# Cost Containment and Vulnerability

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URL: https://www.frixlaw.com/law-library/documents/fr%3A94-3117

## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** February 14, 1994

## Text

DEPARTMENT OF AGRICULTURE
Farmers Home Administration

7 CFR Parts 1924, 1930, and 1944

RIN 0575-AB08

Cost Containment and Vulnerability

AGENCY: Farmers Home Administration, USDA.

ACTION: Final rule.

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SUMMARY: The Farmers Home Administration (FmHA) amends its regulations
regarding the processing of preapplications for Rural Rental Housing
(RRH) assistance. This action is necessary to decrease costs associated
with the program and to reduce program vulnerability. The intended
effect is to improve credit quality and to make our regulations more
responsive to the prudent development of RRH complexes in rural
America.

EFFECTIVE DATE: March 14, 1994.

FOR FURTHER INFORMATION CONTACT: Gail McCowan, Senior Loan Specialist,
Rural Rental Housing Branch, Multi-Family Housing Processing Division,
Farmers Home Administration, USDA, Room 5337--South Agriculture
Building, Washington, DC 20250, telephone (202) 720-1608.

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.

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 1949, Public
Law 91-90, an Environmental Impact Statement is not required.

Intergovernmental Consultation

For the reasons set forth in the Final Rule related Notice(s) to 7
CFR part 2015, subpart V, programs 10.415 Rural Rental Housing Loans
and 10.427--Rural Rental Assistance Payments are subject to Executive
Order 12372 which requires intergovernmental consultation with State
and local officials.

Paperwork Reduction Act

The information collection requirements contained in these
regulations have been approved by the Office of Management and Budget
(OMB) under the provisions of 44 U.S.C. chapter 35 and have been
assigned OMB control numbers 0575-0042 and 0575-0033 in accordance with
the Paperwork Reduction Act of 1980 (44 U.S.C. 3507). The information
collection contained in 0575-0047 will not become effective until
approved by OMB. Please send written comments to the Office of
Information Regulatory Affairs, OMB, Attention: Desk Officer for USDA,
Washington, DC 20503. Please send a copy of your comments to Jack
Holston, Agency Clearance Officer, USDA, FmHA, AG Box 0743, Washington,
DC 20250.

Programs Affected

These programs/activities are listed in the Catalog of Federal
Domestic Assistance under Numbers 10.415, Rural Rental Housing Loans
and 10.427, Rural Rental Assistance Payments.

Background

During its audits of FmHA's identity of interest construction cost
certification process, the Office of Inspector General found many
instances where borrowers were taking advantage of loopholes in FmHA
regulations. This resulted in the loss of Government funds through
excess profit being paid to paper contractors, failure of the borrowers
to reveal identities of interest with related parties, failure on the
part of CPA's to adequately perform cost certifications, and numerous
other discrepancies of varying severity, all of which have had
detrimental effects on the program. OIG reviewed the proposed changes
to the regulations and voiced its support for the proposed changes as a
mean for reducing fraud, waste, and abuse in the 515 program.

Discussion of Comments

The proposed rule, published in the Federal Register (57 FR 27379-
27394) on June 19, 1992, provided for a 60-day comment period ending
August 18, 1992. One hundred and twenty-one comments were received
during the comment period from the public and from FmHA field
employees.

Comments

Implementation Proposal

FmHA has stated that all preapplications and applications on hand
will be subject to the final rule with the exception of applications
whose plans and specifications have been finalized.
Several persons agreed that preapplications and applications not be
``grandfathered'' except for those which have received an AD-622 and
which are within the District's 150 percent loan approval authority.
Other persons objected to not ``grandfathering'' because of the expense
already incurred in developing an application.
Since applicants have already invested substantial sums of money in
the development of building plans, FmHA has reconsidered this position.
Building plans included with preapplications which have been issued an
AD-622 inviting a formal application will not be affected; all other
material associated with preapplications will be subject to the
provisions of the final rule.

