulatory initiatives were 

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 Act. However, HUD recognized the 

need to provide guidance to grantees in 

the interim. On October 27, 2004, HUD 

published CPD Notice 04–11, ‘‘Program 

Income Requirements in the State CDBG 

Program.’’ The notice described the 

changes that occurred in 1992 and 

provided guidance to states on how to 

deal with their increased record-keeping 

responsibilities. 

A major challenge that states face in 

implementing the 1992 Act is that a unit 

of general local government may 

continue to generate and use program 

income long after the originally funded 

activities are completed and closed out. 

The statutory provision significantly 

extended states’ responsibilities to track 

program income. To provide as much 

flexibility as possible within the 

constraints of the law, this proposed 

rule would revise § 570.489(e)(3)(ii)(B) 

by allowing states to demonstrate 

compliance with this requirement in 

any of the following ways: 

(a) 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, receipts of program income 

by a local government may be sporadic, 

a state could craft its contractual 

agreements so that obligations would 

not be imposed once a local government 

has exhausted its program income and 

would arise again only upon receipt of 

new program income. 

(b) States may require, as a condition 

of closeout, that local governments agree 

to obtain advance state approval of a 

local plan to expend program income, or 

of individual expenditures of program 

income, in the absence of a continuing 

contractual relationship. This 

arrangement may be beneficial to 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. 

(c) States may require, as a condition 

of closeout, that the unit of general local 

government agree to notify the state 

when new program income is received 

by the unit of general local government. 

This option may be especially useful 

when dealing with local revolving loan 

funds, or when states and units of local 

governments are not able to project 

future needs to be addressed with 

activities funded by program income. 

(d) 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 (a), above, for those units 

of general local government that receive 

funding every year, and option (c) 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, and it 

constitutes a major multiplier of the 

benefits that the CDBG program 

provides to citizens and beneficiaries. 

For example, in Fiscal Year (FY) 2007, 

states cumulatively receipted $37.3 

million in program income. The $37.3 

million represents only that portion of 

program income that was returned to 

the states by units of general local 

government. Although HUD has issued 

guidance in the past on how to report 

on program income retained at the local 

level, many states have not complied 

with all of HUD’s recommendations. 

This proposed rule would revise 

§ 570.490(a)(3) to require reporting of 

data that will include program income 

retained at the local level. Also, 

consistent with the 1992 Act’s 

requirement to account for program 

income as long as the program income 

remains, this proposed rule would 

revise § 570.489(e)(4) to require the 

annual Performance and Evaluation 

Reports (PERs) of states to include the 

use of program income retained by local 

governments. 

2. Uniform Treatment of Program 

Income 

Over the years, there has been a 

succession of regulatory changes to the 

State CDBG program income 

requirements. Program income received 

from grants made prior to December 9, 

1992, was subject to the requirements 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 FY 1993 and 

later funds is subject to the 

requirements of the 1992 Act as well as 

the requirements of the November 9, 

1992, final rule. Finally, the January 5, 

1995, CDBG Program Economic 

Development Guidelines final rule 

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. Some 

states have expressed confusion about 

whether program income is subject to 


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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. 

This proposed rule would revise 

§ 570.489(e)(1) to apply the tracking 

requirements to all program income 

received and retained by localities, 

regardless of the fiscal year in which the 

state grant funds that generate the 

program income were appropriated. 

HUD does not believe that significant 

amounts of program income are likely to 

be generated by funds appropriated 

before FY 1993, since in most cases the 

funded activities ended years ago. 

Furthermore, this proposed rule would 

also clarify in § 570.489(e)(2)(v) that 

proceeds received from the sale of real 

property acquired or improved in whole 

or part with CDBG funds would not be 

considered program income if the 

proceeds are received more than 5 years 

after expiration of the grant agreement. 

For these reasons, making all program 

income subject to post-FY 1992 

requirements should have little effect on 

grantees. However, HUD specifically 

requests comment from grantees that 

might be adversely affected. 

It is noted that for the purpose of 

determining the administrative expense, 

technical assistance, and public service 

caps, program income is counted in the 

year that it is received by the unit of 

general local government, or by the unit 

of general local government’s 

subgrantee. 

3. Miscellaneous Improvements and 

Updates 

States have requested several 

clarifications of the program income 

requirements, and HUD has discovered 

other requirements that call for 

clarification. In substantially updating 

the program income requirements 

contained in § 570.489(e), this proposed 

rule would incorporate the following 

changes: 

(a) 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 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. Exclusion of such costs from 

program income would be analogous to 

the current provision under which costs 

incidental to the generation of program 

income from the rental or use of CDBGassisted 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 does not 

allow to be netted out those costs that 

are eligible as general administrative 

costs of either the state or the unit of 

general local government. 

(b) Annual Threshold for Program 

Income 

Section 104(j) of the Act allows HUD 

to promulgate regulations excluding 

from the program income requirements 

amounts that are so small that tracking 

them would pose an unreasonable 

administrative burden on the unit of 

general local government. In the CDBG 

Program Economic Development 

Guidelines final rule published on 

January 5, 1995, HUD raised the 

threshold in § 570.489(e)(2)(i) from 

$10,000 to $25,000 per year per unit of 

general local government. Income that 

would otherwise be considered program 

income, but which totals less than the 

current $25,000 threshold, is excluded 

from the definition of program income 

and is therefore not subject to CDBG 

requirements. If the total income that 

would otherwise be considered program 

income exceeds the threshold, then 

none of it is excluded from CDBG 

requirements. In order to account for 

inflation, this proposed rule would raise 

the threshold to $35,000 per year per 

unit of general local government. 

In addition, this proposed rule would 

revise § 570.489(e)(2)(i) to match the 

language found in the Entitlement 

CDBG regulations at § 570.500(a)(4)(i). 

The Entitlement CDBG regulations 

exclude income that ‘‘does not exceed’’ 

the applicable threshold, while the State 

CDBG regulations exempt income 

‘‘which is less than’’ the applicable 

threshold. This proposed rule would 

revise the State CDBG regulations so 

that total income that ‘‘does not exceed’’ 

the applicable threshold would be 

excluded from the definition of program 

income. The Entitlement threshold of 

$25,000 is not being proposed for 

change at this time. 

This proposed rule would also revise 

§ 570.489(e)(2)(i) to clarify that the 

exclusion of total income that does not 

exceed the threshold applies only to 

program income retained by a unit of 

general local government and its 

subgrantees, and that the threshold 

applies separately to each unit of 

general local government. As with the 

current regulation, the exclusion would 

not apply to program income that a unit 

of general local government earns but 

returns to the state. It is HUD’s policy, 

communicated to states in the past, that 

the exclusion does not apply to program 

income received into local revolving 

loan funds (RLFs). The proposed rule 

would codify this policy. Income 

received into an RLF is always included 

in program income and subject to CDBG 

requirements. 

This proposed rule would also codify 

HUD’s policy that income received into 

an RLF is not added to ‘‘regular’’ 

program income received by the local 

government in applying the threshold, 

which this proposed rule would 

increase to $35,000. For example, 

assume that the proposed threshold 

increase becomes effective, and a unit of 

general local government maintains an 

RLF that receives $10,000 in one 

program year. In that same program 

year, it receives $30,000 in non-RLF 

income that, if not for the exclusion in 

§ 570.489(e)(2)(i), would be considered 

program income. In this example, the 

$30,000 in non-RLF income would be 

excluded from program income (and, as 

a result, CDBG requirements would not 

apply to it), even though the total 

amount of program income under 

control by the local government is 

$40,000. The $10,000 that the RLF 

received would be considered program 

income. In another example, the unit of 

general local government maintains the 

same $10,000 in its RLF, but receives 

$35,001 in non-RLF program income. In 

this example, neither the RLF nor nonRLF program income would be 

exempted from CDBG requirements. 

