Supervised Bank Accounts and Multi-Housing Reserve Funds

DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Parts 1902 and 1930

RIN 0575-AB31

Supervised Bank Accounts and Multi-Housing Reserve Funds

AGENCY: Farmers Home Administration, USDA.

ACTION: Final rule.

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SUMMARY: The Farmers Home Administration (FmHA) amends its regulations

to require Multi-Family Housing (MFH) reserve accounts be subject to

countersignature by an Agency official before funds can be withdrawn.

Internal Agency reviews and audits conducted by the Office of the

Inspector General (OIG) indicate reserve funds are being improperly

used. The intended effect of this action is to curtail reserve fund

abuses.

EFFECTIVE DATE: February 28, 1994.

FOR FURTHER INFORMATION CONTACT: James E. Vollmer, Senior Loan

Specialist, Multi-Housing Servicing and Property Management Division,

Farmers Home Administration, USDA, Washington, DC, 20250, telephone

(202) 720-1060.

SUPPLEMENTARY INFORMATION:

Classification

We are issuing this final rule in conformance with Executive Order

12866, and we have determined that it is not a ``significant regulatory

action.'' Based on information compiled by the Department, we have

determined that this final rule: (1) Would have an effect on the

economy of less than $100 million; (2) would not adversely affect in a

material way the economy, a sector of the economy, productivity,

competition, jobs, the environment, public health or safety, or State,

local, or tribal governments or communities; (3) would not create a

serious inconsistency or otherwise interfere with an action taken or

planned by another agency; (4) would not alter the budgetary impact of

entitlements, grants, user fees, or loan programs or rights and

obligations of recipients thereof; and (5) would not raise novel legal

or policy issues arising out of legal mandates, the President's

priorities, or principles set forth in Executive Order 12866.

Intergovernmental Consultation

The programs affected are listed in the Catalog of Federal Domestic

Assistance under Numbers 10.405--Farm Labor Housing Loans and Grants,

10.415--Rural Rental Housing Loans, and 10.427--Rural Rental Assistance

Payments, and are subject to the provisions of Executive Order 12372

which requires intergovernmental consultation with State and local

officials. (7 CFR part 3105, subpart V; 48 FR 29112, June 24, 1983; 49

FR 2267, May 31, 1984; 59 FR 14088, April 10, 1985)

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' It is the determination of FmHA

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment, and in

accordance with the National Environmental Policy Act of 1969, Public

Law 91-190, an Environmental Impact Statement is not required.

Civil Justice Reform

This regulation has been reviewed in light of Executive Order 12778

and meets the applicable standards provided in sections 2(a) and

2(b)(2) of that Order. Provisions within this part which are

inconsistent with state law are controlling. All administrative

remedies pursuant to 7 CFR part 1900, subpart B must be exhausted prior

to filing suit.

Discussion

The Agency is improving FmHA oversight of MFH reserve accounts by

requiring them to be subject to countersignature in a supervised

account. Reserve accounts were previously required to be funded and

used in accordance with Agency regulations, which already required the

prior consent of the Agency prior to withdrawing reserve funds.

However, internal Agency reviews and audits conducted by the Office of

the Inspector General (OIG), highlighted various violations of Agency

regulations and prompted the need for this final rulemaking action.

Among the most common concerns uncovered to date include the

withdrawal of reserve funds without Agency consent, funds being pledged

as security for other loans without Agency knowledge, withdrawal of

interest earned on reserve funds for non-project purposes, lenders

withdrawing funds for application on other defaulted loans, reserve

funds withdrawn at a lending institution for application on other

debts, and reserve accounts held at a lending institution for a short

period of time before transferring to another institution.

The Agency expects to curtail reserve fund abuses by shifting

emphasis to compliance through procedures aimed at preventing abuses

(e.g., requiring the countersignature of Agency officials for

withdrawal of reserve funds which are to be placed in a supervised

account). The Agency's earlier procedures relied on oversight through

monitoring routines, with the threat of potential punitive measures

being imposed should violations be discovered.

The Agency solicited comments concerning the impact of the proposed

rules on those holding reserve funds in money market accounts, bonds,

or financial holdings other than in checking or savings accounts in

federally insured institutions. The prior rulemaking action also

mentioned that the Agency is aware that the proposed rule may result in

some borrowers having to pay financial fees or penalties, which will

erode reserve funds, and is concerned that such adverse impacts be

minimized to the extent practical. The Agency also solicited other

alternative approaches to curtail reserve account abuses. The Agency

desires to ensure that the rules to reduce reserve account abuses are

met in a practical manner without inadvertently imposing severe

financial hardship on existing borrowers.