FmHA Instruction 1924-A

1. Section 1924.10 (c)(2)(i)
Comment: Comments were received concerning the requirement that all
transfers of funds between line items would require the approval of the
servicing official using Form FmHA 1924-7. The general feeling is that
estimates are merely estimates and will fluctuate during the
construction period. To require the servicing official to approve
change orders for every line item change would cause a major paperwork
burden on both the contractor and FmHA.
FmHA response: The Agency recognizes the volume of paperwork and
delay involved with this requirement. FmHA will, instead, implement a
means to flag significant variances in line item costs. Increases or
decreases at or above a 15 percent threshold will require documentation
from the borrower to justify the differences. The State Director will
also have the authority to require documentary justification for less
than 15 percent variances if he/she deems it necessary. The
documentation will be required at the time the project is cost
certified so that construction will not be delayed.
2. Section 1924.13(a)(3)
Comment: Most persons agreed that architectural fees should be
reduced when less than full architectural services are provided. It was
suggested that it would be appropriate to establish a range of fees
covering a range of similar services. It was also pointed out that an
acceptable design in one place can involve a redraw in others due to
local code interpretations.
FmHA response: The intent of this requirement is for those
instances where the applicant uses a set of plans that has previously
been used. Even if a new site requires some modification to adapt the
building to the site, it will not require a complete redraw of the
building. While there can be no hard and fast rules set by Washington
as to the degree of revision needed to qualify the architect for full
services, this can be determined at the State level. Compensation is
expected to reasonably represent the value of the architect's services
to the owner.
3. Section 1924.13(e)(1)(iii)(B)(3) and 1924.13(e)(2)(i)(D)
Comment: A number of persons suggested that more training be
provided to FmHA field staff in analyzing the financial statement to
determine whether there is sufficient ``financial strength to carry out
all phases of construction.'' Another suggestion was that FmHA require
a performance and payment bond from all contractors, in which case the
credit worthiness will have been determined by a surety company.
Several persons pointed out the fact that credit reports do not reflect
the financial strength of the contractor.
FmHA response: FmHA has completed phase one of a two phase training
program in the proper analysis of financial reports. The training is
being conducted by an outside accounting firm and involves State,
District, and National Office personnel. We recognize that requiring a
payment and performance bond from all contractors would probably
eliminate the small yet qualified contractor from participating in the
515 program. Based on the comments that a credit report is not the
vehicle through which financial strength can be determined, FmHA will
require that each contractor provide a financial statement of its
operations. The financial statement will be analyzed to determine if
the contractor has the financial strength to pay construction bills
prior to obtaining draws from the lender. Language relating to the
submission of a financial statement has been added to this section. A
credit report will still be required from all contractors.
4. Section 1924.13(e)(1)(iv) and 1924.13(e)(2)(i)(G)
Comment: There was some opposition to eliminating the price of cost
certifications from the contract.
FmHA response: FmHA deleted this cost from this section because it
intended to contract for cost certifications itself. This would have
eliminated the need for including the cost in the construction contract
since they would be paid from Agency funds. It has now been determined
that the Agency will be unable to contract for all cost certifications,
so the previous language pertaining to cost certification expenses has
been restored to this section to cover those situations where the
borrower will be required by FmHA to obtain the certification.
5. Section 1924.13(e)(1)(v) and 1924.13(e)(1)(v)(E)
Comment: Several persons agreed with the proposal that FmHA
contract directly for cost certifications. The most consistently
expressed concern was about the delay in the Government contracting
process, resulting in increased interim interest expense. There was
also some concern about the burden this proposal would place on FmHA.
There was a suggestion to have FmHA contract with a CPA to review and/
or audit a certain percentage of the cost certifications within the
State each year. Also, one person suggested that FmHA allow contracts
between the CPA and the contractor when the CPA can certify that he/she
has no other relationship with the contractor except for the cost
certification. Comments from other persons stated that the ongoing
working relationship between the borrower and the CPA is a definite
advantage since the CPA is familiar with the accounting system and
procedures of the borrower. They felt that having full-time access to
the CPA who is responsible for monitoring the construction cost
recording process would allow for timely maintenance of records. An
FmHA-contracted auditor would not have this familiarity with the
borrower's books. One respondent suggested that FmHA publish a guide to
tell CPA's how FmHA wants the cost certifications performed and
reported. One suggestion is that instead of contracting for cost
certifications directly, FmHA should strengthen its ability to debar an
incompetent CPA. Another respondent suggested that FmHA establish a
list of CPA's who have been designated as acceptable for cost
certification. One suggestion was that FmHA make a judgment of whether
the borrower's cost certification is satisfactory instead of hiring the
CPA directly.
FmHA response: FmHA has worked with the Office of Inspector General
to develop an audit program which CPA's will follow in performing cost
certification audits. During recent OIG audits of cost certifications
prepared on FmHA-financed rental housing projects, it was discovered
that many CPA's were not maintaining the independence required by
generally accepted auditing standards. It is obvious from some of the
comments that some CPA's who are cost certifying construction costs
have also been involved in the maintenance of the borrowers'
construction records. FmHA will not have sufficient contracting funds
to cover the cost of all certifications; therefore, it anticipates
contracting for all certifications on loans of $1.5 million and over
and a random sampling of all other loans. Details will have to be
worked out in the contracting process to prevent undue delay in closing
loans. In the event FmHA does contract for a cost certification, the
borrower will not be responsible for providing a certification since
that would duplicate energies and expenses. Any funds earmarked in the
loan for cost certification but which are not needed because of an
FmHA-contracted certification will be returned on the loan and may not
be used for any other purpose.
6. Section 1924.13(e)(1)(v)(A)
Comment: There was some confusion about whether FmHA would be
contracting with the CPA who examines the borrower's accounting system
or just with the CPA who performs the cost certification. A suggestion
was offered that the borrower provide a written assertion that it has
an accounting system which complies with the regulations. The cost
certification CPA would then report on the validity of the assertion.
FmHA response: It was the intent of this proposal that the
borrower's CPA be responsible for verifying that the borrower's
accounting system meets the requirements of the regulation so that this
responsibility can be removed from FmHA field personnel. Since the
Agency does not have accountants on staff, we do not feel we have the
expertise to adequately check the borrower's accounting system. We
agree with the suggestion that the borrower be allowed to provide a
written assertion on the accounting system and that the cost
certification CPA report on its validity. This section has been
rewritten to incorporate that suggestion.
7. Section 1924.13(e)(1)(v)(B), 1924.13(e)(2)(iv), and
1924.13(e)(2)(viii)(B)
Comment: There was a question as to whether FmHA intends to reduce
builder's profit when costs of line item are increased. Another
respondent wondered if it is the intent of FmHA to restrict the amount
of each line item to the estimated amount. Several persons objected to
the restriction of general requirements to the estimated amount. One
respondent recommended that any cost savings from project construction
be returned on the loan and that the loan be reamortized to reflect a
decrease in tenant rent.
FmHA response: FmHA intends that builder's profit be reduced when
the total costs of the line item costs exceed their estimates and would
result in an increase in the contract amount. The amounts for general
overhead, profit, and general requirements will be restricted to their
estimated amounts, not the line items to their estimated amounts. FmHA
believes that the estimates for general requirements can be accurately
determined prior to the start of construction and not deviate
significantly thereafter. We do not feel this would result in an undue
burden on the borrower. A refund of loan funds can be used to
reamortize the loan if it can be shown that the amount refunded will
reduce the rents and an exception to the 10 percent requirement has
been granted by the National Office.
8. Section 1924.13(e)(1)(v)(C) and 1924.13(e)(2)(viii)(A)
Comment: There was some objection to requiring the borrower to
agree that the tests conducted will include FmHA audit requirements.
One respondent has recommended that the language be changed to refer to
FmHA 1924-A instead of ``FmHA regulations'' and has provided FmHA with
suggested language for this section.
FmHA response: Because of the problems with how cost certifications
are conducted, as revealed by OIG, FmHA felt it necessary to institute
additional instructions to the CPA/LPA's which are intended to provide
uniformity in the examination of construction costs. FmHA sought advice
and assistance from the American Institute of Certified Public
Accountants in developing the additional instructions referred to as
the Audit Program. The Audit Program will be available in FmHA offices.
It is FmHA's intent that the borrower recognize the Audit Program and
to ensure that the auditor include its requirements in the cost
certification process. The language of this section has been reworded
as recommended by AICPA. FmHA has changed the reference from FmHA
regulations to FmHA Instruction 1924-A.
9. Section 1924.13(e)(1)(v)(D)
Comment: One respondent objects to the auditor having to certify
that he/she has no financial interest in or with the applicant/owner-
builder, architect, engineer, attorney, contractor, etc., since
Government Auditing Standards prohibit such an identity of interest.
Two respondents pointed out an inconsistency in the suggested CPA
opinion letter since one paragraph refers to Generally Accepted
Government Auditing Standards (GAGAS) and another refers to General
Accepted Accounting Principles (GAAP).
FmHA response: Even though the Government Auditing Standards
prohibits identities of interest between CPA's and the applicant,
architect, engineer, attorney, contractor, etc., OIG audits have
revealed apparent close relationships exist between some CPA's and
borrowers. Certain CPA's have not maintained an independence from the
borrower as required by Government Auditing Standards. There is no
inconsistency in the suggested opinion letter since GAGAS pertains to
the audit of the construction costs and GAAP pertains to the accounting
system which the borrower uses in recording construction costs. OIG has
submitted a sample auditor's report which is incorporated in the Audit
Program and available in any FmHA office.
10. Section 1924.13(e)(1)(v)(F)
Comment: The opinion was expressed that the CPA who reviews the
borrower's accounting system be allowed to cost certify. Also, costs
will be duplicated if the borrower has to hire a CPA in addition to
FmHA contracting for CPA services. There was objection to denying the
right of a CPA to cost certify when that CPA is currently handling the
contractor's accounting.
FmHA response: It was originally FmHA's intent that the CPA who
reviews the borrower's accounting system not cost certify the project
after construction. This was primarily due to the fact that OIG audit
findings revealed a lack of independence between CPA's and borrowers.
We have reconsidered this prohibition and will allow the same CPA who
sets up or examines the borrowers accounting system to certify
construction costs. However, the CPA who provides any accounting
services to the borrower during construction will not be allowed to
cost certify the project. To do so would be a violation of rules of
independence set forth in Government Auditing Standards.
11. Section 1924.13(e)(1)(v)(G)
Comment: There was one objection to using the new forms since the
respondent felt FmHA already has an identity of interest statement in
use.
FmHA response: The purpose of the new forms is twofold; one to
require all borrowers to disclose all identities of interest and the
other to identify ``paper companies.'' The identity of interest
statement itself has been changed to also include other related
parties. The forms also provide notification to all affected parties of
the penalty for falsifying the documents. FmHA feels these forms are
needed.
12. Section 1924.13(e)(1)(v)(H)
Comment: One respondent objected to having to report a discount or
rebate when the original line item costs were based on the discounted
amount. Another person offered the rationale that rebates and discounts
are incentives to buy ``right'' and to pay bills on time and that FmHA
is attempting to remove these incentives. One respondent requested
clarification of the next to last sentence in this section. The general
objection was voiced about reducing profit to agree with the reduction
in line item costs of construction. One person felt that contractors
would use the pretext of obtaining a rebate or discount in order to not
contribute additional funds to cover the increase in line item costs.
One respondent supported this section.
FmHA response: After due consideration, FmHA has decided that this
section more appropriately pertains to multiple advance loans where
payments are made by FmHA and the amount of any discounts or rebates
will be deducted before invoices are paid. If discounts or rebates are
given after the invoices are paid, the funds will be returned to the
supervised bank account. Therefore, this section has been amended to
delete reference to discounts and rebates.
13. Section 1924.13(e)(1)(v)(I)
Comment: The reference to the HUD regulatory language apparently
has caused some confusion since it was merely referenced. One
respondent wanted to know if the general contractor has to hammer nails
in order to be performing work. Another respondent felt that
subcontracting out all or nearly all of the work is a typical and
accepted practice. One respondent suggested that this provision be
waived if it can be demonstrated that it is to the benefit of the
property. One person questioned whether this provision will pertain to
everyone or just in those cases where an identity of interest exists;
if it pertains to everyone, then this section should be taken from the
cost certification portion of the regulation. One respondent requested
that we provide a definition of ``actual construction.'' Two
respondents requested that a distinction be made between work on new
construction and work on a rehabilitation. One respondent agreed with
this section.
FmHA response: To eliminate confusion, the reference to the HUD
regulation has been removed from this section. OIG audits have found
repeatedly that persons who identified themselves as the construction
contractor were not qualified to build the project or, for some reason,
did not build the project. They, instead, subcontracted out all or most
of the construction and still took a full builder's profit. FmHA
adamantly opposes the payment of profit to anyone who does not perform
the full range of duties of a general contractor. This section does not
prohibit a contractor from subcontracting out any or all of the work as
long as that contractor does not receive a builder's profit. The Agency
has no objection to the contractor being paid for services rendered.
FmHA does not foresee any situation where waiver of this provision will
benefit the property. This section pertains only to identity of
interest borrowers and will remain in this location. For purposes of
clarification, we are defining ``actual construction'' to mean ``work''
as defined in A.I.A. documents: ``* * * labor, materials, equipment,
and services provided by the contractor to fulfill the contractor's
obligations.'' Irrespective of whether the project is new construction
or rehabilitation, the general contractor should not expect to receive
a builder's profit if he/she has not performed the full ranges of
responsibilities of a general contractor.
14. Section 1924.13(e)(1)(v)(J)
Comment: There was agreement that FmHA implement these new forms.
One respondent suggested that more specific requirements be added such
as years in business, work performed other than on FmHA-financed.
FmHA response: The new Form FmHA 1944-31 will require the entity to
disclose number of years in business. We do not feel that
identification of the work performed on other than FmHA-financed
projects is necessary since the entity is certifying that it is an on-
going business.
15. Section 1924.13(e)(1)(vii)(B)(1) and 1924.13(e)(2)(iii)(A)
Comment: One respondent expressed an opinion that this section will
eliminate the smaller developers. There was some feeling that this
would discourage the participation of owner-builders or that it will
cause undue delay in the processing of the preapplication. One
respondent recommended that the determination of whether to grant an
exception to competitive bidding be made at the application stage
rather than at the preapplication stage. One respondent misinterpreted
this section to mean competitive bids would be granted rather than the
negotiated contracts.
FmHA response: The only new language added to this section requires
that FmHA document, in writing, the examination required prior to the
State Director granting an exception to competitive bidding. We do not
feel that small developers are any more at risk now than before the
change since the requirement is not new to this revision. FmHA agrees
that the determination of whether to grant an exception to competitive
bidding be made during the application stage and have changed the
language to reflect this requirement. The correct meaning of this
section is that negotiated contracts may be allowed once the State
Director has determined all requirements for granting an exception to
competitive bidding have been met.
16. Section 1924.13(e)(2)(i)(G)
Comment: One respondent wanted to know under what circumstances
will cost estimation services be required and asked where else in the
regulation this subject is discussed. Another respondent raised issues
which appear to be unrelated to this section and we could not determine
to which section the comment referred. Other comments pertain to the
deletion of cost certification fees which was previously discussed
under Sec. 1924.13(e)(1)(iv).
FmHA response: The existing regulation contained a provision for
cost estimation services to be used if FmHA did not agree with the
owner-builder's estimate. This was seldom, if ever, imposed. Our recent
test of using estimating services proved to be unreliable and
inconsistent. The reference to cost estimation has been removed from
the regulation.
17. Section 1924.13(e)(2)(iv)
Comment: One respondent suggested that allowances for general
overhead, general requirements, and a builder's profit be based on a
regional cost rather than on a State average.
FmHA response: This section states that the amounts may be
determined by local investigation and also from HUD data for the area.
It does not mention a State average.
18. This Respondent Refers to 1924.13(e)(1)(vii)(D)
There is no such section in FmHA Instruction 1924-A.
19. Section 1924.13(e)(2)(viii)
Comment: One respondent asked if the requirement that projects have
their costs ``audited by FmHA'' refers to cost certification contracted
by FmHA, OIG or other FmHA audit. Another respondent points out that
this section contains a cost certification cutoff for projects of
$350,000 or more and expresses an opinion that there should be no
difference between identity of interest and owner-builder. One
respondent points out that a FmHA 1924-13 is mandatory for all loans of
over $350,000 and that if the loan is publicly bid this form should not
be mandatory.
FmHA response: The reference to ``audited by FmHA'' falls within
the same provision that was discussed earlier concerning FmHA
contracting for all cost certifications. The respondent is correct in
his observation concerning the $350,000 cutoff for owner-builders. All
owner-builders are identity of interest entities which automatically
require a cost certification. The reference to $350,000 has been
removed from this section. FmHA regulation 1944-E now requires that all
applicants submit Form FmHA 1924-13 to facilitate the tracking of line
item costs in the Agency's upcoming computerized cost tracking system.
This applies to all applicants regardless of whether or not an identity
of interest is involved.
20. Section 1924.13(e)(2)(viii)(B)
Comment: One respondent suggested that further clarification be
added to the section regarding amounts for general overhead, general
requirements, and builder's profit as being treated as individual and
separate line items amounts or whether all three should be combined,
thus eliminating the need for Administrative Notice explanation.
Another comment did not appear to pertain to this section.
FmHA response: The Administrative Notice issued on this subject
addressed the percentages for establishing separate amounts for general
overhead, general requirements, and builder's profit; this section
refers to the dollar amounts which are established as a result of the
percentage calculation. The FmHA 1924-13 requires that these three
items be listed separately. This section refers to establishing dollar
amounts for general overhead, general requirements, and builder's
profit and that actual costs for those three items will not exceed
their dollar estimates. Language addressing the allowable percentages
for general overhead, general requirements, and builder's profit has
been added to Sec. 1944.215(a)(1) of subpart E of part 1944.
21. Section 1924.13(e)(2)(viii)(C)
There was one comment and the respondent expressed agreement with
this section.
22. Section 1924.13(e)(2)(viii)(D)
Comment: One respondent expressed agreement with this section.
Another respondent requested clarification of the reference to HUD
regulation.
FmHA response: The reference to the HUD regulations has been
dropped from this section as discussed under Sec. 1924.13(e)(1)(v)(I),
above.