(c) Remission of Interest 

This proposed rule would add 

§ 570.489(e)(2)(iv), listing three types of 

interest income that are not considered 

program income and must be remitted 

to the Treasury Department. The first 

type, which would be defined in 

§ 570.489(e)(2)(iv)(A), would respond to 

an opinion of the Comptroller General 

of the United States that income 

generated by an ineligible CDBGassisted activity must be remitted to the 

U.S. Treasury. According to the 

Comptroller General opinion, eligibility 

includes meeting a national objective. 

Therefore, interest generated from 

CDBG-funded loans could be kept by 

the grantee only when the assisted 

activities meet the national objective 

requirements. 

A second type of interest that is 

excluded from program income would 

be defined at § 570.489(e)(2)(iv)(B). 

Interest income on funds reimbursed to 

a state’s CDBG program account prior to 

the state’s disbursement of the funds for 


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eligible purposes would have to be 

returned to the Treasury Department. 

A third type of interest that is 

excluded from program income and 

must be remitted to the U.S. Treasury 

would be defined at 

§ 570.489(e)(2)(iv)(C). All interest in 

excess of $100 earned by units of 

general local government on grant 

advances prior to disbursement of the 

funds for activities must be returned to 

the Treasury Department under the 

current provision at § 570.489(c)(2). 

Consistent with the proposed revision of 

§ 570.489(c), described above, this 

proposed rule would move the 

requirement to § 570.489(e)(2)(iv), in 

order to complete the listing of what is 

not program income. 

HUD issued comparable provisions in 

a final rule for the Entitlement CDBG 

program, published on November 9, 

1995 (60 FR 56892). In responding to 

public comments in that rulemaking, 

HUD provided guidance on the extent 

and applicability of those provisions. 

Readers with a particular interest in 

those provisions may wish to read the 

preamble to the November 9, 1995, final 

rule (60 FR 56892). 

(d) Program Income Generated by Loans 

to State Grant Recipients 

This proposed rule would add a 

provision in § 570.489(e)(2)(iii) to 

prevent double-counting of program 

income received by a subgrantee and 

subsequently used to make payments on 

a loan from a unit of general local 

government. To the extent that the 

funds used by a subgrantee 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 

subgrantee, no amount of those 

payments represents ‘‘new income’’ to 

the unit of general local government’s 

CDBG program as a whole. Since 

revenue is already counted as program 

income at the time it is received by the 

subgrantee, this provision would 

prevent double-counting of program 

income. To the extent, however, that the 

subgrantee uses non-CDBG funds to 

make the principal or interest payments, 

those payments to the local government 

are new program income to the CDBG 

program. This proposed rule would not 

affect the treatment of such payments 

under existing practice. HUD added a 

similar provision to the Entitlement 

program regulations in the November 9, 

1995, final rule (60 FR 56893). 

For example, if Apple Borough 

provided funds to the Apple 

Development Authority as a subgrantee 

to run its economic development loan 

program, and the Apple Development 

Authority provided a $50,000 loan to 

Apple Dairies for a business expansion, 

Apple Dairies’ repayment of the $50,000 

to the Apple Development Authority 

would be program income. The Apple 

Development Authority’s repayment of 

the $50,000 to Apple Borough would 

not be program income, since it would 

be the same $50,000 transferred from 

Apple Dairies to the Apple 

Development Authority and such 

program income should not be counted 

twice. 

(e) Program Income Retained at the 

Local Level 

Section 104(j) of the Act allows a state 

to require that a unit of general local 

government return any program income 

that it collects to the state, to be used 

by the state to fund additional eligible 

community development activities. 

However, the state must waive this 

requirement ‘‘to the extent such income 

is applied to continue the activity from 

which such income was derived.’’ 

HUD gives states flexibility to 

determine whether program income 

received by a unit of general local 

government is being ‘‘applied to 

continue the activity from which such 

income was derived.’’ HUD is aware of 

situations in which states found that a 

unit of general local government failed 

to use program income in accordance 

with other program requirements or was 

not making sufficient efforts to expend 

its program income to continue the 

activity. HUD does not believe that the 

statutory language prohibits states from 

requiring a unit of general local 

government to return program income if 

it is expending the program income in 

violation of other CDBG requirements or 

delays expenditure for an unreasonable 

period of time. Inasmuch as local 

retention of program income is required 

only ‘‘to the extent such income is 

applied to continue the activity from 

which such income was derived,’’ HUD 

believes the statute necessarily 

contemplates that the funds will be used 

for eligible activities in a timely manner 

and in compliance with applicable 

requirements. This proposed rule would 

revise § 570.489(e)(3)(ii)(A) to provide 

that a state’s determination of whether 

program income is being ‘‘applied to 

continue the activity from which such 

income was derived’’ can include 

consideration of whether the program 

income is not being used (or is unlikely 

to be used) within a reasonable time and 

in accordance with program 

requirements to continue the activity. 

In some situations, a state may 

determine that a unit of general local 

government will apply 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 reasonably 

near future. For example, a community 

has a demand for two housing 

rehabilitation loans per month, but has 

enough program income on hand to 

fund 25 loans. A state could require the 

unit of general local government to 

return some or all of the program 

income to the state’s CDBG program 

income account until such time as it is 

needed by the unit of general 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 income account or, as 

necessary, draw an equivalent amount 

from the state’s line of credit for 

disbursement to the local government. 

In other situations, a state may 

determine that a unit of local 

government is not likely to apply any 

significant amount of program income 

to continue the activity within any 

reasonable amount of time, or that it 

will not apply the program income in 

accordance with applicable 

requirements. In such cases, a state 

could require the unit of general local 

government to return all of the program 

income to the state’s CDBG program 

income account for disbursement to 

other units of local government. 

This proposed rule would increase 

the effective ‘‘buying power’’ of a state’s 

CDBG funds, by making otherwise idle 

CDBG funds available to support current 

needs elsewhere in the state. Reduced 

interest costs to the Treasury 

Department from prematurely drawn 

funds would be another benefit, because 

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. If a state plans to 

manage program income in this manner, 

its approach must be described in the 

state’s action plan submitted in 

accordance with § 91.320 of this title. 

(f) New Entitlement Grantees 

This rule would clarify requirements 

for new Entitlement grantees that 

possess program income that they 

received when they were participating 

in the State CDBG program. Any such 

program income would continue to be 

treated as State CDBG program income, 

unless the state approves the transfer of 


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the program income to the Entitlement 

program. States and units of local 

government may prefer to transfer such 

State CDBG program income to the 

Entitlement program, since doing so 

would reduce states’ monitoring 

burdens and require new Entitlement 

grantees to comply with only one set of 

program income requirements. 

Conversely, on rare occasions a state 

may be faced with the return to the State 

CDBG program of a grantee that has 

recently lost or relinquished its 

Entitlement status. This proposed rule 

would provide that, in such a case, the 

unit of general local government may 

elect to transfer the program income to 

the State CDBG program. Program 

income that is not transferred would 

continue to be subject to Entitlement 

program requirements, and closeout of 

the community’s Entitlement grants 

with HUD could be delayed. While 

guidance has been given to individual 

grantees on these issues in the past, 

HUD recognizes the need to provide for 

these options through regulations. 

This proposed rule would add at 

§ 570.489(e)(3)(iii) a list of conditions 

that must be met by a new Entitlement 

grantee before the state may approve the 

transfer of the State CDBG grantgenerated program income to the 

locality’s new Entitlement program. The 

grantee would have to elect to 

participate in the Entitlement program, 

agree to use the program in accordance 

with Entitlement program requirements, 

set up access to HUD’s Integrated 

Disbursement and Information System 

(IDIS), and agree to enter the transferred 

program income into IDIS. The 

proposed rule would also add at 

§ 570.489(e)(3)(iv) the options for a 

former Entitlement community’s 

handling of program income when 

joining the State CDBG program. The 

proposed rule would also make a 

conforming change to the Entitlement 

program regulations by adding the same 

language at § 570.504(e). 

