Community Development Block Grant Program; Correction of Identified Deficiencies and Updates; Final Rule

SUMMARY: This final rule corrects identified deficiencies in the

Community Development Block Grant (CDBG) program, implements relevant

portions of the Cranston-Gonzalez National Affordable Housing Act,

amends the CDBG conflict of interest provisions, implements statutory

changes from the Housing and Community Development Act of 1987 and the

Appropriations Act of 1989, and provides criteria for performance

reviews and timely expenditure of funds under the CDBG program.

This rule also furthers goals of reinventing government by

incorporating public input in rulemaking, providing performance

standards, and clarifying regulatory language. Very few of this rule's

provisions impose any additional burden on grantees, and these are

designed to increase program accountability, primarily in areas

identified by the Inspector General as material weaknesses or other

serious recurrent audit issues.

EFFECTIVE DATE: December 11, 1995.

FOR FURTHER INFORMATION CONTACT: Deirdre Maguire-Zinni, Director,

Entitlement Communities Division, Room 7282, Department of Housing and

Urban Development, 451 Seventh Street, S.W., Washington, DC 20410,

telephone number (202) 708-1577. A telecommunications device for deaf

persons (TDD) is available at (202) 708-2565. FAX inquiries (but not

comments on the rule) may be sent to Ms. Maguire-Zinni at (202) 708-

2575. (These telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

The information collection requirements for the Community

Development Block Grant (CDBG) program have been approved by the Office

of Management and Budget under the Paperwork Reduction Act of 1980, and

have been assigned OMB Control Number 2506-0077. This rule does not

contain additional information collection requirements.

II. Background

The CDBG program is a key component of HUD's legislative

reinvention proposal, the American Community Partnerships Act. By its

nature, the CDBG program places responsibility for meeting program

requirements squarely on the recipients entitled to receive and

administer the grants. Because the CDBG regulations are the primary

program guidance issued by HUD, program practitioners refer to them

often (unlike other Federal regulations, the primary readers of which

are often attorneys). Therefore, this rule, which updates the CDBG

regulations to reflect significant statutory enhancements since 1987,

furthers the reinvention of government, and of HUD in particular, by

providing local CDBG decisionmakers the advantage of regulatory and

statutory flexibility to design and use their CDBG program resources.

This rule also contains several provisions that enhance grantee

accountability to national program and financial performance standards.

For example: the definition of ``income'' helps ensure that low- and

moderate-income persons are served; the consolidated plan performance

criteria will guide assessment of the extent to which grantees are

carrying out their consolidated plans; and revolving loan fund and

other related changes ensure that funds are not unduly sheltered from

United States Treasury requirements.

Several of the provisions of this final rule were published for

comment as a proposed rule on August 10, 1994 (59 FR 41196). As further

discussed below, these provisions were designed to correct program

deficiencies identified by HUD's Office of Inspector General (OIG), HUD

staff, and HUD clients. The August 10, 1994 proposed rule included: a

flexible definition of ``income'' for families and households; a change

in calculating the planning and administration limitation; new

revolving fund requirements to remove the special protection from

drawdown requirements afforded program income in revolving funds; a

clarification limiting the scope of the definition of ``ineligible

income payments'' in 24 CFR 570.207(b)(4); a description of ``float-

funded'' activities in the action plan; a specification of three

situations in which income earned on grant funds must be remitted to

the U.S. Treasury; a requirement of a determination of benefit when

CDBG funds are used outside the jurisdiction of the recipient; and

performance standards to replace the Housing Assistance Plan (HAP)

standards at Sec. 570.903, for determining whether a grantee has

carried out its consolidated plan housing strategy (formerly

Comprehensive Housing Affordability Strategy (CHAS)).

The preamble to the August 10, 1994 proposed rule stated that any

differences between the rule and the Consolidated Plan final rule,

published on January 5, 1995 (60 FR 1878), would be resolved at the

final rule stage. In making the resolution, HUD included some of the

provisions of the August 10, 1994 proposed rule in the Consolidated

Plan final rule. These pieces include incorporation of some of the

final statement requirements into the consolidated plan and language at

Sec. 91.220 describing CDBG program-specific requirements for the

action plan, including some language on float-funded activities. HUD

also incorporated the provision in the August 10, 1994 proposed rule

regarding delay of the grant when performance reports are delinquent

into the Consolidated Plan final rule at Sec. 91.520(f). In addition,

HUD has adjusted terms and approaches in both rules to conform to the

consolidated plan process.

Two provisions of this final rule were published for comment as a

proposed rule on November 12, 1993 (58 FR 60088) regarding performance

reviews, timely expenditure of CDBG funds, sanctions, and due process

hearings. As further discussed below, this final rule only includes the

provisions from the November 12, 1993 rule on performance standards and

timely expenditure of CDBG funds.

Four of the provisions of this final rule were published for

comment as an interim rule on June 17, 1992 (57 FR 27116). The June 17,

1992 interim rule implemented relevant portions of the Cranston-

Gonzalez National Affordable Housing Act (Pub. L. 101-625, approved

November 28, 1990) (the NAHA). The June 17, 1992 interim rule included:

enhancing the calculation of the public services limitation by

permitting CDBG entitlement recipients to include certain program

income in the base amount of CDBG funds from which the funds available

for public services are calculated; limiting the reach of the conflict

of interest provisions; and responding to grantee requests by

broadening the forms in which funds may be provided to subrecipients

for their use.