1944-E

1. Section 1944.211(a)(3)
Comment: A number of objections were expressed to limiting the
number of preapplications to five. Several respondents supported this
proposal. The reasons were many and too numerous to list. One
respondent suggested that the limitation be based on applications and
not preapplications and that the number be controlled on a State basis.
Many persons suggested that the number of preapplications be based on
the financial capacity of the applicant and not on the number of
preapplications. Other recommendations include a limit of from 3 to 15
preapplications; 5 preapplications and a nationwide limit of 10; 10
preapplications per District; 15 or 20 with no more than 5 funded and/
or under construction at one time; and 10 preapplications nationwide
except for preapplications accompanied by a deposit equal to 1 percent
of the loan. Other respondents recommended no limit be set for
preapplications or applications. Several persons recommended returning
preapplications which cannot be funded within a set period of months.
To illustrate his objection to limiting the number of
preapplications, one respondent sent several photographs of FmHA-
financed apartment complexes which were not being properly managed. The
respondent alleged that these apartments were owned by small developers
and the photographs serve as an example of what would happen to the
section 515 program if only small developers could participate.
FmHA response: The majority of comments were overwhelmingly opposed
to restricting the number of preapplications. Therefore, the Agency is
not undertaking any changes to this section at this time.
FmHA was concerned over the photographs and investigated the
respondent's claim. In all cases, FmHA was taking action to correct the
management deficiencies. In almost all cases, the developers of the
subject apartments were not small developers. In the one case where the
developer would be considered a small developer, the State did not feel
the management problems were due to the fact the developer was not a
large entity. Therefore, we do not consider this particular objection
to the proposed rule to have merit.
2. Section 1944.211(a)(5)
Comment: One respondent expressed an opinion that requiring
evidence that the borrower has or can obtain the 3 percent borrower
contribution at the preapplication stage is premature and should not be
required until prior to obligation.
FmHA response: The ability of the borrower to furnish the
contribution is a criterion of eligibility. The Agency feels that
eligibility must be established at preapplication stage. If that
requirement were to be delayed until the loan is ready to be obligated,
the applicant and FmHA would have invested far too much time and money
to have the applicant determined not eligible. The 3 percent
contribution was increased to 5 percent by the Community Development
Act of 1992 for all projects whose members will receive benefits from
Low Income Housing Tax Credits. The regulation has already been changed
to reflect the increase in the equity contribution requirement.
3. Section 1944.211 (a)(5)
Comment: Two respondents expressed the opinion that applicants
should be required to furnish the 3 percent borrower contribution from
its own resources.
FmHA response: Currently, borrowers have no personal financial
obligation to serve as an impetus to seeing that the project operates
successfully. We agree that such an obligation will encourage continued
interest in overseeing the well-being of the project and it makes sense
from a business standpoint. Therefore, FmHA agrees that applicants
should furnish the 3 or 5 percent contribution from their own resources
and have changed this section to reflect that requirement.
4. Section 1944.211(a)(7)(i)
Comment: Several comments were received concerning the requirement
that the applicant provide sufficient cash to cover start-up costs and
that a list of such materials and equipment be provided. It was felt
that this was an attempt to disallow the use of letters of credit to
cover the O&M expenses.
FmHA response: Currently, regulations allow borrowers to provide a
letter of credit to cover the total amount needed for operating and
maintenance expenses. FmHA has experienced a reluctance on the part of
borrowers to draw on the letters of credit since doing so will incur
interest expenses for which they are liable. Thus, there have been many
instances where there were insufficient funds to cover needed start-up
costs. Requiring the borrower to provide the requirement in cash will
ensure the availability of adequate funds with which to cover these
expenses. The Housing Act of 1949, as amended, states that ``The
Secretary may require that the initial operating reserve under this
section may be in the form of an irrevocable letter of credit * * *''.
This language provides the Agency the option of whether to require
letters of credit or to require the initial O&M in cash. FmHA has
determined that more benefits will be derived by projects if cash is
furnished for the operating reserves and, for this reason, has decided
not to accept letters of credit.
5. Section 1944.212(b)
Comment: A number of comments were received concerning restricting
rehabilitation loans to no more than 5 percent of the loan for new
construction. Several of the respondents expressed their support for
placing this limit on rehabilitation loans. Also, a couple of
respondents suggested that FmHA eliminate purchase and rehabilitation
of historic buildings altogether. Several respondents did not favor
this proposal and misconstrued its intent as an attempt to eliminate
rehabilitation of historic buildings.
FmHA response: The cost for purchasing and rehabilitating existing
buildings has increased noticeably within the recent past and has, in
some cases, exceeded the amount needed for constructing new units. FmHA
feels it appropriate to establish a ceiling to ensure maximum use of
loan funds. The excess cost of rehabilitation would be better spent to
finance more units in other areas of need. Therefore, the Agency feels
that a limit should be placed on the amount of Government funds being
expended for rehabilitating historic buildings. While the Agency does
not wish to prohibit the purchase and rehabilitation of historic
buildings, it feels that a ceiling is needed to prevent unlimited funds
from being used for this purpose. The proposed regulation does not
prohibit the borrower from infusing additional cash from its or other
sources in order to fully fund the purchase and rehabilitation. FmHA's
first consideration must be to providing rental units to its
beneficiaries at the lowest cost to the tenants.
6. Section 1944.212(c)(1)
Comment: One respondent expressed an opinion that this section
limits the basis of FmHA's maximum loan being 97 percent of total
development cost or appraised value. Another respondent stated it does
not appear there is a specific provision to accomplish what is required
in this section. One respondent suggested adding clarification that
FmHA can lend the present market value of the site ``as improved'' and
that the cost of the improvements could not be released until all
improvements were in place. One respondent recommended the section be
revised to state the lower of the appraised value or purchase price
will be used to determine total development cost and the applicant's
initial investment. Another respondent recommended we restore the
original language of this section. One respondent agreed that loan
funds used to purchase land may not exceed the estimated market value
as established by an appraisal.
FmHA response: The only changes made to this section are the
reference to FmHA Instruction 1922-B and deletion of the words ``in
excess of estimated market value'' in the last sentence. These changes
do not alter how the loan is calculated. The purchase price of land is
not the basis for establishing the applicant's initial investment. The
FmHA loan is limited to the development cost or the security value of
the project, whichever is less; the applicant is responsible for the
equity contribution whether it is in the form of land, cash, or a
combination of both. After considering the comments, we feel that this
section is confusing as written since it should be addressing the
amount of loan funds which can be used to purchase land and should not
include discussion of how the purchase price affects the applicant's
initial investment. The last sentence has been removed.
7. Section 1944.212(c)(2)
Comment: One respondent suggested that the existing language be
restored to this section.
FmHA response: The first sentence of the existing paragraph was
removed because it already exists under Sec. 1944.213(c)(10).
8. Section 1944.212(c)(3)
Comment: One respondent voiced the opinion that the density
requirements referred to in Sec. 1944.215(a)(5) are not definitive.
Another respondent suggested that FmHA define excess land. Another
respondent felt that this section is in conflict with
Sec. 1944.215(a)(6) and should be deleted. One respondent agreed with
the section as long as consideration is given to local zoning
requirements.
FmHA response: FmHA feels that excess land is adequately defined in
this section and in Sec. 1944.215(a)(6). We do not agree that this
section conflicts with Sec. 1944.215(a)(6). Section 1944.215(a)(6)
states that local zoning ordinances and, in extreme cases, the site
size, shape, or condition will be the determining factors in arriving
at site density.
9. Section 1944.212(d)
Comment: There were a number of suggestions concerning the
establishment of a range of costs for offsite facilities. One
respondent recommended that all offsite costs be eliminated from the
loan. It was pointed out by several respondents that States have not
approved any off-site facility costs. It was also suggested that each
situation is unique and should be judged on its own merits and not be
compared with past performance. One respondent felt this would place an
undue burden on FmHA and that establishing a range would not prove
anything since the bottom line must be the actual ``as developed''
value of the site.
FmHA response: FmHA agrees that every situation has to be judged on
its own merit and that it would be impractical to try to establish a
range of costs for offsite facilities. The language has been changed to
delete this requirement.
10. Section 1944.212(g)
Comment: There was generally an expression of agreement with the
addition of blinds as an eligible loan purpose. One respondent,
however, suggested that we also include shades with this provision. One
respondent wanted to know if individual washer/dryer hookups could be
interpreted to mean ``laundry facility.'' Another respondent voiced an
opinion that washer/dryer hookups in addition to a central laundry
facility increases marketability of rental units.
FmHA response: FmHA has no objection to including shades in this
provision and has amended the language accordingly. Laundry facilities
are defined as the actual washers and dryers facilities available to
all of the tenants and not just washer and dryer hookups. Washers and
dryers owned by individual tenants are not available to all tenants and
cannot be considered as ``laundry facilities.'' FmHA stands by its
previous position regarding the prohibition of placing washers and
dryers in individual units when a central laundry facility is provided
unless it is customary for the area for the size of project and type of
housing involved. Washer and dryer hookups are an additional expense to
overall project costs and, in the majority of cases, are not used by
the tenants. Additionally, there have been problems with the hookups
leaking and causing water damage to the units.
11. Section 1944.212(i)
Comment: There were numerous objections to disallowing certain fees
when the borrowing entity will receive low income housing tax credits,
primarily because the end result will be an increase in the borrower's
contribution. Other respondents felt that if certain items were
required by FmHA, then those items should be funded. One respondent
suggested that FmHA automatically increase the equity requirement for
low income housing tax credit projects to 5 percent rather than to
eliminate certain fees and charges. One respondent suggested that the
intent be clarified to mean the legal fees associated with closing the
FmHA loan and not the interim lender loan. Another person suggested
that all non-low income housing tax credit projects receive an
additional 10 points in the rating criteria. One respondent felt that
this provision would reduce loan costs and thereby maximize the State's
funding allocation.
FmHA response: The Community Development Act of 1992 increased the
equity contribution to 5 percent for borrowers whose members will
receive benefits from Low Income Housing Tax Credits. The regulation
has already been changed to reflect this increase. The original
language pertaining to related costs has been restored. Legal fees
pertain to the costs associated with the FmHA loan closing only;
clarification has been added to the section. FmHA does not agree with
the suggestion to allow an additional 10 points for non-low income
housing tax credit projects. The purpose of the priority points is to
direct funding to the areas of greatest need and the lack of tax
credits is not an indication of need.
12. Section 1944.212(j)
Comment: There were several respondents who expressed opposition to
allowing payment for assistance to nonprofit groups because of the
inequity in handling profit vs. nonprofit applicants.
FmHA response: FmHA published this section to correct a
typographical error in the original section; however, the Agency feels
that the payment for technical assistance is appropriate for nonprofits
since they must rely on their own resources which, in some cases, are
slim or nonexistent.
13. Section 1944.213(b)(1)
Comment: One respondent understood this section to mean the
nonprofit organization may provide the initial operating capital and/or
relocation costs incurred and suggested that the section be revised to
include relocation costs in the loan.
FmHA response: This section states that the loan may provide for
the development cost or the security value of each project, whichever
is less, plus the 2 percent O&M and/or the relocation costs. This
provision allows for the inclusion of relocation costs in the loan.
14. Section 1944.213(b)(2)
Comment: While 3 respondents agreed with the proposed computation
of the loan amounts, numerous others disagreed. Most felt that the
Agency was attempting to increase the borrower's equity contribution.
FmHA response: FmHA has removed the examples from this section and,
instead, will provide instructions to its staff in how loans should be
calculated in a new Exhibit A-12. The Exhibit provides administrative
guidance only and is not being published with this document. A copy is
available in any FmHA office.
15. Section 1944.213(c)(10)
Comment: One respondent expressed an opinion that there should be
an exception to this provision which allows the person who has owned
land for a period of at least 3 years to recover costs associated with
the increase in value and betterment of the site. Another respondent
suggested the restriction be expanded to provide that there be no
common interest for at least 3 years and that the option be with the
owner of public record; an exception could be made for subsequent loans
on adjacent property.
FmHA response: FmHA does not agree with this suggestion.
Regulations, except in the case of a broadly-based nonprofit
organization, prohibit the use of loan funds to purchase land from the
applicant or a member of the applicant organization. In the case of a
nonprofit organization, the appraisal will determine the value which
can be included in the loan. We think the suggestion concerning common
interest has merit and have changed this section to add a 3-year
provision.
16. Section 1944.213(c)(12)
Comment: One respondent felt that this section is no longer needed
in light of the provisions of Sec. 1944.211(a)(7) (i) and (ii) which
would require the applicant to put up in cash the amount necessary for
the initial 2 percent O&M.
FmHA response: FmHA agrees with this comment and the section has
been deleted.
17. Section 1944.213(d)
Comment: A few respondents expressed their opinion that this
provision would be burdensome and time-consuming. One respondent
pointed out that the expense of a market study is always incurred prior
to the applicant's filing a preapplication. Another respondent pointed
out the language of this section does not allow for predevelopment
loans from nonprofit organizations as was originally intended.
FmHA response: Since most borrowers are familiar with the process
and are aware of what must be done during the preapplication and
application phase, obtaining written verification from FmHA should pose
no undue delay. OIG strongly recommended that FmHA be aware of the
applicant's intention to incur debts before they are actually incurred
to preclude the appearance of giving blanket approval for all such
expenses. We agree that the language does not allow for predevelopment
loans from nonprofit organizations and the language has been amended to
correct this omission. We have also exempted market studies from the
prior written approval requirement since they must be completed prior
to filing a preapplication.
18. Section 1944.213(e)(1)
Comment: Several persons objected to this section because of the
delay it would cause during the construction process. Some suggested
that FmHA require post-approval instead of pre-approval to avoid such
delays.
FmHA response: The Agency feels that obtaining pre-approval from
the District Office will not sufficiently hamper the construction
process if the contractor and borrower react in a timely manner. The
only two occurrences which will allow an increase in per unit cost is
design changes by FmHA or State or local jurisdictions or changes in
financing approved by FmHA. Neither of these events would be construed
as an emergency.
19. Section 1944.215(a)
Comment: Two respondents expressed agreement with this section.
Another respondent voiced an opinion that to require more expensive
building materials and, even though maintenance costs will be less, is
contradictory to cost containment goals.
FmHA response: The Agency has witnessed what happens when cheaper
building materials are used to initially control costs. The results
have been high maintenance costs over the life of the materials and the
ultimate replacement of the materials. While construction costs may be
lower using the cheaper building materials, these savings are more than
overshadowed by the high maintenance costs necessary to prolong the use
of the materials. FmHA strongly advocates the use of low maintenance
and long life materials in its construction.
20. Section 1944.215(a)(1)
Comment: There were several comments expressed about the costs
being ``locked in'' to either our cost tracking system or to the
Marshall & Swift estimates, thereby not allowing any inflation
increases. It was also noted that projects with abnormally high or low
costs should not be entered into the system and that only newer (one
year old) projects be tracked. It was felt that the borrower should not
be responsible for resolving differences between a proposed project's
costs and those costs in the FmHA tracking system or in the Marshall &
Swift estimates. Another respondent suggested that the tracking system
allow for a comparison of bedroom sizes rather than project to project
comparison. One respondent felt that the tracking system should provide
for a distinction between new construction and rehabilitation.
FmHA response: The new cost tracking system will allow FmHA to
track by line item the costs of construction. For instance, the final
estimated cost of concrete for a proposed project will be recorded in
the system at the time the loan is obligated. Once the project has been
built and the costs are certified (identity of interest projects), the
certified cost of concrete will also be recorded in the system and will
become the basis for establishing a benchmark on costs. This should
take into consideration the inflationary escalation of costs during the
construction period. Thereafter, the line item costs for each new
proposal will be compared with the amounts recorded in the tracking
system. Local FmHA offices will allow for future inflationary increases
just as they do now. Only the projects received and processed after the
tracking system comes on line will be entered. We intended that
significant differences between an applicant's cost estimates and the
estimates of our established tracking costs or Marshall & Swift be
resolved since FmHA will not arbitrarily accept any estimates which
appear out of line or unreasonable. We foresee the borrower's
responsibility for resolving the differences in cost as either
providing justification for the differences or taking whatever action
is required to ensure the best estimates are being considered in the
construction. This method of tracking construction costs will make no
distinction between numbers of bedrooms or new construction vs.
rehabilitation; costs will be tracked on a line item basis and not on a
project basis.
21. Section 1944.215(a)(2)
Comment: A few respondents suggested that FmHA establish timeframes
for District and State Offices to follow during preapplication and
application review processing. Another respondent suggested that the
AD-622 cover only the authorization to develop plans and specifications
and that the balance of the application not be pursued until receipt of
the plans and specifications and after the appraisal is completed. It
was felt that this would reduce the time between signing of the
construction documents and the start of construction.
FmHA response: From periodic assessments made of the multi-family
housing program by FmHA's National Office, it is apparent that the