(g) Administering the State CDBG 

Program 

Section 106(d)(2)(A) of the Act (42 

U.S.C. 5306(d)(2)(A)) provides that a 

state may elect to distribute State CDBG 

funds to its non-entitlement areas and 

also provides that any such election is 

permanent and final. Forty-nine states 

and the Commonwealth of Puerto Rico 

have elected to administer the State 

CDBG program, and only Hawaii’s nonentitlement program is administered by 

HUD. The proposed rule would revise 

§ 570.480(a) to clarify that, consistent 

with the Act, the requirements of 

subpart I of part 570 are applicable to 

states that have permanently elected to 

distribute funds to their non-entitlement 

areas. Revised § 570.480(a) would also 

cross-reference requirements outside of 

part 570, subpart I, that apply to the 

State CDBG program. 

C. Flexibility for States To Allocate 

Funds for Administrative Expenses and 

Technical Assistance 

This proposed rule would revise 

§ 570.489(a)(1) to reflect a statutory 

amendment that provides states 

flexibility to allocate an increased 

portion of CDBG funds between state 

administrative expenses and costs of 

providing technical assistance to units 

of local governments and nonprofit 

program recipients. The 2004 

Consolidated Appropriations Act 

amended section 106(d) of the Act to 

allow states to use up to 3 percent of 

their allocations on administrative 

expenses, technical assistance, or a 

combination thereof, in addition to the 

$100,000 base amount that states may 

use for administrative expenses. A 

maximum of 50 percent of 

administrative expenses in excess of 

$100,000 may be paid for with CDBG 

funds, and the remainder must be paid 

for with states’ own funds. Prior to the 

amendment, states could allocate up to 

2 percent of CDBG funds (in addition to 

the $100,000 base amount) for state 

administrative expenses, and up to one 

percent for technical assistance. This 

proposed rule would revise the 

corresponding regulation to reflect 

states’ increased flexibility to allocate 

up to 3 percent of CDBG funds between 

administrative expenses and technical 

assistance according to the states’ 

preferences. 

For instance, a state could increase 

the percentage of CDBG funds for state 

administrative expenses to $100,000, 

plus 2.5 percent of its total allocation, 

in which case it would have only 0.5 

percent available to use for technical 

assistance activities. Or the state could 

spend 2 percent of its allocation on 

technical assistance activities, leaving 

only $100,000 plus one percent of its 

total allocation to spend on state 

administrative expenses. In either case, 

the state will still have to match, dollarfor-dollar, any CDBG funds used for 

administrative expenses in excess of 

$100,000. 

Under the current regulations, a state 

is allowed to add amounts reallocated 

by HUD to the state, as well as program 

income received by units of general 

local government, to the amount of the 

state’s annual grant in calculating its 

state administrative expense cap. This 

proposed rule would provide in 

§ 570.489(a)(1)(ii) that a state may make 

the same additions to the amount of the 

state’s annual grant in calculating the 

technical assistance cap. This proposed 

rule would also add clarifying 

provisions at § 570.489(a)(1)(iv) to 

reflect that increased amounts of CDBG 

funds for state administrative costs are 

available only for periods following the 

enactment of the statutory amendment. 

D. Determining Compliance With 

Administrative Expense Cap 

This proposed rule would revise 

§ 570.489(a)(1)(v)(A), which describes 

the cumulative accounting method to 

determine compliance with the 

administrative expense cap. The 

revisions would ensure that terms are 

used in a manner consistent with 

section 106(d) of the Act, as amended, 

and with § 570.489(a)(1)(v). This rule 

would also correct the description of the 

matching requirement to clarify that the 

amount the state must contribute is 

logically a minimum, rather than a 

maximum, amount. This proposed rule 

would also clarify that if a grant for any 

year during the Consolidated Planning 

period considered has been closed out, 

then aggregate amounts will be reduced 

by amounts attributable to the closedout grant in order to make the required 

comparisons. 

This proposed rule would also revise 

§ 570.489(a)(1)(v)(B) to clarify the yearto-year accounting method for 

determining compliance with the 

administrative expense cap, which is an 

alternative to the cumulative approach 

for determining compliance. The 

current regulation refers to ‘‘an 

accounting process developed and 

implemented by the state which 

provides sufficient information to 

demonstrate that the requirements of 

this subsection are met.’’ This proposed 

rule would replace the current provision 

with a defined alternative to the 

cumulative approach. It would 

specifically describe the process for 

tracking administrative costs on a yearly 

basis, and permit a state to draw down 

funds for administrative expenses (after 

the expenditure of the initial $100,000 

for state administrative expenses) only 

upon expending an equal or greater 

amount of its own funds for 

administrative expenses. HUD does not 

anticipate that this change will have any 

material effect on state CDBG grantees. 

E. State Revolving Funds 

Revolving funds are typically 

established and administered in the 

following manner: A loan is made by a 

unit of general local government with 

CDBG funds (e.g., to a business to 

expand). Payments on the loan (i.e., 

principal, interest, or both) are 

accounted for as CDBG program income 


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on the local government’s books and 

held in a separate 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 subgrantee of 

several units of general local 

government to which the state awarded 

the grants. (Since these subgrantees are 

usually not units of general local 

government, they may not directly 

receive CDBG funding.) Any program 

income the subgrantee administers 

belongs to the unit of general local 

government whose grant generated the 

program income, and successive reuses 

of program income must be traceable 

back to an individual locality’s grant. 

This presents an obstacle for regional 

loan fund operators that wish to use 

program income to fund activities 

anywhere in their service area, 

regardless of which community the 

program income belongs to. While a 

unit of general local government may 

use CDBG funds for activities outside its 

jurisdictional boundaries, it must first 

determine that doing so will meet its 

community development needs. 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. 

To address these obstacles, HUD 

supports efforts to establish regional 

state revolving funds (SRFs). 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 be better 

positioned to act accordingly. Assessing 

the benefits of individual economic 

development projects may also make 

sense from a regional perspective, 

because employees of businesses in 

rural communities frequently commute 

from residences in other communities 

that are a significant distance away from 

their jobs. 

To provide administrative flexibility, 

the Act and current State CDBG 

regulations in § 570.489(f) offer three 

options regarding revolving funds. First, 

section 106(d)(4) of the Act provides 

that 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 (42 U.S.C. 

5305(a)(15)) (assistance to a 

neighborhood-based nonprofit 

organization), repayments generated 

from these activities are not within the 

definition of ‘‘program income’’ at 

§ 570.489(e)(2)(ii) and thus are not 

subject to program requirements. Third, 

a state may operate a statewide 

revolving fund to redistribute program 

income returned to the state, in the form 

of grants to units of general local 

government, as provided at 

570.489(f)(2). 

This proposed rule would expand 

upon this third option by clarifying in 

§ 570.489(f)(2) that a state may operate 

one or more revolving funds on a 

regional or statewide basis. Provided 

that the state determines that the 

program income will not be used to 

continue the activity that generated it, 

section 104(j) permits a state to require 

program income generated from grantfunded activities to be returned to the 

state, regardless of whether the amount 

falls below the $25,000 threshold 

(which this proposed rule would 

increase to $35,000). With the proposed 

change, a state could designate a 

regional revolving fund as an SRF and 

require units of general local 

government to pay their program 

income directly to it. 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 

distribute it to any other eligible unit of 

general local government covered by the 

regional SRF on behalf of the state and 

in accordance with the state’s method of 

distribution. The community whose 

initial grant generated the program 

income would have no further 

responsibility for the program income, 

once the program income is paid into 

the regional SRF. Payments of program 

income to the regional SRF would 

belong to the state, rather than to a unit 

of general local government, and the 

regional SRF entity could award the 

funds, on behalf of the state, to units of 

general local government anywhere 

within the region. While this 

arrangement is similar to a revolving 

loan fund, it is important to note that 

the regional entity administering the 

SRF, as an agent of the state, could make 

grants only to units of general local 

government. Any state choosing this 

approach would be required to describe 

its process in the method of distribution 

contained in its action plan. 

F. Spending Funds Outside the 

Jurisdiction of the Recipient 

This proposed rule would revise 

§ 570.486(b) and add a new § 570.486(c) 

to place conditions on CDBG-funded 

projects that benefit residents outside 

the recipient’s jurisdiction. Under the 

existing regulations, CDBG-funded 

activities may serve beneficiaries living 

outside the jurisdiction of the unit of 

general local government that receives 

the grant, so long as the jurisdiction 

determines that the activity meets its 

community’s needs, in accordance with 

section 106(d)(2)(D) of the Act. HUD has 

identified two emerging trends that 

require further regulation. In both 

situations, funds do not always benefit 

the community that received the grant. 