Discussion of Comments

The proposed rule was published in the Federal Register (57 FR

39631-39635) on September 1, 1992, providing for a 60-day comment

period ending November 2, 1992. The Agency received 25 comments in

response to its proposed rulemaking action. A high number of commentors

indicated the rulemaking was not needed because existing regulations

were adequate if properly enforced. Some commentors were supportive of

the rulemaking action. Comments were received about the potential abuse

of the authority granted to FmHA field representatives, that the

rulemaking action would cause undue delays for approval, impose more

work on existing staff, and possibly warrant requiring fidelity bonds

by Agency personnel. Some commentors suggested alternatives to the

proposed rulemaking action, such as requiring all reserve funds be

remitted to the Government for holding under its accounting system

until such time as a request is approved for a withdrawal, requiring

cosignatories only for problem accounts, requiring only some reserve

funds to be subject to withdrawal, relying on account statements from

financial institutions only, and withholding any authorized return on

owners' investment for any year in which reserve accounts abuses occur.

The Agency considered the various alternatives and determined the

proposed rulemaking action was needed and would not impose an undue

hardship on borrowers. The alternatives suggested did not warrant

adoption by the Agency. The Agency does not deem it wise to require

reserves to be remitted to the Government, and also finds such an

alternative to be administratively undesirable, in part because the

considerable accounting software modifications needed would make it

cumbersome to implement. Requiring co-signatures only for problem

accounts is not attractive because it does not fully accomplish an

Agency objective of ensuring abuses are prevented, rather than relying

on punitive measures. The Agency considers its existing policies to be

adequate to impose appropriate punitive measures for those who are

trying to meet program objectives; however, abuses are still occurring

and preventive steps are deemed necessary. Relying on added review of

statements from financial institutions does not fully accomplish an

Agency objective of ensuring abuses are prevented, rather than

increasingly relying on Agency monitoring to discover and punish

abuses.

A high number of commentors indicated that it was important that

the Agency be required to act timely on requests for reserve fund

withdrawals, especially where emergency repairs are needed. The Agency

expects its employees to take timely action on reserve account

withdrawal requests, especially where emergency cases arise. The Agency

normally expects such requests to be acted on within 5 working days of

the request (See 7 CFR part 1930, subpart C). However, the Agency does

not agree that this is a valid reason to drop the proposed

countersignature provisions.

Agency regulations have long required prior consent before reserve

account funds are used. When circumstances arose where emergency

repairs were needed during non-federal working hours for which no cash

was on hand to pay for the repairs, operators ensured such repairs were

made using commonly available business practices. Operators can

normally request the work be billed for payment within 30 days, or that

the work be paid via the extension of credit arrangements. Such work is

then able to be repaid at a later date, either through the authorized

release of reserve funds for authorized purposes, or through an

alternative revenue source such as project rents. However, the Agency

recognized the need to permit the post approval of commitments made

(e.g., work committed under credit arrangements, etc.) in emergency

cases. The Agency modified 7 CFR part 1930, subpart C at paragraph XIII

B 2 c (5) as a result of similar comments in a separate but related

rulemaking action to accommodate such treatment.

A large number of respondents also recommended requiring at least

two Agency employees to be authorized to countersign for reserve

account withdrawals to ensure that prompt action can be taken should

employees be on travel or leave. Although the Agency understands it may

be desirable to ensure that at least two officials are authorized to

countersign for reserve account withdrawals, it may be impractical to

require multiple counter-signatures by authorized Agency officials in

some circumstances. The Agency does not object to accommodating

multiple counter-signatures. However, it does not desire to require

multiple signatures, in part, because normal business practices should

not demand extremely prompt action on reserve withdrawal requests even

when emergency situations occur. There are ample means of handling

emergencies in a prompt manner other than by relying solely on the

immediate access to reserve account funds. Also, some FmHA offices do

not have two qualified employees to authorize reserve fund withdrawals.

The Agency received a number of comments regarding the use of

reserve accounts. The information published in the reserve section was

basically the same as published in a separate, but related, prior

rulemaking action on 7 CFR part 1930, subpart C. Changes resulting from

that rulemaking action were separately addressed.

The wording proposed at paragraph XIII B 2 c (2) of Exhibit B of

part 1930, subpart C, is being adopted with a modification of the

implementation date. The Agency is modifying the effective date to be

180 days after publication of the final rule instead of 60 days. This

was deemed necessary because of the significant number of commentors

who indicated that establishing accounts requiring countersignature by

Agency officials would be cumbersome to implement, especially if

implemented over a short timeframe. The Agency agrees and is providing

for a longer implementation period. The paragraph also provides that

reserve funds held just prior to the effective date, in instruments

which are subject to monetary penalties for early withdrawal, may be

temporarily held for the time needed to avoid such penalties.

A comment was received concerning whether borrowers whose accounts

were established on or before October 27, 1980, would be subject to a

supervised account for reserve account funds, since these accounts were

not subject to the required account standards set out in FmHA

regulations for loans approved after October 27, 1980. The Agency

intends all RRH, RCH, and all LH borrowers operating projects (e.g.,

all LH borrowers except on-farm type borrowers) to establish a

supervised account for reserve funds.