field staff's time is being utilized to its fullest extent. The large
volume of preapplications being filed has placed a considerable burden
on the field, particularly when those preapplications which will not
continue to be processed because of their rating must still receive
some degree of attention. To place timeframes on the field for each
step of processing would be unrealistic since they would most likely be
impossible for the staff to meet. We do not agree that authorizing just
the completion of plans and specifications would reduce the time
between signing of the construction contract and the actual start of
construction, since there are many other items needed to complete the
application and these could not be addressed until we authorized the
applicant to proceed to a full application. The cost estimates should
be updated at the time the construction contract is signed so that the
most up-to-date estimates are obtained prior to approving the loan.
22. Section 1944.215(a)(3)
Only one comment was received and the respondent agreed with this
section.
23. Section 1944.215(a)(4)
Only one comment was received and the respondent agreed with this
section.
24. Section 1944.215(a)(5)
Comment: There were numerous objections to establishing a set
number of units per acre because of the size, shape, and condition of
sites.
FmHA response: FmHA feels that more diligent efforts could be
expended by applicants in locating more viable sites. Sites which have
sections unsuitable for building should be avoided. However, if a
situation exists where the only available site is of a size, shape, or
condition which makes a portion unsuitable for building and the only
alternative is to not provide units, then a request to the State Office
for an exception to this density requirement may be considered. Such
language has been added to the section.
25. Section 1944.215(a)(6)
Comment: Several respondents expressed the opinion that hiring
construction inspectors is unrealistic at a time when FmHA staff is
being reduced. They also pointed out that delay in obtaining timely
construction inspections by FmHA has been a problem and suggested
including language in the regulation that would require necessary
inspections within a reasonable timeframe.
FmHA response: The hiring of construction inspectors is a
suggestion which may or may not be possible to follow. If not, it may
be possible for States to contract for these services. The comment
about not having timely construction inspections by FmHA provides an
appropriate case-in-point for adequate inspection coverages. This
subject will be discussed at future training meetings with the field
staff. FmHA feels that the proposed language is appropriate as
proposed.
26. Section 1944.215(a)(7)
Comment: There were several comments that the restriction of
building design will result in all buildings being shaped like a box.
FmHA response: FmHA feels this is an overreaction and that this
section will not lead to the construction of boxes. We have observed,
in many States, how a simple yet attractive design is an asset to the
community. These types of simple designs do not deter potential tenants
from seeking residency. The Agency feels that the design of some of the
housing units now in existence have gone beyond what is necessary to
provide decent, safe, and sanitary living units. The Housing Act of
1949, as amended, specifies that ``no loan shall be made or insured * *
* unless the Secretary finds that the construction involved will be
undertaken in an economical manner and will not be of elaborate or
extravagant design or materials.''
27. Section 1944.215(a)(8)
Comment: Two respondents recommended against setting the building
roof slope limits proposed in this section, one because of the snow
loads in the northern States and the other because they could result in
a building which lacks interest.
FmHA response: FmHA agrees with the argument against setting the
lower slopes in cases where there are heavy snow loads. The wording has
been changed to allow the State Director to authorize a higher slope if
needed to accommodate severe weather conditions. The Agency disagrees
with the opinion that these slopes will result in a lack of building
interest.
28. Section 1944.215(a)(9)
Comment: Several respondents expressed agreement with this section.
Several others felt that the use of repetitive designs would result in
``cloned'' projects.
FmHA response: FmHA does not feel that the use of repeat designs
will have any detrimental effect on the aesthetic value of FmHA-
financed units. In fact, several States now require the use of repeat
designs without detrimental effects. The National Office assesses the
515 program in multiple States each year, which includes a visual
inspection of the rental stock. We have not found the use of repeat
designs to be offensive or boring in any State. FmHA feels that the
submission of new designs for all projects needlessly increases the
amount of Government funds needed since the amount of architectural
fees is based on the level of services provided. Repeat designs will
decrease the amount being paid for architectural fees since the use of
``shelf'' plans will reduce the detailed architectural services needed.
29. Section 1944.215(a)(10)
Comment: Several respondents stated that community room furniture
should be included as an eligible loan expense; one respondent
supported the inclusion of dining room furniture in congregate housing.
Another respondent supported the inclusion of community rooms in family
projects and garbage disposals. A few respondents suggested allowing
sliding glass doors where patios/balconies are permitted. One
respondent suggested adding whirlpools to developmentally disabled
housing. Two respondents supported the inclusion of bay/box/picture
windows. One respondent voiced support for prohibiting fire places,
garages and covered parking. Two respondents supported this section.
FmHA response: Community and congregate dining room furniture is
the responsibility of the borrower and its expense should be covered by
the initial O&M funds. Outdoor recreation facilities for family
projects are allowable loan expenses and are intended to substitute for
community room facilities allowed in elderly projects. The Agency
considers community rooms to be an essential part of the daily living
requirement for those elderly projects which can support the additional
expense of the facilities. The obvious reason for not allowing
community rooms in family projects is that family activities are not
necessarily curtailed by age or climate and they are more mobile than
elderly residents, which means their choice of entertainment can extend
beyond their living accommodations. FmHA does not feel that garbage
disposals are necessary and has recommended against financing them in
the past. In addition to the initial cost of the disposal units, too
often problems develop because of lack of care in what is processed
through them, resulting in additional expense of the repairs. FmHA does
not agree that sliding glass doors are necessary even when patios/
balconies are customary for the area. FmHA contends that if a
developmentally disabled person requires whirlpool therapy, then it
should fall within the responsibility of a professional to provide the
service at a therapist's facility. Some of the States which were
previously allowing bay/box/picture windows have discontinued this
practice in accordance with the efforts to contain costs, an action
which we support.
30. Section 1944.215(a)(11)
Comment: One respondent supported the inclusion of individual
patios for the elderly as a means for increasing socialization. Two
respondents supported washer and dryer hookups for all types of units.
FmHA response: FmHA views the community room as instrumental in
encouraging elderly tenant socialization. In a recent survey conducted
by the National Association of Home Builders, tenants were asked to
list amenities in order of their desirability. This survey showed that
balconies were ranked by the tenants at number 15 out of a list of 16
amenities. We place individual patios in the same category with
balconies. See discussion of washer and dryer hookups under
Sec. 1944.212(g), above.
31. Section 1944.215(a)(12)
Comment: One respondent voiced support for allowing outdoor
recreation for elderly projects for those occasions where there are
minor children in the unit and where grandchildren come to visit. There
was support expressed for the allowance for garbage disposals and
community rooms for family projects.
FmHA response: Playground equipment would either stand idle in the
case where there were no minors living with the elderly or would
attract children from outside the project. The noise generated as a
result of playgrounds would not be viewed as a welcome addition by some
of the elderly residents who enjoy peaceful surroundings. FmHA response
to community rooms for family projects and garbage disposals has
already been discussed under Sec. 1944.215(a)(10) above.
32. Section 1944.215(a)(13)
Comment: Several respondents objected to the number of parking
spaces for elderly since more persons now keep their cars for a longer
period of time, particularly since those persons reside in rural areas
with no other means of transportation. One respondent recommended that
spaces for visitors and health care workers not be included in the
calculation. One respondent suggested that this limit be recommended
and not mandated. One respondent recommended the limit be set at 1.5 to
2 for family and .5 to 1.25 for elderly; another respondent recommended
.75 to 1.25 for elderly. One respondent supported this section.
FmHA response: A 1990 congregate housing study revealed that only
21 percent of congregate tenants owned cars. The proposed allowance for
congregate parking spaces is based on that percentage. In order to
accommodate the additional cars owned by persons in elderly projects,
we have changed the language of this section to allow for additional
spaces for visitors and staff.
33. Section 1944.215(a)(14)
Comment: A number of respondents objected to establishing a range
of acceptable allowances for earthwork. A couple of respondents
mistakenly interpreted this section to mean that the allowance cover
the combination of landscaping and earthwork.
FmHA response: FmHA's cost tracking system will allow us to capture
landscaping and earthwork costs; therefore, the section has been
amended to delete the requirement that ranges be established.
34. Section 1944.215(a)(15)
Comment: One respondent recommended that congregate projects where
an expanded meal service is designed to provide meals to all of the
community's elderly citizen be exempted from the limitations of the
Manual of Acceptable Practices (MAP). The same respondent pointed out
that the MAP is a supplement to an obsolete minimum property standards.
Another respondent pointed out that the MAP is not available in any
FmHA office. One respondent agreed with this section.
FmHA response: The MAP is no longer in print. Guidance pertaining
to the size of these facilities can be found in Guide 2 of FmHA
Instruction 1924-A. This section has been changed to reflect the proper
reference.
35. Section 1944.215(b)(1)
Comment: Several respondents objected to this way of measuring
square footages. Two others objected to restricting congregate units to
110 percent of the minimum square footages since this dimension may not
allow sufficient square footages to meet the requirements of the
Americans with Disabilities Act. One respondent voiced the opinion that
setting the square foot limits will lead to a drop to the minimum
footages and adversely impact the rentability. One respondent
recommended a lower maximum square footage. One respondent recommended
eliminating the reference to ``related facilities'' since their
inclusion will distort the square footage of ``living area.''
FmHA response: The methodology described in this section for
calculating living area is consistent with common industry practices.
Congregate living units are not affected by the Americans with
Disabilities Act. We do not understand the concern that setting the
square foot limit will lead to a drop to the minimum footages since
these ranges have been in existence for some time and have not resulted
in an automatic drop in square feet. We see no reason to lower the
maximum square footage since the size of the unit can be controlled
within the allowable ranges. The section has been changed to eliminate
``related facilities'' from being included in the computation of living
area.
36. Section 1944.215(e)
Two comments were received and the respondents supported this
section.
37. Section 1944.215(w)(3)
Comment: A number of respondents objected to FmHA's requiring the
applicant to reveal the percentage of tax credits it will seek. Several
persons appeared to misinterpret the intent of the section. A few of
the respondents felt that FmHA is attempting to make the determination
of the number of tax credit units the project will receive. One
respondent suggested that the section be amended to state that the
``market study'' will be subject to further examination and not the
preapplication itself. One respondent points out that if the project is
requesting rental assistance, the affordability of basic rent is
irrelevant. One person recommended that the word ``percentage'' to
changed to ``number'' to avoid confusion. Several persons supported
this section.
FmHA response: FmHA regulations require that the Agency determine
whether a proposed project is feasible. In order for a project to be
feasible, there must be persons of sufficient incomes to support the
expenses and to amortize the loan. The market for 515 projects depends
on the existence of persons with a lower level of incomes in those
cases where tax credits are awarded to the borrower. Many market
analysts are still determining need based on incomes up to the moderate
level. This becomes an issue when there is not sufficient rent subsidy
for all units. In order to make a proper analysis of feasibility, we
must determine the level of incomes which will be required to support
the project. Even if the applicant requests 100 percent rental
assistance and there is sufficient subsidy to cover all of the units,
FmHA is not absolved of its responsibility of examining feasibility.
FmHA feels that it is imperative that we are aware of the number of tax
credit units anticipated so that the appropriate level of incomes can
be studied. In no way does FmHA intend to become involved in the
determination of the number of tax credits assigned to a project by the
State Agencies. We will, however, provide information to the State
Agencies as to the amount of financial assistance granted to the
borrower by FmHA. The word ``percentage'' has been changed to
``amount'' and the words ``percentage of units targeted for tax credit
eligible persons'' have been added.
38. Section 1944.231(a)(2)
Comment: A number of respondents supported this section with the
stipulation that no other preapplication be authorized until the second
market study has been completed and a determination made on the
original preapplication. Two respondents pointed out that the 45-day
period in which to respond to the applicant is not sufficient to
accomplish the necessary processing.
FmHA response: FmHA agrees that the preapplication hold its
position in the ranking and has amended the section to state that no
other preapplication will move ahead of the preapplication in question
until the feasibility issue has been resolved. The contracts will be
similar to those used by the Agency in obtaining appraisals in that the
State will let one contract under which the market studies will be
prepared by one or more market analysts. This will eliminate the need
for contracting for each individual study, thus saving processing time.
39. Section 1944.235(a)(1)
Comment: Two respondents suggested that closing instructions be
furnished to the borrower within a certain timeframe.
FmHA response: The issuance of the closing instructions involves
coordination and input from another Government Agency. While FmHA may
request more expeditious issuance of the closing instructions, it has
no control over when the instructions will be furnished. Additionally,
we have no way of knowing how the process is impacted by that Agency's
workload.
40. Section 1944.235(a)(2)
Comment: One respondent supported this section. Another respondent
stated that this section does not agree with the earlier requirement
concerning what amount needs to be furnished to cover the initial O&M
amount discussed in Sec. 1944.211(a)(7)(i).
FmHA response: This issue was discussed under
Sec. 1944.211(a)(7)(i), above.
41. Section 1944.235(b)(3)
Comment: One respondent suggested that an appeal process be
included for co-general partners. One respondent suggested that another
provision be added to allow transfer of an obligation when the
applicant is unable to continue for legitimate reasons and the
transferee is eligible for 515 assistance. Another respondent suggested
consideration be given to who is responsible for the default so that a
co-general partner who is innocent of the default will not be penalized
by being denied access to the program for 5 years.
FmHA response: We interpret the first and last respondent comments
to pertain to the same concern. FmHA does not agree that a co-general
partner be exempt from these provisions since the loan was made to the
entity and it is up to the entity to maintain its financial integrity.
The regulations already contain provisions for handling cases where the
entity chooses to transfer an obligation without monetary default.
There would be no penalty in that case.
42. Section 1944.235(c)(1)
Comment: One respondent suggests that the language be changed to
allow interim lenders who are now making loans to only FmHA-financed
projects. Another suggested that the language be changed to state
``other than identity of interest companies.'' Another respondent felt
that the record of providing financing to non-FmHA projects be on a
national basis and not limited to the State in which a particular loan
is made. A respondent suggested that the language be changed to state
the lender be ``authorized'' to do business in a State since not all
States require the lender to be licensed. Two respondents suggested
that FmHA provide the interim financing to eliminate the expense
connected with outside interim financing. Two other respondents voiced
their objection to this section. Two respondents supported this
section.
FmHA response: FmHA feels strongly that the borrower not provide
its own interim financing. The interim lender is responsible for
inspecting each stage of construction. If borrowers are allowed to
provide their own interim financing they, in essence, would also be
allowed to inspect their own construction. FmHA feels that inspections
by arms-length third parties will provide a more objective assessment
of construction standards and quality. The language has been changed to
state that the lender be ``authorized'' to do business in a State
rather than ``licensed.'' As long as interim financing can be secured
at reasonable rates, fees, and terms, FmHA does not feel that the
wholesale use of Government funds for interim financing is in keeping
with the intent that local lenders be given the opportunity of
furnishing the interim financing.
43. Section 1944.236
Comment: Two respondents objected to nonprofit borrowers being able
to use an attorney who is a member of their organization while limited
profit borrowers are prohibited from doing the same.
FmHA response: The only change being made to this section is to
correspond to a recent wording change in FmHA's closing regulation. The
use of member attorneys by nonprofit groups has been allowed by the
regulation for some time. FmHA does not consider the relationship
between a nonprofit borrower and its attorney in any way resembles the
relationship between a profit-motivated borrower and its attorney. The
nonprofit attorney has no financial interest in the nonprofit whereas
the reverse can be true of the attorney who is a member of the limited
profit.
44. Section 1944.237(a)
Comment: One respondent suggested that this section be amended to
make clear that subsequent loans to existing borrowers for
rehabilitation do not have to go through the preapplication process.
Another respondent felt that this will adversely affect developers who
acquired land for a future second phase. Another respondent recommended
that this section show what types of paperwork are needed for a
subsequent loan or that the information be contained in an exhibit to
the regulation. Two respondents expressed their opinion that the
language which states that subsequent loans made on or after December
15, 1989, cannot be prepaid is contrary to prior interpretations by the
National Office. Another person suggested that this section be revised
to permit the addition of office, laundry, maintenance, or other
community space not be subject to rating and ranking. One respondent
agreed with this section.
FmHA response: This section states that subsequent loans to develop
additional units must be rated and ranked. All other subsequent loans
which do not fall within this definition are excluded, including
rehabilitation of existing FmHA-financed units. It was always FmHA's
intention that subsequent loans to develop additional units be subject
to the rating system; this section merely clarifies that intention.
FmHA agrees that some guidance be added to the regulation which better
defines what types of paperwork are required for subsequent loans. The
types of paperwork needed for subsequent loans has been added to the
regulation as Exhibit A-14. Prepayment is covered by proposed changes
now being incorporated in FmHA regulations. Office, laundry,
maintenance, and other community space facilities are not considered
living units and do not fall under this definition.
45. Exhibit A