[[Page 56893]]

Several other provisions of this final rule were published for

comment as a proposed rule on March 28, 1990 (55 FR 11556). The March

28, 1990 proposed rule implemented: section 511 of the Housing and

Community Development Act of 1987 (Pub. L. 100-242, approved February

5, 1988) (the 1987 Act) regarding the availability of CDBG funds for

Uniform Emergency Telephone Number Systems; and relevant portions of

the Department of Housing and Urban Development--Independent Agencies

Appropriations Act of 1989 (Pub. L. 100-404, approved August 19, 1988)

(the Appropriations Act).

As further discussed below, this final rule also implements

statutory provisions that require little or no regulatory elaboration.

This rule implements three provisions of the Multifamily Housing

Property Disposition Reform Act of 1994 (Pub. L. 103-233, approved

April 11, 1994): (1) section 207, regarding the use of CDBG funds to

pay for administration of the HOME program and (2) authorization of a

housing services eligibility category; and (3) section 234, permitting

statutory waivers for activities designed to address a Federally

declared disaster.

In addition, this rule implements the following provisions of the

NAHA that require little or no regulatory elaboration: (1) section

902(a), regarding the overall benefit of 70 percent; (2) section 903,

regarding city and county classification; and (3) section 912,

regarding discrimination on the basis of religion. HUD included certain

other self-implementing changes from the NAHA in the Consolidated Plan

final rule, published in the Federal Register on January 5, 1995 (60 FR

1878).

This rule also implements changes from the Housing and Community

Development Act of 1992 (Pub. L. 102-550, approved October 28, 1992)

that require little or no regulatory elaboration: (1) section 807(a),

regarding separate eligibility categories for provision of technical

assistance to public or private entities and assistance to institutions

of higher education for carrying out eligible activities; (2) section

807(b), regarding the extension of the authority to use CDBG funds for

direct homeownership assistance for a specified additional period; (3)

section 807(c)(1), regarding recipient and subrecipient capacity

building to carry out microenterprise activities; (4) section 807(e),

regarding amendments to the current restrictions on areas in which CDBG

funds may be used for code enforcement to take into account privately

funded development in addition to publicly funded development; and (5)

section 809, permitting as eligible administrative expenses the costs

of establishing and administering Federally approved Empowerment Zones

and Enterprise Communities.

Finally, as further described below, the rule contains

miscellaneous technical updates and corrections to the CDBG

Entitlement, State, Small Cities, and Insular Areas provisions.

III. Provisions From the August 10, 1994 Proposed Rule

HUD received 45 comments on the August 10, 1994 proposed rule. The

following discussion summarizes those comments.

A. Definition of ``Income''

The CDBG program is unique among HUD's major programs in needing a

definition of income that will be familiar and useful to private

businesses and others outside the industry of housing service

providers, and that will be useful when measuring benefit for an

activity that will serve an area generally. This rule furthers the

reinvention of HUD by providing a great deal of administrative

flexibility while improving accountability in an area of identified

weakness. This flexibility is provided in the design of the definition

as well as in the documentation requirements (which are unaffected by

this rule). Grantees may choose to assess participant income in one of

three ways based on the cash or asset elements included in either the

Section 8, Internal Revenue Service, or Census definitions of income.

The existing documentation requirements permit participants to self-

certify their family incomes or to substitute documentation of their

qualification in a Federal or State program that has income

qualifications at least as rigorous as the selected definition.

Standardizing the definitions ensures that citizens are treated fairly,

and retaining the current documentation requirements continues to

provide significant administrative flexibility to grantees. Further,

grantees still retain the responsibility for determining how much

assistance to provide.

HUD received eighteen comments on the proposed definition of

income, including comments from five urban counties, four metropolitan

cities, three national public interest groups, two low-income citizens

advocacy groups, two single city nonprofit housing rehabilitation

groups, one State, and one regional community development group. Twelve

of the commenters were generally in favor of the new, flexible

definition. Almost without exception, the commenters requested that if

HUD implemented the proposed definition, HUD should permit a fourth

option. The commenters suggested that this fourth option be either: (1)

to qualify automatically an individual already qualified under a means-

tested program, or (2) to allow each grantee to develop its own

definition, to be approved by HUD. Some confusion about the difference

between the documentation and definition provisions was apparent in the

comments on these points.

The two low-income advocates generally endorsed the definition of

income as proposed, although one requested additional clarification of

two points. The first point involves clarification of the language

proposed in paragraph (2) of the definition. By ``integrally related

activities of the same type,'' HUD intended to denote, for example, a

program of single family rehabilitation lending activities (which are

generally grouped for reporting purposes), a ``bundle'' of public

services provided through a single program to the same clientele (such

as services provided during transitional housing to the homeless), or a

portfolio of commercial loans made by a particular subrecipient. If the

grantee administers a community-wide single family rehabilitation loan

program, it should use the same definition of household income or

family income (as applicable) in evaluating each loan in that program.