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. As discussed above in 

section II.E, this presents a challenge for 

units of general local government, 

which are responsible for ensuring that 

program income generated from their 

grant is used to meet the community’s 

needs. HUD has concluded that the 

current regulations should be revised to 

clarify the extent to which funded 

activities must benefit residents of the 

jurisdiction whose grant generated the 

program income. 

Second, HUD is aware of a number of 

situations in which states awarded a 

grant to one community, but the benefits 

of the activities occurred 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 that 

principally benefitted a nearby 

Entitlement community. HUD does not 

believe it is appropriate for one 

community to serve as a primary grant 

recipient when the funded activity will 

not provide a significant benefit to 


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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. 

This proposed rule would add to 

§ 570.486(b) the requirement that all 

State CDBG-funded activities must 

significantly benefit residents of the 

grant recipient’s jurisdiction. HUD is 

aware that some projects (e.g., one that 

provides assistance to a business that 

will provide 200 jobs in a locality with 

a population of 500) will provide 

benefits to residents of surrounding 

jurisdictions. Because the project 

significantly benefits residents of the 

grant recipient’s jurisdiction, the project 

would meet this proposed requirement 

of the proposed rule. (Another proposed 

requirement, described below in this 

section, would permit the expenditure 

of CDBG funds in this example only if 

it provides no more than an incidental 

benefit to any surrounding Entitlement 

jurisdictions.) 

In making a determination that a 

project will ‘‘significantly benefit’’ 

residents of the recipient’s jurisdiction, 

the community must determine that the 

benefits to its residents will be sufficient 

to justify the amount of CDBG funds it 

will expend on the project. HUD would 

not challenge 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 an 

activity in non-entitlement jurisdictions, 

so long as the magnitude of the benefit 

to recipient jurisdiction residents is not 

unreasonably outweighed by the 

recipient jurisdiction’s expenditure of 

CDBG funds. HUD does not anticipate 

that this proposed rule would inhibit 

joint efforts by cities and counties to 

benefit their residents. 

This proposed rule would also add a 

new requirement at § 570.486(c) that 

residents of Entitlement jurisdictions 

may not receive more than an incidental 

benefit from the state grantee’s 

expenditure of funds. In situations 

involving activities located in or 

benefiting residents of Entitlement 

communities, HUD believes it is 

appropriate for Entitlement 

communities to participate in funding 

such projects at levels commensurate 

with the benefits their citizens receive, 

since Entitlement communities receive a 

separate source of funding. HUD 

realizes that addressing the community 

development and housing needs of 

nonentitlement area residents may 

necessarily involve serving residents of 

Entitlement communities. In some 

cases, the most feasible or practical 

location for an activity may be within 

the boundaries of an Entitlement 

community (such as for reasons of 

public transportation accessibility, 

maximizing accessibility to the greatest 

number of beneficiaries, operational 

cost-effectiveness, land/building 

availability, or engineering 

considerations). Also, state or local law 

may prohibit a nonentitlement county 

from limiting the benefits of an activity 

to residents of the nonentitlement area 

of the county. In such cases, the 

prohibition against using State CDBG 

funds to provide more than an 

incidental benefit to Entitlement area 

residents would apply. However, if the 

Entitlement community is participating 

financially in proportion to the share of 

expected benefits its residents will 

receive, it would be appropriate for the 

state to conclude that the Entitlement 

community residents are receiving no 

benefit, or only an incidental benefit, 

from the State CDBG funds contributed 

to the activity. The recipient would be 

responsible for determining the 

magnitude of the benefits in such cases 

and the appropriate financial 

contribution by the entitlement 

community. Comparable language is 

contained in the CDBG Entitlement 

program regulations at § 570.309. 

G. Program Income Exclusion for 

Activities Financed by Section 108 Loan 

Guarantees in Areas That Meet 

Empowerment Zone Eligibility 

Requirements 

This proposed rule would remove 

§ 570.489(e)(2)(iii). This paragraph 

excludes from the definition of program 

income revenue generated from Section 

108 loan guarantees that meet one or 

more of the public benefit standards of 

§ 570.482(f)(3)(v) or that are 

implemented in conjunction with an 

Economic Development Initiative grant 

under Section 108(q) of the 1974 Act, as 

amended, and which are located in an 

area that meets the Empowerment Zone 

eligibility requirement from the 

definition of program income. It is 

HUD’s belief that this paragraph has 

been of limited use by grantees. 

H. State Authority To Impose 

Additional Provisions 

This proposed rule would add a new 

provision at § 570.480(f) to expand 

states’ administrative flexibility. This 

new provision would authorize states to 

impose on participating units of general 

local government additional 

requirements or requirements that are 

more restrictive than those established 

by HUD. Such authority is implied in 

the states’ authority to administer the 

CDBG program, but HUD has never 

expressly provided for it in the 

regulations. States would not be 

authorized to impose requirements that 

would be inconsistent with the Act or 

with other statutory or regulatory 

provisions that apply to the State CDBG 

program. HUD proposes this provision 

to clarify states’ responsibilities and 

authorities. 

I. Pre-Agreement Costs 

This proposed rule would revise 

§ 570.489(b) to clarify that states may 

charge to the grant certain preagreement costs that they incur, to the 

extent that the activities that generate 

the costs are eligible. Such activities 

would have to be in conformance with 

the environmental review provisions of 

part 58 and the citizen participation 

requirements of part 91, as is the case 

for other costs incurred by a state. The 

current regulation provides that states 

may permit units of general local 

government to charge certain preagreement costs to the grant, but does 

not expressly state that states may also 

charge to the grant certain preagreement costs that they incur. As 

discussed below in section L, this 

proposed rule would also require states 

and their recipients of CDBG funds to 

comply with applicable cost principles. 

However, it would permit certain costs, 

including pre-agreement costs, to be 

charged to the grant without the prior 

approval by HUD that would otherwise 

be required under Appendix B of 2 CFR 

part 225. 

J. Audits 

This proposed rule would correct an 

outdated regulatory citation within 

§ 570.489(m). Currently, the paragraph 

states that audits of the state and units 

of general local government must be 

conducted in accordance with 24 CFR 

part 44, which used to implement the 

Single Audit Act. However, the Single 

Audit Act requirements applicable to 

states and local governments are now at 

§ 85.26. Although part 85 as a whole 

only applies to states that adopt it, this 

proposed rule would require states to 

adhere to one specific provision within 

that part. This proposed rule would 

revise § 570.489(m) to require that 

audits be conducted in accordance with 

§ 85.26(a), which in turn incorporates by 

reference the provisions of OMB 

Circular A–133. 

K. Grant-Making 

This proposed rule would add a new 

paragraph at § 570.480(g) to clarify the 

long-standing statutory requirement, 

found at section 106(d)(2)(A) of the Act, 

that states must distribute CDBG funds 

in the form of grants only to units of 

general local government. Another 


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statutory provision, found at section 

106(d)(3)(A) and (6) of the Act, permits 

states to deduct and expend limited 

amounts of CDBG funds for 

administrative expenses and technical 

assistance to local governments and 

nonprofit program recipients. States 

may find it necessary to procure such 

administrative services and technical 

assistance from third parties and, 

accordingly, to make payments to them. 

This proposed rule would clarify that 

the requirement for a state to disburse 

CDBG funds to units of general local 

government does not prohibit it from 

making payments to other entities to 

procure goods and services to support 

the state’s administrative and technical 

assistance activities. 