Paragraph IV.B.6

Comment: Two respondents expressed their opinion that no new AD-622
be issued until the market question is resolved.
FmHA response: This was discussed under section 1944.231(a) above.
46. Exhibit A-2
Comment: One respondent felt that a new column ``housing
condition'' be added to this exhibit.
FmHA response: The respondent did not make known whether the
reference to housing condition refers to the overall condition or to
the interior condition of the units. If the latter, we have
deliberately not required this type of information since it would be
almost impossible for a market analyst to inspect the inside of the
units. In the case of the overall exterior condition of the property,
FmHA feels this analysis is subject to the personal feelings of the
analyst and would not be based on any uniform means for ranking the
physical condition. FmHA does require the analyst to give an opinion as
to the upkeep of the existing stock in accordance with Exhibit A-8,
``Outline of Professional Market Study.''
47. Exhibit A-7

Paragraph I.A

Comment: There were many objections raised to this section that
requires an audited financial statement. It was pointed out that, even
if individual financial statements could be audited, the cost for
providing the original and updates during the processing period would
be prohibitive. These same individuals objected to providing a copy of
their prior year income tax return because it is deemed an invasion of
privacy. One respondent pointed out the hardship this would create for
nonprofit applicants and proposed that they be able to provide their
most recent audited statement. One respondent supported this section
but suggested that ``current'' be defined as the end of the company's
last fiscal year and that updates be unaudited. One respondent
suggested that instead of requiring audited financial statements, a
good review of financial statements by FmHA personnel would ensure
financial security. Several persons pointed out the fact that most
applicants are newly established organizations which have no financial
record to audit. One respondent representing a Certified Public
Accounting firm stated that it is often impracticable to conduct an
examination of personal financial records in accordance with generally
accepted accounting principles and to express an unqualified opinion.
That respondent recommended the section be changed to require that the
personal financial statements either be compiled or reviewed and stated
that a detailed and complete underwriting of creditworthiness can be
performed on compiled or reviewed personal financial statements that
are comprehensively prepared. Two respondents supported this section.
FmHA response: In light of the difficulty in obtaining audited
financial statements of individuals, FmHA will continue with the
requirements currently in existence and has eliminated the word
``audited'' from this section. The Agency also feels that a proper
analysis of a financial statement will provide a better understanding
of an applicant's creditworthiness than would an individual's income
tax statement. FmHA maintains the position that a financial statement
not be more than 6 months old when the preapplication is filed.
48. Exhibit A-7