HUD does not intend the phrase ``integrally related activities of

the same type'' to denote activities that are part of the same

``project,'' because many community development projects are for mixed

uses and mixed purposes. For example, a three-story building may have

public parking in the basement, commercial space and a community center

on the ground floor, and affordable housing in the upper stories. This

is all one construction project, but with distinct activities serving

different populations and meeting distinct national objectives within

the CDBG program. Further, while the term ``project'' is used

throughout the HOME program, it is only used for limited purposes in

the CDBG program (for example, under Secs. 570.203 and 570.204 and for

environmental and Davis-Bacon purposes).

Ideally, HUD would like each grantee to select one definition for

all its CDBG activities, or at least for purposes of meeting each

income-based national objective category. However, as described in the

preamble to the August 10, 1994 proposed rule, HUD recognizes that this

would be administratively difficult and not useful for many grantees.

[[Page 56894]]

Some commenters appeared to confuse definition and documentation

issues. Both advocacy groups suggested that the rule require, in

Sec. 570.3, that none of the three definitions be used if the

assistance was to be provided to a person who provides documentation of

income-eligibility for another program ``recognized as more rigorous

than CDBG.'' This suggestion mixes the definition of income at

Sec. 570.3 and the documentation of income at Sec. 570.506(b). The

definition of income merely describes the assets (if any), salaries,

and other income flows that must be considered in determining income.

The documentation requirements describe how to verify income at the

time assistance is provided. Therefore, if a person provides

documentation from another means-tested program to show that the

necessary elements (and possibly more than those elements) were

considered, and affirms that his/her financial status remains the same

at the time the CDBG assistance is provided, then HUD would find this

acceptable.

The groups also requested that Aid to Families with Dependent

Children (AFDC) and Supplemental Security Income (SSI) be added to the

definitions of ``programs at least as restrictive'' at Sec. 570.506.

HUD has decided to add neither, however, because the programs listed at

that point are illustrative. Documentation from any means-tested

program may be used if the grantee determines that the program's

elements and thresholds are at least as restrictive as the CDBG

definition being used for the activity.

Five grantees, one public interest group, and two nonprofits

requested that a fourth option be added to permit grantees to develop

their own definitions, or to continue using the definitions they had

been using. Because HUD intends to limit the variation in definitions

of income, HUD did not adopt these suggestions. However, as noted

above, if a person is participating in a means-tested State or Federal

program at least as restrictive as CDBG with regard to income elements

and thresholds, documentation of qualification for that program may be

used to determine CDBG income eligibility.

One grantee and two of its nonprofit subrecipients apparently

misconceived how the IRS and Census definitions are to be used. These

commenters apparently thought HUD meant that the Census or tax form, as

completed at the time required for Census or tax purposes, should be

used to determine CDBG income eligibility--even when the CDBG

assistance was provided months or years after an individual completed

the form. In almost all cases, neither of these documents alone would

accurately represent the level of income of the family or household at

the time CDBG assistance is provided. Instead, the familiar terms used

on these forms will help each person receiving assistance to understand

which cash and asset values to consider before making the certification

required by Sec. 570.506 as to their current family or household (not

individual) income, as appropriate. Although the IRS 1040 form is often

used to report individual income, not family or household income, that

form provides a familiar way to show people which kinds of income are

to be considered. One commenter asked whether the IRS short form could

be used. Any form can be used, provided the grantee ensures that the

information is current and that all sources of income covered by the

selected definition are considered in making income eligibility

determinations.

Finally, several commenters to the August 10, 1994 proposed rule

and to the Consolidated Plan proposed rule requested that the terms

used for the various income groups be conformed among the regulations

for the CDBG program, the consolidated plan, and other programs. After

discussion, HUD decided to use the existing CDBG terms in the

regulations for both the CDBG program and the consolidated plan. In the

consolidated plan HUD added two additional terms--''middle-income,'' to

denote families whose income is 80 to 95 percent of median income, and

``very low-income'' to denote families whose income is below 30 percent

of median income. HUD did not need to make changes in this rule to

accommodate this decision.

B. Calculation of the Planning and Administration Limitation

HUD's original proposal was to rule out source-year based

calculation of the spending limit and to require program-year based

calculation based on expenditures. In response to the comments and in

adherence with the principles of reinventing government, HUD changed

the rule at this final stage to make the calculation more accommodating

of costs (notably planning costs) which may unexpectedly cross program

year boundaries. HUD retained the regulatory provision specifying the

calculation method in the regulations instead of using less binding

guidance materials, because abuse in this area would decrease funds

available directly to improve the lives of low- and moderate-income

persons and to rebuild their communities.

HUD received thirteen comments on the proposed change to the

language describing the calculation of the limitation on planning and

administration expenditures. Two commenters, both low-income citizens

advocacy groups, supported the change. One group commented that the

change would ``inhibit grantees from playing shell games'' with

administrative funds. Both commenters felt that this change would make

it harder for grantees to hide from citizens the exact amount of funds

used for administering the program each year. One major metropolitan

city commented that the change would not affect it.

Three metropolitan cities, three counties, one State, and three

public interest groups submitted opposing comments. As one public

interest group commented: ``Although the source year method of

calculation is infrequently used by CDBG grantees, those who do use it

find the proposed change extremely detrimental.'' Almost every one of

these commenters cited the disruption that could be caused to the

calculation by a large contract (such as a planning contract)

unexpectedly extending into another program year. Several commenters

disagreed with the reasons HUD proposed the language change, stating

that if the performance report did not support source-year funding, it

should be modified. One commenter pointed out that program income can

simply be sourced to the year in which it is received. The State

commenter agreed with HUD's decision to rule out the source-year method

as inherently arbitrary. It argued, however, that it may be necessary

when apportioning expenditures among agencies with ``varied non-CDBG

funding sources,'' and the source-year method might also be the most

efficient way to govern and track expenditures by other entities. An

urban county and the interest groups made similar arguments.