L. Cost Principles and Prior Approval of 

Certain Costs by HUD 

This proposed rule would add a new 

paragraph (n)(1) to § 570.489 to require 

that State CDBG funds must be 

expended in compliance with 

applicable cost principles that are now 

codified in title 2 of the CFR. (Prior to 

codification, these cost principles were 

referred to by the name of the OMB 

circular through which they were 

issued.) The cost principles that apply 

depend on whether a given cost is 

incurred by a government entity, 

nonprofit organization, or educational 

institution. Application of the cost 

principles to expenditures would ensure 

that HUD bears its fair share of costs in 

a consistent manner across all states, 

thereby ensuring a level playing field. 

The cost principles that apply to state, 

local, and Indian tribal governments are 

codified at 2 CFR part 225. Appendix B 

of part 225 provides that a number of 

cost items are allowable only if 

approved by the cognizant federal 

agency. For example, section 31 of 

Appendix B of part 225 requires prior 

approval of pre-agreement costs, which 

are further discussed in section I of this 

preamble. HUD’s regulations for the 

Entitlement program provide at 

§ 570.200(a)(5) that HUD’s prior 

approval is not required to the extent 

that cost items otherwise comply with 

the cost principles and other 

requirements. This proposed rule would 

add a similar provision at 

§ 570.489(n)(2) for the State CDBG 

program. Cost items that require federal 

agency approval under Appendix B of 

part 225 would be allowable without 

HUD’s prior approval, so long as they 

otherwise comply with 2 CFR part 225 

and subpart I of 24 CFR 570. Approval 

on a case-by-case basis would still be 

required under cost principles that are 

applicable to educational institutions 

and nonprofit organizations. 

M. Fiscal Controls and Administrative 

Procedures 

This proposed rule would also 

provide clarification at 

§ 570.489(d)(2)(iii) for states that opt to 

apply part 85 in order to comply with 

the requirement at 570.489(d)(1) for 

fiscal controls and administrative 

procedures. Such states would be 

required to comply with all of the 

provisions of part 85, and would also be 

required to ensure that recipients of 

their State CDBG funds comply with 

part 84, ‘‘Uniform Administrative 

Requirements for Grants and 

Agreements with Institutions of Higher 

Education, Hospitals, and Other Nonprofit Organizations,’’ as applicable. 

This requirement would ensure that 

there will be no inconsistencies or 

accountability gaps between the 

practices of those states that adopt 

HUD’s administrative standards and the 

practices of their recipients. 

N. Reporting 

This proposed rule would add a new 

paragraph at § 570.490(a)(3) that would 

require states to make entries into the 

Integrated Disbursement Information 

System (IDIS) in a form prescribed by 

HUD, to accurately capture the state’s 

accomplishment and funding data 

during each program year. It is 

recommended that the data be entered 

on a quarterly basis, and states would be 

required to enter the data at least 

annually. This change would better 

enable HUD and grantees to report 

accomplishments to community 

development stakeholders. 

III. Request for Public Comments on 

Whether Other Changes Are Needed 

HUD requests public comments on 

whether regulations are needed on the 

matters described below. Any such 

regulations would be published under a 

separate proposed rule. 

A. Lump Sum Drawdowns 

Section 104(h) of the Act allows units 

of general local government to make 

lump-sum drawdowns of CDBG funds to 

establish revolving loan funds for 

property rehabilitation activities. It also 

provides for HUD to establish standards 

governing lump-sum drawdowns. Such 

standards exist in the CDBG Entitlement 

program regulations in § 570.513, but 

HUD has not promulgated comparable 

regulations for the State CDBG program. 

HUD is inviting public comments on 

whether separate regulations are needed 

to address situations not covered by the 

Entitlement regulations. 

B. Use of Escrow Accounts for 

Rehabilitation 

Section 570.511 of the Entitlement 

program regulations allows Entitlement 

communities to establish escrow 

accounts for funding loans and grants 

for the rehabilitation of privately owned 

residential property. HUD has never 

created comparable regulations for the 

State CDBG program. HUD is inviting 

public comments on whether separate 

regulations are needed to address 

situations not covered by the 

Entitlement regulations. 

IV. Findings and Certifications 

Paperwork Reduction Act 

The information collection 

requirements contained in this proposed 

rule have been submitted to the Office 

of Management and Budget (OMB) 

under the Paperwork Reduction Act of 

1995 (44 U.S.C. 3501–3520). In 

accordance with the Paperwork 

Reduction Act, 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 currently valid OMB control 

number. 

The burden of the information 

collections in this proposed rule is 

estimated as follows: 

Reporting and Recordkeeping Burden: 

Section reference Number of 

respondents 

Number of 

responses 

per 

respondent 

Estimated 

average time 

for 

requirement 

(in hours) 

Estimated 

annual burden 

(in hours) 

§ 570.489(e)(4) ................................................................................................... 550 Ongoing ...... 27 15,000 

§ 570.490(a)(3) ................................................................................................... 50 10 ................ 2 1,000 

Totals .......................................................................................................... 600 NA ............... 29 16,000 


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In accordance with 5 CFR 

1320.8(d)(1), HUD is soliciting 

comments from members of the public 

and affected agencies concerning this 

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 regarding the 

information collection requirements in 

this rule. Comments must refer to the 

proposal by name and docket number 

(FR–5181–P–01) and must be sent to: 

HUD Desk Officer, Office of 

Management and Budget, New 

Executive Office Building, 

Washington, DC 20503, Fax number: 

(202) 395–6947; and 

Laruth Harper, Reports Liaison Officer, 

Office of Community Planning and 

Development, Department of Housing 

and Urban Development, 451 Seventh 

Street, SW., Room 7233, Washington, 

DC 20410. 

Environmental Impact 

A Finding of No Significant Impact 

with respect to the environment has 

been made in accordance with HUD 

regulations in 24 CFR part 50 that 

implement section 102(2)(C) of the 

National Environmental Policy Act of 

1969 (42 U.S.C. 4332(2)(C)). The 

Finding is available for public 

inspection during regular business 

hours in the Regulations Division, 

Office of General Counsel, Department 

of Housing and Urban Development, 

451 Seventh Street, SW., Room 10276, 

Washington, DC 20410–0500. Due to 

security measures at the HUD 

Headquarters building, please schedule 

an appointment to review the Finding 

by calling the Regulations Division at 

202–402–3055 (this is not a toll-free 

number). Individuals with speech or 

hearing impairments may access this 

number via TTY by calling the Federal 

Information Relay Service at 800–877– 

8339. 

Executive Order 13132, Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial direct compliance costs on 

state and local governments and is not 

required by statute, or the rule preempts 

state law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Order. This proposed 

rule does not have federalism 

implications and would not impose 

substantial direct compliance costs on 

state and local governments nor 

preempt state law within the meaning of 

the Order. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 establishes 

requirements for federal agencies to 

assess the effects of their regulatory 

actions on state, local, and tribal 

governments and the private sector. 

This final rule does not impose a federal 

mandate on any state, local, or tribal 

government, or the private sector within 

the meaning of the Unfunded Mandates 

Reform Act of 1995. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

(5 U.S.C. 601 et seq.) generally requires 

an agency to conduct a regulatory 

flexibility analysis of any rule subject to 

notice and comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. This rule 

would revise certain requirements that 

apply to the management of CDBG 

funds, program income, and other 

administrative matters by state 

governments. In many instances, the 

changes would codify existing HUD 

policy, update obsolete provisions, or 

revise regulations to reflect statutory 

language. Therefore, the undersigned 

certifies that this rule will not have a 

significant impact on a substantial 

number of small entities. 

Notwithstanding HUD’s view that this 

rule will not have a significant effect on 

a substantial number of small entities, 

HUD specifically invites comments 

regarding any less burdensome 

alternatives to this rule that will meet 

HUD’s objectives, as described in this 

preamble. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance (CFDA) program number for 

the State CDBG program is 14.228 and 

the CFDA program number for the 

Entitlement program is 14.218. 

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, Loan 

programs—housing and community 

development, Low and moderate 

income housing, Northern Mariana 

Islands, Pacific Islands Trust Territory, 

Puerto Rico, Reporting and 

recordkeeping requirements, Student 

aid, Virgin Islands. 