Paragraph I.H

Respondents agreed with this section.
49. Exhibit A-7

Paragraph II.A

Comment: One respondent recommended that FmHA establish a
percentage of elderly homeowners that could be considered as potential
tenants. Two respondents disagreed with the use of a checklist in
evaluating market studies. A few respondents disagreed with limiting
the area of consideration to 20 percent of the substandard rental
units. Two respondents objected to the use of professional market
studies in the analysis of need and suggested that personal contact
with possible tenants, talking with other apartment owners, or
conducting a newspaper questionnaire would provide a more credible
means for determining need. One respondent suggested that we include a
definition of ``substandard units.'' Also, that respondent pointed out
that the same persons who reside in ``overcrowded'' units are being
doublecounted, first from the substandard category and second from the
new households category. One respondent agreed with this section.
FmHA response: FmHA does not agree that elderly homeowners should
be considered in the need for units. That is not to say these elderly
homeowners cannot live in the FmHA-financed unit. We do not feel that
the general market can absorb the sale of multiple homes at one time.
Exhibit A-8 does state that if the economic conditions reflect normal
selling times for homes in the market area, then elderly homeowners may
be considered as a secondary market. FmHA has had in use a checklist
for analyzing market studies for some time; this regulation now
requires its use to enhance internal control over administration of the
program. The purpose of the checklist is to enable the reviewer to
determine if all segments of Exhibit A-8 have been addressed by the
study.
Market demand and feasibility is created by several factors. One of
those factors is the demand created by persons who are living in
substandard units and seeking decent, safe and sanitary housing which
can be financed by FmHA. Currently, there is no limit on the percentage
of substandard units which an analyst can project in determining market
demand. For example, if there are 100 units of substandard housing in a
given market, analysts can and have stated that 80, or any other
arbitrary, percentage of the families living in these units create a
portion of the demand. We have found that the percentage of units
projected as a result of substandard housing varies significantly from
study to study. In addition, without any boundaries, it provides the
market analyst with a contingency to justify demand. The 20 percent
limitation was offered based upon previous experience with market
analysis. Without a threshold, FmHA is defenseless in challenging a
professional market analyst. It is reasonable to set a limit since
there is no objective methodology in which to actually determine how
many people residing in substandard units will move to a newly
completed Section 515 complex. The Agency will, however, allow a higher
number if the analyst can clearly document that the occupants of more
than 20 percent of the occupied substandard rental units are willing
and able to relocate to the proposed housing. The documentation will be
in the form of signed survey sheets prepared expressly to capture such
information.
The use of market studies does not prohibit anyone from doing more
to assess the market, such as making local contacts. Placing a
questionnaire in a newspaper does not ensure the return of any
responses. A definition of substandard has been added.
FmHA feels it necessary to standardize the way need is calculated
in order to provide some uniformity in market studies. The revised
Exhibit A-8 outlines the sources of demand which will be accepted by
the Agency. There was a discrepancy between this section and the
Exhibit A-8 language in delineating sources of need. This section of
the regulation has been changed to agree with the language of Exhibit
A-8.

Paragraph II.F

Comment: One respondent suggested that the tax credit income
information be provided with the application and not with the
preapplication.
FmHA response: Feasibility must be determined during the
preapplication stage and the ranges of local incomes must be
established at that time. For this reason, the Agency cannot change
this requirement. Other discussions concerning tax credit incomes is
found under Sec. 1944.215(w)(3).
50. Exhibit A-7

Paragraph III.C

Comment: One respondent suggested adding a provision that the
option to buy be with the current owner of public record.
FmHA response: We agree with this suggestion and have added that
provision.
51. Exhibit A-7

Paragraph IV.F

Comment: One respondent objected to applicants who publicly bid
their projects having to submit a Form FmHA 1924-13. One respondent
felt that requesting this much detail information at the preapplication
stage would not prove useful since cost estimates change markedly
between preapplication and application. One respondent supported this
section.
FmHA response: FmHA's new cost tracking system will track the trade
item costs of each project. The Form FmHA 1924-13 provides a breakdown
of trade item costs which will readily facilitate the use of the cost
tracking system. Otherwise, the value of the tracking system will be
diminished, thus not allowing the Agency to establish cost data
comparisons. Persons submitting bids must have prepared extensive cost
estimates in preparing the bid. Therefore, we do not feel this will
cause an undue burden on the contractor.
52. Exhibit A-8
Comment: One respondent suggested that a definition of substandard
be included. One respondent asked if FmHA intends to prepare and
distribute special tabulations of substandard units by its definition,
by occupancy, tenure, income, and household size. Several respondents
expressed objection to FmHA not considering elderly homeowners as a
basis of need. Several respondents objected to the 20 percent ceiling
on substandard units which FmHA will accept in the determination of
need. One respondent raised the question of who is responsible for
determining if the analyst is qualified and what the qualifications are
for preparing a study. That person also wanted to know if the study is
incomplete, is the preapplication determined incomplete and returned to
the applicant. Two respondents felt that requiring the market analyst
to make an on-site visit was a significant improvement in this exhibit.
One respondent suggested that the exhibit be used as a guide only and
not mandated. One respondent asked if FmHA intended to exclude
rentoverburden households from rentup demand estimates. That respondent
also expressed an opinion that the listing of small businesses in the
Site section of the exhibit would be construed to mean those businesses
must be available in order for a community to be considered eligible
for FmHA financing. Other comments and suggestions offered on the
technical content of the exhibit are too numerous to list here.
FmHA response: A definition for substandard has been included. HUD
furnished FmHA with information pertaining to occupancy in substandard
units based on the 1980 census. That information was disseminated to
our field staff for distribution to market analysts. We are in the
process of coordinating with HUD to obtain this same data when it
becomes available. (See discussion of elderly homeowners under Exhibit
A-7, Paragraph II.A. and a discussion of substandard housing under
Exhibit A-7, Paragraph II.A). The qualifications of a market analyst
and the responsibility for determining whether an analyst is qualified
are iterated in Exhibit A-7 of this instruction. If a market study is
incomplete, the applicant may furnish additional information to
complement the market study without the necessity of returning the
entire preapplication. This will inevitably delay the processing of the
preapplication. The requirement that a market analyst visit the site of
the proposed project was not introduced with this revision; it has
always been a requirement. The purpose of the exhibit is to require
enough information on which a feasibility decision can be based and to
establish uniformity in the content of studies. Prior to FmHA issuing
the exhibit, the market studies varied greatly and all did not contain
the most basic types of information. We have seen a marked improvement
in the studies because of the issuance of the exhibit. While FmHA
originally allowed applicants to consider the exhibit as a guideline,
we did not feel it prudent to continue this practice. The exhibit is,
therefore, required in order for the study to be acceptable to the
Agency; market studies which do not contain Exhibit A-8 requirements
will not be acceptable. We understand that the HUD information on
rentoverburdened households is not yet available. In the interim,
language has been added to the exhibit which invites the analyst to
include this type of information where available. While this exhibit is
not the proper vehicle for establishing policies concerning required
community services and facilities, the Site section has been reworded
to state that the businesses listed are an example of the types of
business which may be located in the community.
Many of the proposed changes are based on comments and
recommendations submitted from market analysts over the past two years.
Market analysts have expressed differing opinions concerning the
content of this exhibit. We have considered all of these differing
opinions and have amended the exhibit to include what we consider a
rational and understandable basis for a market study. We have attempted
to correct the original exhibit requirements where it lacked sufficient
statistics to make a determination for elderly and congregate projects.
Other changes made to the exhibit will standardize the types of
information market studies will contain and provide the uniformity
heretofore missing. We have considered all comments and the exhibit now
reflects those changes which FmHA has determined appropriate for
inclusion.
53. Exhibit A-9

Paragraph 2

Comment: One respondent suggested a rewrite of this section to
include other items of construction.
FmHA response: This section has been reworded to further define
what types of information on related costs must be submitted in
addition the Form FmHA 1924-13.

Paragraph 5

Comment: A few respondents recommended that the market information
be updated after 12 months rather than requiring a new study.
FmHA response: FmHA feels this is reasonable and has changed the
wording to reflect an update rather than a new study.
54. Exhibit A-10 is Amended to Include Language Implementing
Section 515(x)(2) of the Housing Act of 1949, as Amended, to Provide
for Cooperation between FmHA and State Agencies in Developing a
Comprehensive Housing Affordability Strategy (CHAS)
Other comments: Other comments were received which were general in
nature and did not pertain to any specific issues. These comments have
not been addressed by FmHA.

List of Subjects

7 CFR Part 1924

Agriculture, Construction management, Construction and repair,
Energy conservation, Housing, Loan programs--Agriculture, Low and
moderate income housing.

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
requirements.

7 CFR Part 1944

Administrative practice and procedure, Aged, Handicapped, Loan
programs--Housing and community development, Low- and moderate-income
housing--Rental, Mortgages, Nonprofit organizations, Rent subsidies,
Rural housing.

Accordingly, parts 1924, 1930, and 1944, chapter XVIII, title 7,
Code of Federal Regulations are amended as follows:

PART 1924--CONSTRUCTION AND REPAIR

1. The authority citation for part 1924 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--Planning and Performing Construction and Other
Development

2. Section 1924.4 is amended by redesignating paragraphs (i)(4)
through (i)(7) as (i)(5) through (i)(8), respectively, and by adding
paragraphs (i)(4) and (i)(9) to read as follows:

Sec. 1924.4 Definitions.

* * * * *
(i) * * *
(4) Between the spouse, significant other, relatives, and step-
relatives of the principal owners of the party of the first part and
its management, such as Grandmother, Aunt, Daughter, Granddaughter,
Grandfather, Uncle, Son, Grandson, Mother, Sister, Niece, Cousin,
Father, Brother, Nephew;
* * * * *
(9) An identity of interest will also exist when another party can
significantly influence the management or operating policies of the
transacting parties or if it has an ownership interest in one of the
transacting parties and can significantly influence the other to an
extent that one or more of the transacting parties might be prevented
from fully pursuing its own separate interests.
* * * * *
3. Section 1924.13 is amended by revising paragraphs (a)(3),
(e)(1)(iii)(B)(2), (e)(1)(iv), (e)(1)(v), (e)(1)(vii)(B)(1),
(e)(2)(i)(B), (e)(2)(i)(G), (e)(2)(i)(H), (e)(2)(ii)(C),
(e)(2)(iii)(A), (e)(2)(iv), (e)(2)(v), and (e)(2)(viii) to read as
follows:

Sec. 1924.13 Supplemental requirements for more complex construction.