The opposing commenters suggested a variety of solutions. One

suggestion was to drop the proposed change entirely. However, this

suggestion does not address the issues that led HUD to propose the

change in the first place or the issues raised by the advocacy

organizations in their comments. Another suggestion was to permit

grantees that use this method of accounting to submit to an audit to

determine whether they are using the method correctly, and to submit

the results of any audit in their favor to HUD for approval to use this

method. Another suggestion was to base the cap calculation on the

amount ``committed''

[[Page 56895]]

for administration during the program year, rather than the amount

expended. A variation of this suggestion was that the grantee count

expenditures when the activity was to be carried out by its own staff

and count commitments when the activities were to be carried out by a

subrecipient, a contractor, or, in the case of the State, another

agency.

In the past, HUD has based the planning and administrative

limitation on expenditures because many, if not most, of the

expenditures for these activities are for the grantee's own staff on

payroll. Prediction and management of annual payroll expenses is a

normal part of the budgeting process. Therefore, the expenditure basis

of the cap is not a burden for most grantees, but rather is the

simplest method of calculating and governing the cap. According to HUD

data, some grantees also have an unused margin each year.

In drafting the final rule, HUD rejected suggestions allowing

grantees to calculate 20 percent of each annual grant, and to use this

amount in the current year or to carry it over into future grant years

until the entire amount was expended. This could have the effect of

making expenditure of the maximum possible for program administration

costs the norm. Any funds spent on program administration are not being

spent on activities that more directly implement the purposes of the

Housing and Community Development Act of 1974 (the Act). However, HUD

agrees with commenters who argued that even with proper management,

planning and administrative contracts can occasionally involve

expenditures occurring in a year other than the one in which the costs

were budgeted. HUD also agrees that an expenditures-only test ignores

the difficulties in managing the precise period when a contractor or

subrecipient will actually expend funds. Therefore, this rule changes

the cap calculation by basing it on annual obligations (rather than

expenditures) for purposes of calculating the 20 percent cap. At the

end of the program year, grantees will reconcile these amounts using

the same method now used for reconciling the public services

limitation, which is currently calculated based on obligations. (While

the base for the public services cap includes the amount of program

income received during the previous program year, the base for the

planning and administration cap uses the current year's program

income.) Using this approach, a grantee that does not obligate any

planning and administrative funds before expending them is still

treated as though the requirement is based on expenditures rather than

obligations, while a grantee that requires some additional flexibility

will have it.

C. Revolving Funds and Returning Excess Program Income

HUD proposed the revolving loan fund (RLF) and return of program

income provisions in response to Inspector General findings. HUD is

making these changes to ensure that recipients of Federal resources

meet certain responsibilities (in this case demonstrating fiscal

responsibility and not unnecessarily increasing the Federal deficit) in

return for the Federal assistance, which is one of the principles of

reinventing government. The proposed rule language would have

eliminated the provision that sheltered money in RLFs from the

requirement that no additional funds be drawn down from the line of

credit when CDBG funds are already on hand.

HUD received 31 comments from groups and individuals regarding the

revolving loan fund proposed changes. Fourteen metropolitan cities,

four urban counties, three national interest groups, three community-

based nonprofit organizations, two regional community development

groups, two States, two local HUD program officers, and one low-income

citizens advocacy group were included among the commenters. All

commenters opposed the changes. Many of the comments linked the

proposed revolving loan fund changes to the proposed rule to require

grantee- or subrecipient-held program funds in excess of one-twelfth of

the grant amount to be returned to the line of credit.

HUD has considered all the comments and finds some of them

persuasive. However, several commenters apparently misunderstood how

the proposed changes would work and were concerned that HUD was

striking at the activities typically funded by RLFs, instead of just

adjusting the RLF mechanism. This in turn led to confusion of the

issues associated with permitting revolving funds to shelter program

income. However, HUD did not propose to eliminate revolving loan funds,

and HUD agrees that the activities typically carried out through

revolving funds (e.g., housing rehabilitation) serve vital program

purposes.

Any activity carried out under a revolving fund can be carried out

through the normal CDBG delivery mechanism. The basic question,

therefore, is whether the revolving fund structure, per se, serves a

vital program purpose. Under the proposed rule, principal and interest

payments for loans in a revolving fund would have been held in the

grantee's general program account, while RLF accounts would have been

kept separately. In effect, the proposed changes would have made the

grantee the ``bank'' in which the RLF was held. HUD did not contemplate

changes to the budgeting of RLF amounts in the final statement (now

called the action plan), so comments claiming that the changes would

increase the difficulty of securing funding during the local budgeting

process seem misplaced. Even under existing rules, program income to

RLFs must be projected for citizens who are then able to comment on

whether to propose another use for the funds.

Other comments include those described in the following paragraphs.