Accordingly, for the reasons described 

in the preamble, HUD proposes to 

amend 24 CFR part 570 as follows: 

PART 570—COMMUNITY 

DEVELOPMENT BLOCK GRANTS 

1. The authority citation for 24 part 

570 continues to read as follows: 

Authority: 42 U.S.C. 5300–5320. 

2. In § 570.480, revise paragraph (a) 

and add paragraphs (f) and (g), to read 

as follows: 

§ 570.480 General. 

(a) This subpart describes policies and 

procedures applicable to states that have 

permanently elected to receive 

Community Development Block Grant 

funds for distribution to units of general 

local government in the state’s 

nonentitlement areas under the Housing 

and Community Development Act of 

1974, as amended (the Act). Other 

subparts of part 570 are not applicable 

to the State CDBG program, except as 

expressly provided otherwise. 

Regulations of part 570 outside of this 

subpart that apply to the State CDBG 

program include §§ 570.200(j) and 

570.606. 

* * * * * 

(f) In administering the CDBG 

program, a state may impose additional 

or more restrictive provisions on units 

of general local government 

participating in the state’s program, 

provided that such provisions are not 

inconsistent with the Act or other 

statutory or regulatory provisions that 

are applicable to the State CDBG 

program. 

(g) States shall make CDBG grants 

only to units of general local 

government. This restriction does not 

limit a state’s authority to make 

payments to other parties for state 

administrative expenses and technical 

assistance activities authorized in 

section 106(d) of the Act. 

3. In § 570.486, revise paragraph (b) 

and add paragraph (c), to read as 

follows: 


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§ 570.486 Local government requirements. 

* * * * * 

(b) Activities serving beneficiaries 

outside the jurisdiction of the unit of 

general local government. Any activity 

carried out by a recipient of State CDBG 

funds must significantly benefit 

residents of the jurisdiction of the grant 

recipient, and the unit of general local 

government must determine that the 

activity is meeting its needs in 

accordance with section 106(d)(2)(D) of 

the Act. For an activity to significantly 

benefit residents of the recipient 

jurisdiction, the CDBG funds expended 

by the unit of general local government 

must not be unreasonably 

disproportionate to the benefits to its 

residents. 

(c) Activities located in Entitlement 

jurisdictions. State grant recipients may 

not expend State CDBG funds for 

activities located in or serving 

Entitlement jurisdictions, unless 

Entitlement residents receive only an 

incidental benefit from State CDBG 

expenditures for the activity. 

4. Amend § 570.489 as follows: 

a. Revise paragraphs (a)(1), (b), (c), 

(e)(1), (2), and (3)(i) and (ii), and (m); 

b. Add paragraphs (d)(2)(iii)(A) and 

(B), (e)(3)(iii), (iv), and (4), and (n); and 

c. Revise the first sentence of 

paragraph (f)(2), to read as follows: 

§ 570.489 Program administrative 

requirements. 

(a) Administrative and planning 

costs—(1) State administrative and 

technical assistance costs. (i) The state 

is responsible for the administration of 

all CDBG funds. The state shall pay 

from its own resources all 

administrative expenses incurred by the 

state in carrying out its responsibilities 

under this subpart, except as provided 

in this paragraph (a)(1)(i) of this section, 

which is subject to the time limitations 

in paragraph (a)(1)(iv) of this section. To 

pay administrative expenses, the state 

may use CDBG funds not to exceed 

$100,000, plus 50 percent of 

administrative expenses incurred in 

excess of $100,000. Amounts of CDBG 

funds used to pay administrative 

expenses in excess of $100,000 shall 

not, subject to paragraph (a)(1)(iii) of 

this section, exceed 3 percent of the sum 

of the state’s annual grant, program 

income received by units of general 

local government during each program 

year (whether retained by units of 

general local government or paid to the 

state), and of funds reallocated by HUD 

to the state. 

(ii) To pay the costs of providing 

technical assistance to local 

governments and nonprofit program 

recipients, a state may, subject to 

paragraph (a)(1)(iii) of this section, use 

CDBG funds received on or after January 

23, 2004, in an amount not to exceed 3 

percent of the sum of its annual grant, 

program income received by units of 

general local government during each 

program year (whether retained by units 

of general local government or paid to 

the state), and funds reallocated by HUD 

to the state during each program year. 

(iii) The amount of CDBG funds used 

to pay the sum of administrative costs 

in excess of $100,000 paid pursuant to 

paragraph (a)(1)(i) of this section and 

technical assistance costs paid pursuant 

to paragraph (a)(1)(ii) of this section 

must not exceed 3 percent of the sum 

of a state’s annual grant, program 

income received by units of general 

local government during each program 

year (whether retained by the unit of 

general local government or paid to the 

state), and funds reallocated by HUD to 

the state. 

(iv) In calculating the amount of 

CDBG funds that may be used to pay 

state administrative expenses prior to 

January 23, 2004, the state may include 

in the calculation the following 

elements only to the extent they are 

within the following time limitations: 

(A) $100,000 per annual grant 

beginning with FY 1984 allocations; 

(B) Two percent of the sum of a state’s 

annual grant and funds reallocated by 

HUD to the state within a program year, 

without limitation based on when such 

amounts were received; 

(C) Two percent of program income 

returned by units of general local 

government to states after August 21, 

1985; and 

(D) Two percent of program income 

received and retained by units of 

general local government after February 

11, 1991. 

(v) In regard to its administrative 

costs, the state has the option of 

selecting its approach for demonstrating 

compliance with the requirements of 

this paragraph (a)(1) of this section. Any 

state whose matching costs 

contributions toward state 

administrative expense matching 

requirements are in arrears must bring 

matching cost contributions up to the 

level of CDBG funds expended for such 

costs. A state grant may not be closed 

out if the state’s matching cost 

contribution is not at least equal to the 

amount of CDBG funds in excess of 

$100,000 expended for administration. 

Funds from any year’s grant may be 

used to pay administrative costs 

associated with any other year’s grant. 

The two approaches for demonstrating 

compliance with this paragraph (a)(1) of 

this section are: 

(A) Cumulative accounting of 

administrative costs incurred by the 

state since its assumption of the CDBG 

program. Under this approach, the state 

will identify, for each grant it has 

received, the CDBG funds eligible to be 

used for state administrative expenses, 

as well as the minimum amount of 

matching funds that the state is required 

to contribute. The amounts will then be 

aggregated for all grants received. The 

state must keep records demonstrating 

the actual amount of CDBG funds from 

each grant received that were used for 

state administrative expenses, as well as 

matching amounts that were contributed 

by the state. The state will be 

considered to be in compliance with the 

applicable requirements if the aggregate 

of actual amounts of CDBG funds spent 

on state administrative expenses does 

not exceed the aggregate maximum 

allowable amount and if the aggregate 

amount of matching funds that the state 

has expended is equal to or greater than 

the aggregate amount of CDBG funds in 

excess of $100,000 (for each annual 

grant within the subject period) spent 

on administrative expenses during its 3- 

to 5-year Consolidated Planning period. 

If the state grant for any grant year 

within the 3-to 5-year period has been 

closed out, the aggregate amount of 

CDBG funds spent on state 

administrative expenses, the aggregate 

maximum allowable amount, the 

aggregate matching funds expended, 

and the aggregate amount of CDBG 

funds in excess of $100,000 (for each 

annual grant within the subject period) 

will be reduced by amounts attributable 

to the grant year for which the state 

grant has been closed out. 

(B) Year-to-year tracking and 

limitation on drawdown of funds. For 

each grant year, the state will calculate 

the maximum allowable amount of 

CDBG funds that may be used for state 

administrative expenses, and will draw 

down amounts of those funds only upon 

its own expenditure of an equal or 

greater amount of matching funds from 

its own resources after the expenditure 

of the initial $100,000 for state 

administrative expenses. The state will 

be considered to be in compliance with 

the applicable requirements if the actual 

amount of CDBG funds spent on state 

administrative expenses does not 

exceed the maximum allowable amount, 

and if the amount of matching funds 

that the state has expended for that 

grant year is equal to or greater than the 

amount of CDBG funds in excess of 

$100,000 spent during that same grant 

year. Under this approach, the state 

must demonstrate that it has paid from 

its own funds at least 50 percent of its 


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administrative expenses in excess of 

$100,000 by the end of each grant year. 