* * * * *
(a) * * *
(3) Architectural fees. Fees for architectural services shall not
exceed the fee ordinarily charged by the profession for similar work
when FmHA financing is not involved. The fee should cover only the
architectural services rendered by the architect. The reduction or
elimination of any services described in paragraph (a)(5) of this
section shall be directly reflected in the fee. Fees for special
services rendered by the architects, such as the packaging of the loan
application or additional nonarchitectural services, will not be
authorized to be paid with loan funds.
* * * * *
(e) * * *
(1) * * *
(iii) * * *
(B) * * *
(2) A current, dated and signed financial statement of the
contractor's operations indicating the payment status of accounts and
any contingent liabilities that may exist. FmHA personnel will be
responsible for analyzing the financial statement as to the sufficiency
of the contractor's financial capability to carry out construction. The
financial strength must demonstrate the ability of the contractor to
pay all bills prior to receiving periodic draws of funds from the
lender.
* * * * *
(iv) Contract cost breakdown. In any case where the loan approval
official feels it appropriate, and prior to the award or approval of
any contract in which there is an identity of interest as defined in
Sec. 1924.4 (i) of this subpart, the contractor and any subcontractor,
material supplier or equipment lessor sharing an identity of interest
must provide the applicant and FmHA with a trade-item cost breakdown of
the proposed contract amount for evaluation. The cost of any surety as
required by Sec. 1944.222 (h) and (i) of subpart E of part 1944 of this
chapter and Sec. 1924.6 (a)(3) of this subpart, or cost certification
as required by paragraph (e)(1)(v) of this section, will be included in
the proposed contract amount and shown under General Requirements on
Form FmHA 1924-13, which is available in all FmHA offices. FmHA
personnel will be responsible for reviewing the estimates on Form FmHA
1924-13 to determine if the dollar amounts total correctly, to assure
that costs are categorized under their appropriate columns, and to
confirm that the estimated costs for all line items are reasonable and
customary for the State.
(v) Cost certification. Whenever the State Director determines it
appropriate, and in all situations where there is an identity of
interest as defined in Sec. 1924.4 (i) of this subpart, the borrower,
contractor and any subcontractor, material supplier, or equipment
lessor having an identity of interest must each provide certification
using Form FmHA 1924-13 as to the actual cost of the work performed in
connection with the construction contract. The construction costs, as
reported on Form FmHA 1924-13, must also be audited, in accordance with
Government Auditing Standards, by a CPA, or LPA licensed on or before
December 31, 1970. In addition, certain agreed upon procedures
(available in any FmHA office) will be performed in accordance with
Attestation Standards. In some cases, FmHA will contract directly with
a CPA or LPA for the cost certification. In that event, documentation
necessary to have the costs of construction certified by an FmHA
contractor that they were the actual costs of the work performed, as
reported on Form FmHA 1924-13, will be provided. Funds which were
included in the loan for cost certification and which are ultimately
not needed because FmHA contracts for the cost certification will be
returned on the loan. FmHA personnel will utilize Exhibit M of this
subpart (available in any FmHA office) and Form FmHA 1924-26, ``Cost
Certification Worksheet,'' to assist in the evaluation of the cost
certification process.
(A) Prior to the start of construction, the borrower, contractor
and any subcontractor, material supplier, or equipment lessor sharing
an identity of interest must submit, to the CPA or LPA, the accounting
system that the borrower, contractor, subcontractor, material supplier
or equipment lessor and/or the CPA or LPA proposes to set up and use in
maintaining a running record of the actual cost. In order to be
acceptable, the borrower must provide a written assertion that it has
an accounting system that is suitably designed to provide for a trade-
item basis comparison of the actual cost as compared to the estimated
cost submitted on Form FmHA 1924-13. Costs pertaining to a specific
line item will be set up in the accounting system for that particular
account. For instance, only costs of materials, supplies, equipment,
and labor associated with concrete will be shown in the concrete
account. The accounting system must also restrict costs to those
pertaining to a specific project so that costs from multiple projects
will not be co-mingled. The independent CPA or LPA shall report on the
borrower's assertion in accordance with the Standards for Attestation
Engagements of the American Institute of Certified Public Accountants
(AICPA). The borrower's and the CPA or LPA's reports on the accounting
system shall be provided to FmHA by the borrower.
(B) Prior to final payment to anyone required to cost certify, a
trade-item breakdown showing the actual cost compared to the estimated
cost must be provided to the owner and FmHA. Form FmHA 1924-13 is the
form of comparative breakdown that must be used, and contains the
certifications required of the applicant and contractor prior to final
payment. The amounts for builder's general overhead, builder's profit,
and general requirements, respectively, shall not exceed the amounts
represented on the estimate of cost breakdown provided in accordance
with paragraph (e)(1)(iv) of this section for any contractor,
subcontractor, material supplier, or equipment lessor having or sharing
an identity of interest with the borrower. The amounts for general
overhead, builder's profit, and general requirements must be
established prior to FmHA approving the construction contract and will
not be changed during the course of construction. This applies to all
contractors, subcontractors, material suppliers, or equipment lessors
having or sharing an identity of interest with the applicant. Contract
change orders will be processed to adjust the contract amount downward
prior to the final payment to the contractor, if necessary, to assure
that the amounts shown in the certificate of actual costs do not exceed
the amounts represented in the contract cost breakdown. Reduction in
the builder's profit, and general overhead if needed, will
counterbalance any increase reflected in the contract costs. Any funds
remaining as a result of hard cost savings will be applied to the
account as an extra payment or used for eligible loan purposes approved
by FmHA as long as the improvements are genuinely needed and will
enhance marketability of the project. All increases or decreases of 15
percent or more in line item costs will require documentation as to the
reason for the increases and/or decreases. The State Director may
require documentation for increases and/or decreases of less than 15
percent, if he/she determines it necessary. This information will be
required with the cost certification.
(C) The CPA or LPA audit, performed in accordance with Government
Auditing Standards, will include such tests of the accounting records
and such other auditing procedures of the borrower and the contractor
(and any subcontractor, material supplier or equipment lessor sharing
an identity of interest) concerning the work performed, services
rendered, and materials supplied in accordance with the construction
contract he/she considers necessary to express an opinion on the
construction costs as reported on Form FmHA 1924-13. The CPA or LPA
shall also perform the additional agreed upon procedures specified by
FmHA (available in any FmHA office), performed in accordance with
Attestation Standards, for the applicant and the contractor (and any
subcontractor, material supplier, or equipment lessor sharing an
identity of interest) concerning the work performed, services rendered,
and materials supplied in accordance with the construction contract.
(D) Upon completion of construction and prior to final payment, the
CPA or LPA will provide an opinion concerning whether the construction
costs, as reported on Form FmHA 1924-13, present fairly the costs of
construction in conformity with eligible construction costs as
prescribed in FmHA regulations.
(E) In some cases, cost certification will be obtained by FmHA
through direct contract with the CPA or LPA. The borrower and his/her
CPA or LPA will cooperate fully with the contract CPA or LPA by
providing all documentation necessary to conduct the certification.
FmHA reserves the right to determine, upon receipt of the certified
Form FmHA 1924-13 and the auditor's report, whether they are
satisfactory to FmHA. If not satisfactory to FmHA, the borrower will be
responsible for providing additional information.
(F) There will exist no business relationship between the CPA or
LPA and the borrower except for the performance of the examination of
the cost certification, accounting systems work, and tax preparation.
Any CPA or LPA who acts as the borrower's accountant (performing manual
or automated bookkeeping services or maintains the official accounting
records) will not be the same CPA or LPA who cost certifies the
project.
(G) Forms FmHA 1944-30, ``Identity of Interest (IOI) Disclosure
Certificate'' and FmHA 1944-31, ``Identity of Interest (IOI)
Qualification Form,'' provide written notification to the borrower that
willful and intentional falsification of cost certification documents
will result in debarment of all violators in accordance with the
provisions of FmHA Instruction 1940-M (available in any FmHA office).
These forms require the disclosure of all identities of interest
associated with project construction, certify the entity's ability to
provide the contracted service, and cite the penalties for failure to
disclose or falsify such certification. Each applicant/borrower will be
required to complete and sign the forms (available in any FmHA office).
(H) Subcontracting development work.
(1) Contractors will not be allowed to obtain a profit and overhead
unless they are performing actual construction. ``Actual construction''
means ``work'' as defined in American Institute of Architects (AIA)
documents: ``* * * labor, materials, equipment, and services provided
by the contractor to fulfill the contractor's obligations.'' Under this
definition, contractors who choose to subcontract out construction of
the project to another contractor will not obtain a builder's fee
(general overhead and profit) when:
(i) More than 50 percent of the contract sum in the construction
contract is subcontracted to one subcontractor, material supplier, or
equipment lessor, and/or
(ii) Seventy-five percent or more with three or fewer
subcontractors, material suppliers and/or equipment lessors.
(2) Note: If two or more subcontractors have common ownership, they
are considered as one subcontractor.
(3) How to apply rule:
(i) The 50 percent rule will apply when division of the amount of
the largest subcontract by the contract sum of the construction
contract results in more than 50 percent.
(ii) The 75 percent rule will apply when division of the sum of the
amounts of the three largest subcontracts by the contract sum of the
construction contract results in 75 percent or more.
(I) Qualified contracting entities. Contractors, subcontractors,
material suppliers, and any other individual or organization sharing an
identity of interest and providing materials or services for the
project must certify that it is a viable, ongoing trade or business
qualified and properly licensed to undertake the work for which it
intends to contract. Form FmHA 1944-31 will be prepared and executed by
the contracting entities. The form provides notification to the
entities of the penalty, under law, for erroneously certifying to the
statements contained therein. Debarment actions will be instituted
against entities who fail to disclose an identity of interest in
accordance with the provisions of FmHA Instruction 1940-M (available in
any FmHA office).
* * * * *
(vii) * * *
(B) * * *
(1) If, after a full review of the case documents by the
appropriate members of the State Office staff, the State Director
determines that the requirements have been met and the costs are
reasonable, an exception to competitive bidding may be granted. Written
documentation of the State Office review results will be placed in the
application file.
* * * * *
(2) * * *
(i) * * *
(B) Dated and signed financial statements on the owner-builder's
operation (including balance sheets and statements of income and
expense) from current and prior years indicating the payment status of
the owner-builder's accounts and any contingent liabilities that may
exist. FmHA personnel will be responsible for analyzing the financial
statement as to the sufficiency of the owner-builder's financial
capability to carry out construction. The financial strength must
demonstrate the ability of the owner-builder to pay all bills prior to
receiving periodic draws of funds from the lender.
* * * * *
(G) A current, dated, and signed trade-item cost breakdown of the
estimated total development cost of the project which has been prepared
by the applicant/owner-builder. Form FmHA 1924-13 will be used for this
purpose. If cost certification services are required by FmHA, the cost
of such services may be included in the total development cost of the
project. Any subcontractor, material supplier, or equipment lessor
sharing an identity of interest with the applicant/owner-builder as
defined in Sec. 1924.4(i) of this subpart must also provide a trade-
item cost breakdown of the proposed amount.
(H) Prior to the start of construction, the owner-builder and any
subcontractor, material supplier, or equipment lessor sharing an
identity of interest must submit, to the CPA or LPA, the accounting
system that the owner-builder, subcontractor, material supplier or
equipment lessor and/or the CPA or LPA proposes to set up and use in
maintaining a running record of the actual cost. In order to be
acceptable, the owner-builder must provide a written assertion that it
has an accounting system that is suitably designed to provide for a
trade-item basis comparison of the actual cost as compared to the
estimated cost submitted on Form FmHA 1924-13. Costs pertaining to a
specific line item will be set up in the accounting system for that
particular account. For instance, only costs of materials, supplies,
equipment, and labor associated with concrete will be shown in the
concrete account. The accounting system must also restrict costs to
those pertaining to a specific project so that costs from multiple
projects will not be co-mingled. The independent CPA or LPA shall
report on the owner-builder's assertion in accordance with the
Standards for Attestation Engagements of the AICPA. The owner-builder's
and the CPA or LPA's reports on the accounting system shall be provided
to FmHA by the owner-builder.
* * * * *
(ii) * * *
(C) The total development cost of the project does not exceed that
which is typical for similar type projects in the area. The total
development cost recognized by FmHA for each individual case will be
determined by the MFH Coordinator with the advice of the State
Architect.
* * * * *
(iii) * * *
(A) If, after a full review of the case documents by the
appropriate members of the State Office staff, the State Director
determines that the requirements have been met and the construction
cost is reasonable, an exception to competitive bidding may be granted.
Written documentation of the State Office review results will be placed
in the application file.
* * * * *
(iv) The development cost of the project may include a typical
allowance for general overhead, general requirements and a builder's
profit. These amounts may be determined by local investigation and also
from HUD data for the area. The applicant/owner-builder and any
subcontractors, material suppliers and equipment lessors having or
sharing an identity of interest with the applicant/owner-builder may
not be permitted a builder's profit, general overhead, and general
requirements which exceed the amounts represented on their cost
breakdown.
(v) Under no circumstances will loan funds be used to pay the
owner/builder or its stockholders, members, directors or officers,
directly or indirectly, any profits from the construction of the
project except a typical builder's fee for performing the services that
would normally be performed by a general contractor under the contract
method of construction. Discounts and rebates given the owner-builder
in advance must be deducted before the invoices are paid. If discounts
or rebates are given after the invoices are paid, the funds must be
returned to the supervised bank account or applied on the interim
construction loan, as appropriate. Under no circumstances will the
dollar amount be placed in the reserve account.
* * * * *
(viii) The applicant/owner-builder and any subcontractor, material
supplier, or equipment lessor sharing an identity of interest as
defined in Sec. 1924.4(i) of this subpart must each provide
certification as to the actual cost of the work performed in connection
with the construction of the project on Form FmHA 1924-13 prior to
final payment. The construction costs, as reported on Form FmHA 1924-
13, must be audited by a CPA, or LPA licensed on or before December 31,
1970, in accordance with Government Auditing Standards, and certain
agreed upon procedures (available in any FmHA office) performed in
accordance with Attestation Standards. In some cases, FmHA will
contract directly with a CPA or LPA for the cost certification. In that
event, documentation necessary to have the costs of construction
certified by an FmHA contractor that they were the actual costs of the
work performed, as reported on Form FmHA 1924-13, will be provided.
Funds which were included in the loan for cost certification and which
are ultimately not needed because FmHA contracts for the cost
certification will be returned on the loan.
(A) The CPA or LPA's audit, performed in accordance with Government
Auditing Standards, will include such tests of the accounting records
and such other auditing procedures of the applicant/owner-builder (and
any subcontractor, material supplier, or equipment lessor sharing an
identity of interest) concerning the work performed, services rendered,
and materials supplied in connection with the construction of the
project he/she considers necessary to express an opinion on the
construction costs as reported on Form FmHA 1924-13. Upon completion of
construction and prior to final payment, the CPA or LPA will provide an
opinion as to whether the construction costs as reported on Form FmHA
1924-13 present fairly the costs of construction in conformity with
eligible construction costs as prescribed in FmHA regulations. FmHA
reserves the right to determine, upon receipt of the certified Form
FmHA 1924-13 and the auditor's report, whether they are satisfactory to
FmHA. At a minimum, the CPA or LPA shall also perform any additional
agreed upon procedures (available in any FmHA office) specified by
FmHA, performed in accordance with Attestation Standards, of the owner-
builder (and any subcontractor, material supplier, or equipment lessor
sharing an identity of interest) concerning the work performed,
services rendered, and materials supplied in connection with the
construction. There will exist no business relationship between the CPA
or LPA and the borrower except for the performance of the examination
of the cost certification, accounting systems work, and tax
preparation. Any CPA or LPA who acts as the borrower's accountant
(performing manual or automated bookkeeping services or maintains the
official accounting records) will not be the same CPA or LPA who cost
certifies the project.
(B) Prior to final payment to anyone required to cost certify, FmHA
must be provided with a certification and a trade-item breakdown
showing the actual cost compared to the estimated cost furnished in
accordance with paragraph (e)(2)(i)(G) of this section. Form FmHA 1924-
13 is the form of comparative breakdown that must be used, and contains
the certification required of the applicant/owner-builder prior to
final payment. The amounts for builder's general overhead, general
requirements, and builder's profit shall not exceed the amounts
represented on the estimate of cost breakdown provided in accordance
with paragraph (e)(2)(i)(G) of this section for the owner-builder or
any subcontractor, material supplier, or equipment lessor having or
sharing an identity of interest with the applicant/owner-builder. Final
payment to the owner-builder will be adjusted, if necessary, to assure
that the amounts shown on the certificate of actual cost do not exceed
the amounts represented on the cost breakdown. Any funds remaining as a
result of hard cost savings will be applied to the account as an extra
payment or used for eligible loan purposes approved by FmHA as long as
the improvements are genuinely needed and will enhance marketability of
the project. All increases or decreases of 15 percent or more in line
item costs will require documentation as to the reason for the
increases or decreases. The State Director may require documentation
for increases or decreases of less than 15 percent, if he/she
determines it necessary. This information will be required with the
cost certification.
(C) Subcontracting development work.
(1) Owner-builders will not be allowed to obtain a profit and
overhead unless they are performing actual construction. ``Actual
construction'' means ``work'' as defined in AIA documents: ``* * *
labor, materials, equipment, and services provided by the contractor to
fulfill the contractor's obligations.'' Under this definition, owner-
builders who choose to subcontract out construction of the project to
another contractor will not obtain a builder's fee (general overhead
and profit) when:
(i) More than 50 percent of the total cost of the building
construction is subcontracted to one subcontractor, material supplier,
or equipment lessor, and/or
(ii) Seventy-five percent or more with three or fewer
subcontractors, material suppliers, and/or equipment lessors.
(2) Note: If two or more subcontractors have common ownership, they
are considered as one subcontractor.
(3) How to apply rule:
(i) The 50 percent rule will apply when division of the amount of
the largest subcontract by the total amount of the building cost
results in more than 50 percent.
(ii) The 75 percent rule will apply when division of the sum of the
amounts of the three largest subcontracts by the total building cost
results in 75 percent or more.
(D) Qualified contracting entities. Contractors, subcontractors,
material suppliers, and any other individual or organization sharing an
identity of interest and providing materials or services for the
project must certify that it is a viable, ongoing trade or business
qualified and properly licensed to undertake the work for which it
intends to contract. Form FmHA 1944-31 will be prepared and executed by
the contracting entities. The form provides notification to the
entities of the penalty, under law, for erroneously certifying to the
statements contained therein. Debarment actions will be instituted
against entities who fail to disclose an identity of interest in
accordance with the provisions of FmHA Instruction 1940-M (available in
any FmHA office).
* * * * *
4. Section 1924.50 is revised to read as follows:

Sec. 1924.50 OMB control number.

The reporting and recordkeeping requirements contained in this
regulation have been approved by the Office of Management and Budget
(OMB) and have been assigned OMB control number 0575-0042. Public
reporting burden for this collection of information is estimated to
vary from 5 minutes to 4 hours per response, with an average of 37
minutes 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 of information, including suggestions for reducing this
burden, to U.S. Department of Agriculture, Clearance Officer, OIRM, AG
Box 7630, Washington, DC 20250; and to the Office of Management and
Budget, Paperwork Reduction Project (OMB# 0575-0042), Washington, DC
20503.

PART 1930--GENERAL

5. 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 and 2.70.

Subpart C--Management and Supervision of Multiple Family Housing
Borrowers and Grant Recipients

Sec. 1930.123 [Amended]

6. Section 1930.123 is amended by revising in the first column of
paragraph (i) the words ``Identity of Interest Disclosure Certification
Memorandum'' to read ``Forms FmHA 1944-30, Identity of Interest (IOI)
Disclosure Certificate, and FmHA 1944-31, Identity of Interest (IOI)
Qualification Form.''
7. Exhibit B of subpart C is amended by redesignating paragraphs V
B 2 a and V B 2 b as paragraphs V B 2 b and V B 2 d, respectively, by
revising newly redesignated paragraph V B 2 b, and by adding paragraphs
V B 2 a and V B 2 c; by removing paragraph XIII B 2 a (1)(iii), by
redesignating paragraph XIII B 2 a (1)(iv) as XIII B 2 a (1)(iii), and
by revising paragraphs XIII B 2 a (1)(i), XIII B 2 a (1)(ii), and the
introductory text of newly redesignated paragraph XIII B 2 a (1)(iii)
to read as set forth below; and by revising in the first column of
paragraph XIII C 2 f (3) the words ``Identity of Interest Disclosure
Certification Memorandum'' to read ``Identity of Interest (IOI)
Disclosure Certificate, Form FmHA 1944-30 and Identity of Interest
(IOI) Qualification Form, Form FmHA 1944-31''.

Exhibit B of Subpart C--Multiple Housing Management Handbook

* * * * *
V * * *
B * * *
2 * * *
a FmHA Forms 1944-30, ``Identity of Interest (IOI) Disclosure
Certificate,'' and FmHA 1944-31, ``Identity of Interest (IOI)
Qualification Form,'' (available in any FmHA Servicing office) will
be completed and submitted as part of the management plan.
Management agents will sign either form as ``applicant.''
b The initial disclosure shall be in effect for a period of 3
years and renewed every 3 years thereafter, except if there are any
changes in the business practices of the applicant/borrower and/or
management entity during the interim years that include identity of
interest concerns, the entity must file amended Forms FmHA 1944-30
and FmHA 1944-31.
c The forms provide notification to the entities of the
penalty, under law, for erroneously certifying to the statements
contained therein.
* * * * *
XIII * * *
B * * *
2 * * *
a * * *
(1) * * *
(i) The initial operating capital must be in the form of cash as
set forth in Sec. 1944.211 (a)(6) of subpart E of part 1944 of this
chapter.
(ii) The borrower will have deposited the required initial
operating cash into the general operating account by the time of the
FmHA loan closing or when interim financing funds are obtained,
whichever occurs first. These funds will blend with other revenue
that accrues to the account to cover budgeted expenditures including
payment of return to owner.
(iii) After 2, but before 5 full (12 month) borrower fiscal
years of project operation, the borrower may request (in writing)
the State Director's authorization to make a one-time withdrawal of
the initial operating capital, or a part of it. The one-time
withdrawal can never exceed the initial operating capital as
described in the loan agreement or loan resolution. The withdrawal
can be approved provided that:
* * * * *
8. Exhibit B-3 of subpart C is amended by revising paragraph I D
and the list of Attachments at the end of this exhibit to read as
follows:

Exhibit B-3 of Subpart C--Sample Management Agreement for Farmers Home
Administration (FmHA) Financed Multiple Family Housing (MFH) Projects

* * * * *
I * * *
D Identity of interest. The Agent discloses to the Owner and
FmHA any and all identities of interest that exist or will exist
between the Agent and the Owner, suppliers of material and/or
services, or vendors in any combination of relationship. Forms FmHA
1944-30, ``Identity of Interest (IOI) Disclosure Certificate,'' and
FmHA 1944-31, ``Identity of Interest (IOI) Qualification Form,''
completed by the Agent as ``applicant,'' are attached and made part
of this agreement.
* * * * *
Attachments: Management plan, Loan resolution or agreement,
Identity of Interest Disclosure Certificate, Identity of Interest
Qualification Form.

Exhibit B-8 of Subpart C [Amended]

9. Exhibit B-8 of subpart C is amended by revising in the first
column the words ``Identity of Interest (IOI) Disclosure Certificate
Memorandum'' to read ``Forms FmHA 1944-30, `Identity of Interest (IOI)
Disclosure Certificate,' and FmHA 1944-31, `Identity of Interest (IOI)
Qualification Form'.''

PART 1944--HOUSING

10. The authority citation for part 1944 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 E--Rural Rental and Rural Cooperative Housing Loan
Policies, Procedures, and Authorizations

11. Section 1944.205 is amended by removing the definition for
``Irrevocable letter of credit;'' by adding the definitions for
``Servicing office'' and ``Servicing official;'' and by revising the
definition for ``Initial operating capital'' to read as follows:

Sec. 1944.205 Definitions.

* * * * *
Initial operating capital. Cash to pay for costs such as property
and liability insurance premiums, fidelity coverage premiums if an
organization, utility hookup deposits, maintenance equipment,

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-3117. Public record. Not legal advice.