All of the following comments were expressed to some degree by more

than one commenter. Several commenters asserted that the proposed rule

changes would cause enough additional delay and expense that

administration of RLFs would become time prohibitive. For instance,

commenters remarked that RLFs held in local financial institutions can

provide access time as short as one day; such short access times are

often critical to small and minority contractors carrying out CDBG

activities. One commenter remarked that management of its own RLF by a

neighborhood- or community-based nonprofit organization empowers the

organization. Allowing it to manage and keep its own funds teaches the

skills that foster successful, sustainable organizations. Other

commenters added that if a financial institution is used as a

depository, it often can be persuaded to provide other benefits.

Commenters also argued that the proposed changes will increase

administrative costs to the RLF administrator caused by constant

passing back and forth of small amounts of money, resulting in fewer

CDBG dollars being used to assist activities.

In response, HUD agrees that it would be more advantageous for a

number of reasons to keep loan repayments in a separate account and not

``mix'' it with other program income, the use of which has not been

predetermined. This convenience does justify some expense to taxpayers.

Many commenters suggested as an alternative to the proposed rule

that HUD require a minimum expenditure from a revolving fund in a year,

or a maximum carryover percentage from year to year. One commenter, a

local HUD program officer, suggested a single system that at least

partly addresses the issues behind both the RLF proposal and the return

of grant funds proposal.

[[Page 56896]]

Because many of the commenters indicated linkages between the RLF and

return of excess program income proposals, the comments and issues

related to the return of excess program income proposal are discussed

immediately below, followed by the description of the final regulatory

provisions adopted in response to comments on both proposals.

The proposal to require return of excess program income drew 17

comments opposing it in whole or in part. The commenters included six

metropolitan cities, four urban counties, three public interest groups,

one low-income citizens advocacy group, one local HUD program officer,

one community-based nonprofit organization, and one State. The

strongest opposition came from those who interpreted the language to

mean that, on an ongoing basis, as a grantee accumulated in its program

account an amount greater than one-twelfth of its annual grant amount,

that amount must be remitted to the grantee's CDBG line of credit. This

is what HUD originally intended. Several commenters expressed intense

objection to this proposal, based on the costs of administering such a

complex system and passing small amounts of funds back and forth. Three

commenters stated that such a system would be a significant

disincentive to carrying out the revenue-producing activities that

currently generate approximately $450 million in additional funds for

community development activities annually.

Several commenters suggested that the funds should be required to

be remitted only at specific intervals, such as quarterly or annually.

This process would establish CDBG balances and allow HUD to be certain

that large sums were not being held unused, in violation of Treasury

guidelines. One commenter, the HUD program officer, linked the concept

of an annual remittance of funds on hand to his suggestion for how to

better manage RLFs. This commenter suggested that all unexpended funds,

except those needed immediately, those in RLFs, or those resulting from

legal lump-sum drawdowns, be remitted to the line of credit annually

near the beginning of the program year to establish a beginning

balance. Under this proposal, with this one exception, program income

received during the program year would be treated as it is now. At the

time of the remittance, the recipient would describe to HUD the exact

amount of funds in each RLF. The HUD program officer further proposed

annual RLF expenditure and carryover standards, which, if violated,

would result in HUD requiring the grantee to dissolve the RLF.

HUD is yielding to the unanimous view of the commenters that RLFs

are an important CDBG tool by retaining a specific provision for RLFs

in this final rule. The RLF provision in this final rule accommodates

the suggestions of the commenters while substantially addressing the

original problem, the loss of revenue to the U.S. Treasury. The final

rule provides that cash balances of each RLF must be held in an

interest-bearing account, and that any interest earned by funds

accumulating in this account must be remitted annually, at the end of

each program year, to the Treasury. This remittance will partially

offset the cost to the Treasury of removing RLF funds from the general

requirement that funds on hand must be used before any draws to the

Treasury. Interest paid by borrowers on loans made from the RLF will

remain program income and may be used as part of the RLF for further

lending.

Furthermore, in response to comments on the return of grant funds

proposal, HUD modified the rule to require all program income cash

balances or investments thereof in excess of one-twelfth of the grant

or subgrant amount--except for those needed immediately, those in RLFs,

those resulting from lump-sum drawdowns authorized under Sec. 570.513,

and those invested or held as additional security for a Section 108

loan guarantee--be remitted to the CDBG line of credit annually. This

remittance will take place as soon as practicable following the end of

the grantee's program year. HUD expects that all such remittances will

be complete within 60 days following the end of a grantee's program

year. The amount to be remitted will be calculated based on the total

program income balances (with the exceptions above) held by the grantee

and all of its subrecipients as of the last day of the grantee's

program year. While the rule requires at Sec. 570.503(b)(3) that

subrecipient agreements include a provision allowing the grantee to

require subrecipient remittance of program income cash balances or

investments at the end of the program year, the grantee is responsible

for determining whether amounts held by any subrecipient or

subrecipients are sufficiently large that such remittance will be

necessary to enable it to meet the requirement at

Sec. 570.504(b)(2)(iii). HUD anticipates that information describing

the exact amount of any program income cash balances and investments

thereof that the rule permits grantees to retain will be provided to

HUD by the grantee as part of the annual performance report.

D. Income Payments

The income payments provision of this final rule follows the

principles of reinventing government by clarifying and limiting

burdensome regulations; the rule allows grantees more options for

empowering program participants. On the effective date of this rule,

downpayment assistance (other than that authorized by Sec. 570.201(n)),

and loans for subsistence will be eligible public services, rather than

ineligible income payments. Only subsistence grants will remain CDBG-

ineligible.