(b) Reimbursement of pre-agreement 

costs. The state may permit, in 

accordance with such procedures as the 

state may establish, a unit of general 

local government to incur costs for 

CDBG activities before the 

establishment of a formal grant 

relationship between the state and the 

unit of general local government and to 

charge these pre-agreement costs to the 

grant, provided that the activities are 

eligible and undertaken in accordance 

with the requirements of this part and 

24 CFR part 58. A state may incur costs 

prior to entering into a grant agreement 

with HUD and charge those preagreement costs to the grant, provided 

that the activities are eligible and are 

undertaken in accordance with the 

requirements of this part, part 58 of this 

title, and the citizen participation 

requirements of part 91 of this title. 

(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. States must also have 

procedures in place and units of general 

local government must use these 

procedures to minimize the time 

elapsing between the transfer of funds 

by the state and disbursement for CDBG 

activities. 

(d) * * * 

(2) * * * 

(iii) * * * 

(A) A state that opts to satisfy this 

requirement for fiscal controls and 

administrative procedures by applying 

the provisions of part 85 must comply 

with the requirements therein. 

(B) A state that opts to satisfy this 

requirement for fiscal controls and 

administrative procedures by applying 

the provisions of part 85 of this title 

must also ensure that recipients of the 

state’s CDBG funds comply with part 84 

of this title, ‘‘Uniform Administrative 

Requirements for Grants and 

Agreements with Institutions of Higher 

Education, Hospitals, and Other NonProfit Organizations,’’ as applicable. 

(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 subgrantee of the 

unit of general local government that 

was generated from the use of CDBG 

funds, regardless of when the CDBG 

funds were appropriated and whether 

the activity has been closed out, 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, except as provided in paragraph 

(e)(2)(v) of this section; 

(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 subgrantee of the 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 

other entity carrying out a CDBG 

activity 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)(iii) of this section; 

(vi) Proceeds from the sale of loans 

made with CDBG funds, less reasonable 

legal and other costs incurred in the 

course of such sale that are not 

otherwise eligible costs under sections 

105(a)(13) or 106(d)(3)(A) of the Act; 

(vii) Proceeds from the sale of 

obligations secured by loans made with 

CDBG funds, less reasonable legal and 

other costs incurred in the course of 

such sale that are not otherwise eligible 

costs under sections 105(a)(13) or 

106(d)(3)(A) of the Act; 

(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 nonresidential properties and 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 subgrantee 

of the unit of general local government 

from the ownership interest in a forprofit entity acquired in return for the 

provision of CDBG assistance. 

(2) ‘‘Program income’’ does not 

include the following: 

(i) The total amount of funds, which 

does not exceed $35,000 received in a 

single year from activities, other than 

revolving loan funds that is retained by 

a unit of general local government and 

its subgrantees (all funds received from 

revolving loan funds are considered 

program income, regardless of amount); 

(ii) Amounts generated by activities 

eligible under section 105(a)(15) of the 

Act and carried out by an entity under 

the authority of section 105(a)(15) of the 

Act; 

(iii) Payments of principal and 

interest made by a subgrantee carrying 

out a CDBG activity for a unit of general 

local government, toward a loan from 

the local government to the subgrantee, 

to the extent that program income 

received by the subgrantee is used for 

such payments; 

(iv) The following classes of interest, 

which must be remitted to HUD for 

transmittal to the Department of the 

Treasury, and will not be reallocated 

under section 106(c) or (d) of the Act: 

(A) Interest income from loans or 

other forms of assistance provided with 

CDBG funds that are used for activities 

determined by HUD to be not eligible 

under § 570.482 or section 105(a) of the 

Act, to fail to meet a national objective 

in accordance with the requirements of 

§ 570.483, or to fail substantially to meet 

any other requirement of this subpart or 

the Act; 

(B) Interest income from deposits of 

amounts reimbursed to a state’s CDBG 

program account prior to the state’s 

disbursement of the reimbursed funds 

for eligible purposes; and 

(C) Interest income received by units 

of general local government on deposits 

of 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 

otherwise permitted to be paid with 

CDBG funds. 

(v) Proceeds from the sale of real 

property purchased or improved with 

CDBG funds, if the proceeds are 

received more than 5 years after 

expiration of the grant agreement. 

(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 


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the state for administrative costs or 

technical assistance under paragraph (a) 

of this section, 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 § 91.320(k)(1)(i) of 

this title 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 

Department of the Treasury, except as 

provided in paragraph (f) of this section. 

(ii) Program income retained by a unit 

of general local government. A state may 

permit a unit of general local 

government that receives or will receive 

program income to retain the program 

income. Alternatively, subject to the 

exception in paragraph (e)(3)(ii)(A) of 

this section, a state may require that the 

unit of general local government pay 

any such income to the state. 

(A) A state must permit the unit of 

general local government to retain the 

program income to the extent that the 

program income is applied to continue 

the activity from which it was derived. 

A state will determine whether a unit of 

general local government is likely to 

apply funds to continue the activity 

from which the funds were derived, and 

HUD will give maximum feasible 

deference to a state’s determination, in 

accordance with § 570.480(c). In making 

such a determination, a state may 

consider whether the unit of general 

local government is or will be unable to 

comply with the requirements of 

paragraph (e)(3)(ii)(B) of this section or 

other requirements of this part, and the 

extent to which the program income is 

unlikely to be applied to continue the 

activity within the reasonably near 

future. When a state determines that the 

program income will be applied to 

continue the activity from which it was 

derived, but that the amount of program 

income held by the unit of general local 

government exceeds projected cash 

needs for the reasonably near future, the 

state may require the local government 

to return all or part of the program 

income to the state until such time as 

the program income is needed by the 

unit of general local government. When 

a state determines that a unit of local 

government is not likely to apply any 

significant amount of program income 

to continue the activity within a 

reasonable amount of time, or that it 

will not likely apply the program 

income in accordance with applicable 

requirements, the state may require the 

unit of general local government to 

return all of the program income to the 

state for disbursement to other units of 

local government. A state that intends to 

require units of general local 

government to return program income 

in accordance with this paragraph 

(e)(3)(ii)(A) of this section must describe 

its approach in the state’s action plan 

required under § 91.320 of this title. 

(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, 

regardless of whether the activity that 

generated the program income has been 

closed out. If the grant that generated 

the program income is still open when 

the program income is generated, 

program income permitted to be 

retained will be considered part of the 

unit of general local government’s grant 

that generated the program income. If 

the grant is closed, program income 

permitted to be retained will be 

considered to be part of the unit of 

general local government’s most 

recently awarded open grant. If the unit 

of general local government has no open 

grants, the program income retained by 

the unit of general local government 

will be counted as part of the state’s 

grant year in which the program income 

was generated. A state must employ one 

or more of the following methods to 

ensure that units of general local 

government comply with applicable 

program income requirements: 

(1) Maintaining contractual 

relationships with units of general local 

government for the duration of the 

existence of the program income; 

(2) Closing out the underlying 

activity, but requiring as a condition of 

closeout that the unit of general local 

government obtain advance state 

approval of either a unit of general local 

government’s plan for the use of 

program income, or of each use of 

program income by grant recipients via 

regularly occurring reports and requests 

for approval; 

(3) Closing out the underlying 

activity, but requiring as a condition of 

closeout that the unit of general local 

government notify the state when new 

program income is received; or 

(4) With prior HUD approval, other 

approaches that demonstrate that the 

state will ensure compliance with the 

requirements of this subpart by units of 

general local government. 

(C) 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 

paragraph (f) of this section. 

(iii) Transfer of program income to 

Entitlement program. A unit of general 

local government that becomes eligible 

to be an Entitlement grantee may 

request the state’s approval to transfer 

State CDBG grant-generated program 

income to the unit of general local 

government’s Entitlement program. A 

state may approve the transfer, provided 

the unit of general local government: 

(A) Has officially elected to 

participate in the Entitlement grant 

program; 

(B) Agrees to use such program 

income in accordance with Entitlement 

program requirements; and 

(C) Has set up Integrated 

Disbursement Information System (IDIS) 

access and agrees to enter receipt of 

program income into IDIS. 