Comments received in conjunction with the prior rulemaking changes

for 7 CFR part 1930, subpart C, suggested reserve accounts be permitted

to be invested in other than federally insured institutions and readily

marketable obligations of the United States Treasury. The Agency agreed

to make some expansion for MFH reserve accounts as prescribed in 7 CFR

part 1930, subpart C. Consequently, it is necessary to make a number of

technical changes to 7 CFR part 1902, subpart A to be compatible with

these principles. Those changes would have necessitated extensive

changes to numerous paragraphs in the existing regulation. Therefore,

the Agency determined the public would be better served to have a

separate section covering all regulations governing the MFH reserve

accounts, instead of providing extensive exceptions in numerous

sections of the existing regulation. Section 1902.4 was added to the

regulation, taking into consideration the comments for improvements

recommended by the public.

In addition, a number of recommendations were offered to improve

the technical implementation of any regulations resulting from the

prior rulemaking action. Comments indicated that using the term ``bank

statements'' when discussing MFH reserve accounts was not appropriate.

The Agency agrees and avoided this wording when used in conjunction

with MFH reserve accounts.

A commentor also desired clarification as to whether originals or

copies of account activity statements are expected. The Agency will

accept either for MFH reserve accounts. A commentor also desired

clarification as to when the MFH supervised account activity statements

will be provided to the Agency. The Agency normally will not need

account activity statements. Accordingly, the Agency made changes to

clarify this intent. Commentors also were concerned about the need and

frequency of providing MFH reserve account deposit information to the

Agency. The Agency normally will not need deposit documentation.

Accordingly, the Agency made changes to clarify this intent.

It was recommended that proposed rulemaking wording for

Sec. 1902.1(k) be modified, since it states that the ``Interest-Bearing

Deposit Agreement'' be executed in conjunction with Form FmHA 1940-1.

The Agency agrees that the ``Interest-Bearing Deposit Agreement'' need

not be executed when MFH reserve accounts are involved. The Agency

avoided referencing this form when it consolidated all the MFH reserve

account provisions in Sec. 1902.4.

A commentor indicated that the proposed revision to

Sec. 1902.2(a)(6) is not appropriately located, and suggested adding

another paragraph to cover the treatment of MFH accounts at

Sec. 1902.2(a). The Agency determined that the proposed clarifying

wording is appropriate to ensure it is understood that MFH accounts are

to be kept in supervised accounts as long as the borrower is indebted

to the Agency. However, the Agency also agrees that additional coverage

would help convey that MFH reserve funds must be withdrawn for

disbursement for an authorized purpose. Consequently, the Agency

consolidated these related provisions into Sec. 1902.4.

Also, commentors suggested removing the word ``checking'' where it

occurs throughout Sec. 1902.14, in part because credit unions and

savings accounts may also be used when MFH reserve accounts are being

established. The Agency agrees and is dropping the word ``checking''

from the section governing MFH reserve funds.

List of Subjects

7 CFR Part 1902

Accounting, Banks, Banking, Grant programs--Housing and community

development, Loan programs--Agriculture, Loan programs--Housing and

community development.

7 CFR Part 1930

Accounting, Administrative practice and procedure, Grant programs--

Housing and community development, Loan programs--Housing and community

development, Low- and moderate-income housing--Rental, Reporting and

recordkeeping requirements.

Accordingly, title 7, chapter XVIII of the Code of Federal

Regulations is amended as follows:

PART 1902--SUPERVISED BANK ACCOUNTS

1. The authority citation for part 1902 continues to read as

follows:

Authority: 7 U.S.C. 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR

2.23; 7 CFR 2.70.

Subpart A--Loan and Grant Disbursement

2. The heading of subpart A to part 1902 is revised to read as

follows:

Subpart A--Disbursement of Loan, Grant, and Other Funds

3. Section 1902.1 is amended by adding introductory text to read as

follows:

Sec. 1902.1 General.

This subpart prescribes the policies and procedures of the Farmers

Home Administration (FmHA) for disbursement of funds under the Loan

Disbursement System (LDS), in establishing and using supervised bank

accounts, and in placing Multi-Family Housing (MFH) reserve accounts in

supervised bank accounts. The LDS system provides for disbursement of

funds on an as needed basis to substantially reduce interest costs to

FmHA borrowers, U.S. Treasury, and FmHA.

* * * * *

4. Section 1902.4 is added to read as follows:

Sec. 1902.4 Establishing MFH reserve accounts in a supervised bank

account.

(a) General Requirements. All MFH borrowers required to maintain

reserve accounts must place the reserve accounts in a supervised bank

account(s) which meets the following requirements:

(1) Countersignature requirements. The reserve account must require

that any funds withdrawn be countersigned by an authorized FmHA

official.