HUD received 17 comments on the new definition of prohibited income

payments. The commenters included five urban counties, four

metropolitan cities, three public interest groups, two HUD program

officers, two low-income citizens advocacy groups, and one State. Only

the two HUD program officers opposed the change entirely.

First, one of the HUD program officers was concerned that loans for

income payments would often be made to those who could not or would not

make payments. Since grants are ineligible, this program officer asked

what HUD's position would be on the eligibility of a subsistence loan

activity that appeared from its results to be a grant activity. HUD

recognizes that loans for small amounts for subsistence activities are

risky. However, some grantees have had success in offering people the

responsibility of loan repayments along with subsistence assistance.

Grantees are responsible for meeting program requirements. If a loan

program default rate is unusually high, HUD would examine the system

the grantee has in place to ensure payment, and in this case, to ensure

eligibility. If such a system was absent or faulty, HUD would recommend

and, if necessary, enforce corrective actions.

The other program officer's objection was that other programs exist

to provide for subsistence and downpayment assistance, and that it is

inappropriate for the CDBG program to allow such activities. HUD

acknowledges that the regulatory prohibition against direct-to-the-

individual subsistence-type income payments exists, in part, because

other large programs, such as food stamps, Aid to Families with

Dependent Children (AFDC), Section 8, and Social Security are designed

to provide such assistance. None of these programs, however, provides

general assistance in the form of loans or is linked to an overall

community development program. Further, since such loans in the CDBG

program are subject to the 15

[[Page 56897]]

percent cap on public services obligations, their use will be limited.

In response to similar comments on downpayment assistance activities,

HUD believes it is clear that the amount required to meet the need for

downpayment assistance for low- and moderate-income persons exceeds the

amount of funds available under all HUD's programs within its Office of

Community Planning and Development (CPD). HUD strongly supports

expanding the resources available for homeownership, and many grantees

have already found CDBG useful for this purpose.

Five commenters opposed the placement of downpayment assistance in

the public services category upon its removal from the income payment

category, although all agreed that it is not an income payment. Some

suggested other placements for it, such as the economic development,

rehabilitation, or acquisition categories. HUD understands the

commenters' desire to keep downpayment assistance unencumbered by the

public service cap, and agrees that the category is not a perfect fit.

However, downpayment assistance also clearly does not belong under

economic development, as it is defined in the CDBG regulations.

Assisting acquisition by an individual homebuyer for the purpose of

rehabilitation is already eligible, but activities not associated with

rehabilitation do not fit in Sec. 570.202. Furthermore, the law limits

the eligibility of acquisition for purposes other than economic

development or rehabilitation to grantees and other public or private

nonprofit entities. Downpayment assistance may also be carried out by

qualified Community-Based Development Organizations (CBDOs) as part of

a Sec. 570.204 eligible activity (such activities will generally be

subject to the annual limitation on public services obligations).

Some of the commenters may have objected to changing the

eligibility of downpayment assistance because they believed that HUD

was indicating that such activities could meet the national objective

of benefit to low- and moderate income persons under the criteria at

Sec. 570.208(a)(2)--Limited clientele activities. However, application

of the limited clientele criteria would allow downpayment assistance

qualifying under Sec. 570.201(e) to be provided to a substantial

percentage (up to 49 percent) of above-income persons even if it is not

part of a neighborhood revitalization effort. The more appropriate low-

and moderate-income category to apply is Sec. 570.208(a)(3)--Housing

activities. For clarification, HUD modified the second sentence of that

section to include acquisition or rehabilitation by an individual

homebuyer on the exemplary list of activities covered by that

provision.

In terms of eligibility, downpayment assistance fits best as part

of the temporary category at Sec. 570.201(n)--Direct homeownership

assistance. The eligibility for this activity expired on its ``sunset''

date of October 1, 1995. However, HUD has requested that Congress amend

the statute to reinstate the activity's eligibility. One commenter, a

public interest group, objected to HUD allowing downpayment assistance

as a public service because this would remove pressure from Congress to

delete the sunset provision on direct homeownership assistance (a broad

category that includes downpayment assistance) as a separate activity.

However, HUD believes that downpayment assistance is useful to grantees

in meeting the needs of their residents and therefore has decided to

make this activity eligible under CDBG (although it is constrained by

the public services cap).

Four commenters requested that child care be removed from the list

of prohibited income payments. One wanted ongoing ``scholarship''

payments made to a family, organization, or institution for medical and

child care made eligible. HUD agrees that scholarships for child care

should be eligible and is removing child care from the list of

ineligible subsistence payments. However, the grantee must design a

system that ensures that any cash payment made to a family for child

care (or any purpose) is actually used as the grantee intended. To this

end, HUD recommends that, whenever possible, payments for such purposes

are made in the form of vouchers or payments directly to the provider.

One commenter wanted clarification that loans for housing

rehabilitation are not public services. Loans for housing

rehabilitation are eligible under Sec. 570.202 as rehabilitation

activities. Such loans are not eligible as public services. This

includes loans and downpayments to assist acquisition for the purpose

of rehabilitation.