(iv) Transfer of program income of 

grantees losing Entitlement status. Upon 

entry into the State CDBG program, a 

unit of general local government that 

has lost or relinquished its Entitlement 

status must, with respect to program 

income that a unit of general local 

government would otherwise be 

permitted to retain, either: 

(A) Retain program income generated 

under Entitlement grants and continue 

to comply with Entitlement program 

requirements for program income; or 

(B) Retain the program income and 

transfer it to the State CDBG program, in 

which case the unit of general local 

government must comply with the 

state’s rules for program income and the 

requirements of this paragraph (e). 

(4) The state must report on the 

receipt and use of all program income 

(whether retained by units of general 

local government or paid to the state) in 

its annual performance and evaluation 

report. 

(f) * * * 

(1) * * * 

(2) The state may establish one or 

more state revolving funds to distribute 

grants to units of general local 

government throughout a state or a 

region of the state to carry out specific, 

identified activities. * * * 

* * * * * 

(m) Audits. Notwithstanding any 

other provision of this title, audits of a 

state and units of general local 

government shall be conducted in 

accordance with § 85.26 of this title, 

which implements the Single Audit Act 

(31 U.S.C. 7501–07) and incorporates 

OMB Circular A–133. States shall 

develop and administer an audits 

management system to ensure that 

audits of units of general local 

government are conducted in 

accordance with OMB Circular A–133, 

if applicable. 

(n) Cost principles and prior approval. 

(1) A state must ensure that costs 


jlentini on PROD1PC65 with PROPOSALS
61770 Federal Register / Vol. 73, No. 202 / Friday, October 17, 2008 / Proposed Rules 

incurred by the state and by its 

recipients are in conformance with the 

following cost principles, as applicable: 

(i) ‘‘Cost Principles for State, Local, 

and Indian Tribal Governments (OMB 

Circular A–87),’’ which is codified at 2 

CFR part 225; 

(ii) ‘‘Cost Principles for Non-Profit 

Organizations (OMB Circular A–122),’’ 

which is codified at 2 CFR part 230; and 

(iii) ‘‘Cost Principles for Educational 

Institutions (OMB Circular A–21),’’ 

which is codified at 2 CFR part 220. 

(2) All cost items described in 

Appendix B of 2 CFR part 225 that 

require federal agency approval are 

allowable without prior approval of 

HUD to the extent they otherwise 

comply with the requirements of 2 CFR 

part 225 and are otherwise eligible 

under this subpart I, except for the 

following: 

(i) Depreciation methods for fixed 

assets shall not be changed without the 

express approval of HUD or, if charged 

through a cost allocation plan, the 

cognizant federal agency. 

(ii) Fines and penalties (including 

punitive damages) are unallowable costs 

to the CDBG program. 

5. Add § 570.490(a)(3) to read as 

follows: 

§ 570.490 Recordkeeping requirements. 

(a) * * * 

(3) Integrated Disbursement and 

Information System (IDIS). The state 

shall make entries into IDIS in a form 

prescribed by HUD to accurately capture 

the state’s accomplishment and funding 

data, including program income, for 

each program year. It is recommended 

that the state enter IDIS data on a 

quarterly basis and it is required to be 

entered annually. 

* * * * * 

6. Add § 570.504(e) to read as follows: 

§ 570.504 Program income. 

* * * * * 

(e)(1) Transfer of program income to 

Entitlement program. A unit of general 

local government that becomes eligible 

to be an Entitlement grantee may 

request the state’s approval to transfer 

State CDBG grant-generated program 

income to the unit of general local 

government’s Entitlement program. A 

state may approve the transfer, provided 

the unit of general local government: 

(i) Has officially elected to participate 

in the Entitlement grant program; 

(ii) Agrees to use such program 

income in accordance with Entitlement 

program requirements; 

(iii) Has set up Integrated 

Disbursement and Information System 

(IDIS) access and agrees to enter receipt 

of program income into IDIS. 

(2) Transfer of program income of 

grantees losing Entitlement status. Upon 

entry into the State CDBG program, a 

unit of general local government that 

has lost or relinquished its Entitlement 

status must, with respect to program 

income that a unit of general local 

government would otherwise be 

permitted to retain, either: 

(1) Retain the program income 

generated under Entitlement grants and 

continue to comply with Entitlement 

program requirements for program 

income; or 

(2) Retain the program income and 

transfer it to the State CDBG program, in 

which case the unit of general local 

government must comply with the 

state’s rules for program income and the 

requirements of § 570.489(e). 

Dated: September 23, 2008. 

Susan D. Peppler, 

Assistant Secretary for Community Planning 

and Development. 

[FR Doc. E8–24572 Filed 10–16–08; 8:45 am] 

BILLING CODE 4210–67–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–103146–08] 

RIN 1545–BH69 

Information Reporting Requirements 

Under Internal Revenue Code Section 

6039; Hearing 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of public hearing on 

proposed rulemaking. 

SUMMARY: This document provides 

notice of public hearing on a notice of 

proposed rulemaking relating to the 

return and information statement 

requirements under section 6039 of the 

Internal Revenue Code. These 

regulations reflect changes to section 

6039 made by section 403 of the Tax 

Relief and Health Care Act of 2006. 

These proposed regulations affect 

corporations that issue statutory stock 

options and provide guidance to assist 

corporations in complying with the 

return and information statement 

requirements under section 6039. 

DATES: The public hearing is being held 

on October 30, 2008, at 10 a.m. The IRS 

must receive outlines of the topics to be 

discussed at the hearing by October 23, 

2008. 

ADDRESSES: The public hearing is being 

held in room 2116, Internal Revenue 

Building, 1111 Constitution Avenue, 

NW., Washington, DC. Send 

submissions to: CC:PA:LPD:PR (REG– 

103146–08), room 5203, Internal 

Revenue Service, P.O. Box 7604, Ben 

Franklin Station, Washington, DC 

20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

to CC:PA:LPD:PR (REG–103146–08), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC. Alternatively, 

taxpayers may submit electronic 

outlines of oral comments via the 

Federal eRulemaking Portal at http:// 

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the regulations, Thomas 

Scholz at (202) 622–6030 (not a toll-free 

number); concerning submissions of 

comments, the hearing, and/or to be 

placed on the building access list to 

attend the hearing, Richard A. Hurst at 

Richard.A.Hurst@irscounsel.treas.gov. 

SUPPLEMENTARY INFORMATION: The 

subject of the public hearing is the 

notice of proposed rulemaking (REG– 

103146–08) that was published in the 

Federal Register on Thursday, July 17, 

2008 (73 FR 40999). 

Persons who wish to present oral 

comments at the hearing that submitted 

written comments, must submit an 

outline of the topics to be discussed and 

the amount of time to be devoted to 

each topic (signed original and eight (8) 

copies) by October 23, 2008. 

A period of 10 minutes is allotted to 

each person for presenting oral 

comments. After the deadline for 

receiving outlines has passed, the IRS 

will prepare an agenda containing the 

schedule of speakers. Copies of the 

agenda will be made available, free of 

charge, at the hearing or in the Freedom 

of Information Reading Room (FOIA RR) 

(Room 1621) which is located at the 

11th and Pennsylvania Avenue, NW., 

entrance, 1111 Constitution Avenue, 

NW., Washington, DC. 

Because of access restrictions, the IRS 

will not admit visitors beyond the 

immediate entrance area more than 30 

minutes before the hearing starts. For 

information about having your name 

placed on the building access list to 

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this 

document. 

Cynthia Grigsby, 

Acting Chief, Publications and Regulations 

Branch, Legal Processing Division, Associate 

Chief Counsel (Procedure and 

Administration). 

[FR Doc. E8–24653 Filed 10–16–08; 8:45 am] 

BILLING CODE 4830–01–P 


jlentini on PROD1PC65 with PROPOSALS