(2) Restrictions on collateral. The financial institution holding

the reserve account must ensure that the funds are not pledged or taken

as security without the Agency's prior consent.

(3) Interest bearing. The reserve account funds are encouraged to

be maintained in an interest-bearing account. The ``Interest-Bearing

Deposit Agreement'' set out in Exhibit B of this subpart is not

required to be used for reserve accounts.

(4) Restricted investments. Reserve funds must be placed in

investments authorized in subpart C of part 1930 of this chapter. The

authorized investments are deemed to be of acceptable risk such that

the potential for any loss is minimal.

(5) Financial institutions. The reserve account must be maintained

in authorized financial institutions set out in subpart C of part 1930

of this chapter (e.g., banks, savings and loan institutions, credit

unions, brokerage firms, mutual funds, etc.). Generally, any financial

institution may be used provided invested or deposited funds are

insured to protect against theft and dishonesty. The reserve account

funds need not be Federally insured. However, if Federally insured, any

amount held above the Federal insurance ceilings established must be

backed by a pledge of collateral from the financial institution, or

otherwise covered by non-federal insurance against theft and

dishonesty.

(6) Rules where multiple projects are involved. A reserve

account(s) must be maintained for each borrower. When a borrower owns

multiple projects, reserve accounts may be established for each

project. A single reserve account may also be established by a borrower

owning multiple projects, provided the conditions set out in subpart C

of part 1930 of this chapter are met.

(7) Term. Reserve accounts are expected to be kept for the full

term of the loan.

(b) Deposits and account activity statements.

(1) Deposits. Generally, the FmHA will not require the review or

approval of deposits or the use of Forms FmHA 402-1 or FmHA 402-2.

(2) Account activity statements. Generally, the FmHA will not

monitor or reconcile the reserve account activity statements issued

periodically by the financial institutions holding the funds. FmHA will

monitor reserve account levels through budget reports, audits, and

Agency reserve tracking systems. If disputes arise or the borrower is

in violation of Agency regulations, the Agency may require account

activity statements. When account activity statements are sought, it

will normally be sufficient to obtain the statement which reflects

balances as of the last activity statement ending period. Form FmHA

402-2 is not required to be used.

Secs. 1902.17-1902.49 [Added and reserved]

5. Sections 1902.17 thru 1902.49 are added and reserved.

6. Section 1902.50 is added to read as follows:

Sec. 1902.50 OMB control number.

The reporting and recordkeeping requirements contained in this

regulation have been approved by the Office of Management and Budget

and have been assigned OMB control number 0575-0158. Public reporting

burden for this collection of information is estimated to vary from 5

minutes to 1\1/2\ hours per response, with an average of 0.42 hours per

response, including time for reviewing instructions, searching existing

data sources, gathering and maintaining the data needed, and completing

and reviewing the collection of information. Send comments regarding

this burden estimate or any other aspect of this collection, including

suggestions for reducing this burden, to Department of Agriculture,

Clearance Officer, OIRM, room 404-W, Washington, DC 20250; and to the

Office of Management and Budget, Paperwork Reduction Project (OMB

#0575-0158), Washington, DC 20503.

PART 1930--GENERAL

7. The authority citation for part 1930 continues to read as

follows:

Authority: 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23; 2.70.

Subpart C--Management and Supervision of Multiple Family Housing

Borrowers and Grant Recipients

8. The introductory text of paragraph XIII B 2 c of Exhibit B of

subpart C is revised to read as follows:

Exhibit B of Subpart C--Multiple Housing Management Handbook

* * * * *

XIII Accounting and Reporting and Financial Management Analysis:

* * * * *

B. * * *

2. * * *

c. Reserve account. The reserve account is a required account

subject to the requirements set out in this paragraph. The borrower

will initiate monthly deposits in this project account, preferably

an interest bearing account, starting the same month the first loan

payment is due FmHA. As projects age, the required reserve account

level may be adjusted to meet anticipated ``life-cycle'' needs,

including equipment and facility replacement costs, by amending the

loan agreement/resolution. All RRH, RCH, and LH borrowers operating

projects (i.e., all LH borrowers exclusive of those on-farm type LH

borrowers) are required to establish a reserve account. Effective as

of July 26, 1994, reserve funds will be required to be placed in a

supervised account. The provisions of subpart A of part 1902 of this

chapter apply. Reserve funds on deposit just prior to this date in

instruments which are subject to monetary penalties for early

withdrawal may be temporarily held for the time needed to avoid such

penalties.

* * * * *

Dated: October 12, 1993.

Bob Nash,

Under Secretary for Small Community and Rural Development.

[FR Doc. 94-1602 Filed 1-26-94; 8:45 am]

BILLING CODE 3410-07-U