The two advocacy groups wanted emergency one-time payments to be

changed to emergency payments made over no longer than a three-month

period. HUD agrees and has made the suggested change. Further, HUD

wants to clarify that, under the language of this rule, payments to

help a family or individual meet one emergency do not preclude such

assistance being provided to the same family or individual at some

later, not immediately sequential, point in time to meet a different

emergency. The commenters also wanted the preamble language stating

that loans for subsistence would not be considered income payments to

be stated in the regulation, along with language in Sec. 570.207

stating that downpayment assistance was no longer prohibited by that

paragraph. HUD has adopted the first half of the suggestion at

Sec. 570.201 by adjusting the specific activity list. However, adding

language in Sec. 570.207 would be redundant.

E. Float-Funded Activities

Float-funded activities use undisbursed funds in the line of credit

and the CDBG program account that are budgeted in action plans for one

or more other activities that do not need the funds immediately. HUD

included the provision governing float-funded activities in the

proposed rule at the urging of the Office of Inspector General, which

had identified serious repeated findings of program mismanagement in

two audits of interim financing carried out during the 1980s.

In the proposed rule, HUD added criteria for float-funded

activities in the final statement section of the regulations. These

criteria included citizen participation and security requirements

necessary to offset the risks of float-funding. In this final rule,

because HUD incorporated basic final statement requirements into the

regulations for the consolidated plan (24 CFR part 91), the float-

funded activities language is the bulk of the language remaining in

Sec. 570.301.

HUD received 11 comments with respect to these proposed

requirements. Three public interest groups representing community

development practitioners, three urban counties, two low-income

advocacy organizations, two large metropolitan cities, and a local HUD

Community Planning and Development program officer responded. Seven of

the commenters, including the HUD program officer, wanted the 2.5-year

time limit for the duration of a float-funded activity either removed,

lengthened, or modified by adding a provision permitting exceptions to

the limit in certain cases. One advocacy organization suggested the

2.5-year limit might be too long, but admitted a lack of experience

with the issue area. The other two commenters, a city and a county,

generally supported HUD's proposed changes. The county characterized

the rule as ``logical and sufficient.''

[[Page 56898]]

In the preamble to the proposed rule, HUD noted that among the

primary risks to the CDBG program inherent in the float funding process

are, first, that the float-funded activity will not generate sufficient

program income to allow for timely undertaking of previously budgeted

activities. HUD also noted that in undertaking a float-funded activity

from which funds will not return for use for previously budgeted

activities for a particularly long time period, grantees apparently

assume that they will receive sufficient additional CDBG funds in

future years to continue funding those previously budgeted activities

until the float-funded activity generates program income. HUD further

noted that grantees are only authorized to use such a funding technique

(e.g., relying on future CDBG funds to backstop a large loan for a

particular activity in the present) under the Section 108 Loan

Guarantee program. Although one commenter, a city, stated that an

irrevocable letter of credit removes the first risk, HUD's experience

is that this is not always the case. Most of the commenters did accept

the 2.5-year limit as the general rule or as a guideline. However, in

response to comments, HUD is clarifying that, while it expects most

float-funded activities will conform to the 2.5-year requirement, a

float-funded loan may be extended, reissued, or ``rolled over'' by

treating it as though it were a new float-funded activity and showing

that it meets all the same requirements that apply to float funding.

(In the past, HUD equated float extensions and rollovers with

refinancing existing indebtedness, which is not generally allowed under

the CDBG program.)

The advocacy organizations suggested a variety of special action

plan amendment procedures for float-funded activities, including the

following requirements: relating changes to consolidated plan

priorities, focusing citizen participation on the area or neighborhood

that would have benefited from a defaulted or canceled float-funded

project, and reprogramming action within 30 days of learning of the

delay or default. HUD has long held that float-funded activities must

meet all the same requirements that apply to CDBG-assisted activities

generally, and the proposed rule added additional requirements only in

response to the identified primary risks to the program stemming from

the float-funding process. The suggested additional citizen

participation requirements far exceed the existing requirements

covering all CDBG activities. Therefore HUD is not adopting these

suggested changes.

One of the public interest groups asked HUD to clarify that the

rule did not mean that each float-funded activity be identified

separately in the action plan, but rather that such activities be

identified by eligibility category, as many other activities may be

designated (e.g., community-wide single family rehabilitation loan

programs). However, to ensure that citizens are properly informed, HUD

does intend that each float-funded activity be identified separately in

the action plan.

Another of the public interest groups stated that the income stream

from an activity can be difficult to predict, and it requested

information on how HUD would treat a grantee who carried out a float

activity that exceeded the 2.5-year limit. In response, HUD suggests

that activities appropriate for float funding be evaluated for the

predictability of their income streams, with only more predictable

activities being so funded. HUD further notes that the corrective

actions permitted to HUD under the CDBG program vary from issuing a

letter of warning to enforcing a grant reduction. The local HUD offices

(in the case of float-funded activities, usually in conjunction with

Headquarters) will assess each deficiency and design a corrective

action to prevent a continuation of the performance deficiency,

mitigate the adverse consequences of the deficiency, and prevent a

recurrence of the deficiency. As noted above, the rule does provide for

float-funded activities to be extended, reissued, or rolled-over,

provided certain requirements are met.

Two grantees responded to the request for comment on whether a

limit should also be set on the proportion of a grantee's funds that

could be used for float funding. Both grantees responded that there

should be no limit, stating that the other proposed requirements were

sufficient to address the identified risks. Therefore, HUD will impose

no such limit at this time.

One commenter, a grantee, suggested that the rule permit the action

plan covering the float-funded activity to describe the characteristics

of the lender that will provide an irrevocable letter of credit, rather

that providing the actual lender's name. The commenter also suggested

describing the maximum and minimum terms for the letter of credit in

the action plan, because the terms may change somewhat when the deal is

negotiated after the action plan is amended. HUD finds no problem with

this approach if the language used is as specific as possible.

Therefore, any grantee choosing this approach should contact its local

HUD office for guidance in developing a suitable description.

Another commenter, the local HUD program officer, suggested that

the action plan break out the identified float payment amount into

principal and interest, so that citizens can tell whether the activity

will ``make money.'' This rule requires at Sec. 570.301(b) that each

float-funded activity be individually listed in the action plan, and

that the ``full amount'' of income expected to be generated by that

activity must be shown (the latter requirement is also included in the

consolidated plan regulations at 24 CFR 91.225(g)(1)(ii)(D)). These

requirements will permit citizens to determine easily whether the

activity is expected to ``make money.'' The rule language is also

easily adaptable to float-funded activities that do not involve loans.

The program officer also suggested that HUD allow in the rule for

HUD approval of grantee-proposed methods, other than those described in

the rule, of securing the repayment of the float funding. HUD accepted

this proposal, so long as the method ensures fund availability within

30 days of default or shortfall. This approval can be made in writing

by the appropriate local HUD office, in advance of carrying out the

float-funded activity.

F. Using CDBG Funds Outside the Grantee's Jurisdiction

HUD included this provision in this rule as a result of the

Inspector General's audit findings regarding grantees loaning funds to

other jurisdictions rather than using the funds in their own. The

proposed language would have added a new Sec. 570.309 to require that,

prior to using CDBG funds to assist projects outside jurisdiction

boundaries, grantees make a determination that the principal benefit of

the activities will accrue to persons residing within jurisdiction

boundaries.

HUD received 13 comments on this portion of the proposed rule, nine

of which expressed some opposition. Those opposed included four urban

counties, one State, one national public interest group, one regional

nonprofit organization, and one large metropolitan city. An advocacy

group and a national public interest group supported the proposal with

little additional comment. A metropolitan city and an urban county

neither supported nor opposed the proposed change, but requested

clarification on its effects. In addition, HUD received one comment

from a local HUD program officer opposing the rule as proposed and

raising some related issues.

[[Page 56899]]

The opposition to this proposal was primarily based on the chilling

effect the commenters felt this proposal would have on projects that

were jointly funded by cities and counties. The large metropolitan city

argued that this change would increase the isolation of central cities.

One urban county argued that all economies are linked--there are

indirect effects of development and long-term benefits to an area from

an activity, even one outside the county's jurisdiction. HUD's concern

should be assuring that a national objective is met. Several grantees

requested that different activities, such as water and sewer

developments, that are expected to result in jobs be excluded from the

requirement.

One public interest group cited a February 7, 1986 HUD memorandum

signed by former Assistant Secretary for Community Planning and

Development Moran. The Moran memorandum discussed an issue raised by an

urban county using CDBG funds in cities within the county, but outside

the jurisdiction of the urban county. As stated in that memorandum, HUD

believes that the determination of to whom and how an activity will

provide benefit is best left to the county. At that time, HUD had not

yet come across any grantee that appeared to be regularly spending CDBG

funds outside its jurisdiction. Since that time, several grantees have

loaned their CDBG funds to nonparticipating or nonentitled

jurisdictions, or have used CDBG funds outside their jurisdictions,

despite pressing need for facilities and services within their own

jurisdictions.

The CDBG formula results in grant awards to communities to benefit

the residents whose poverty and housing needs determined (via the

formula) the amount of funding. HUD has noticed that, particularly in

large urban counties, citizens can easily be unaware of the boundaries

of the urban county for purposes of the CDBG program when it differs

from the boundaries of the county as a whole, and may not be aware that

funds that were supposed to benefit one community are being spent to

benefit another. Since HUD is aware that activities located outside a

grantee's jurisdiction may indeed provide substantial benefits to the

citizens within the jurisdiction, the rule does not prohibit such

activities. The rule simply requires that the grantee consider whom the

funds will benefit and make a determination. HUD will not question the

determination unless it is clearly unreasonable. The rule does not

limit the amount or percentage of funds that may assist such an

activity, and should not affect joint efforts by cities and counties to

benefit their residents.

Several commenters noted that ``principal'' benefit would be

difficult to determine in certain cases. For example, the amount of

benefit to ascribe to each jurisdiction participating in joint

affirmative fair housing activities might not be easily assigned. In

response, HUD has adjusted the final rule to require a determination

that the activity was necessary to meet the purposes of the Act and

community development objectives of the recipient, and that

``reasonable'' benefits will accrue to the residents of the recipient.

The recipient is free to determine the reasonableness of the benefits

in such case.

HUD received an inquiry from a large metropolitan city about

whether this rule change would block affirmative fair housing efforts

to develop minority housing outside of areas of minority concentration.

In response, HUD definitely does not believe that this provision will

cause any such problem, especially as HUD has adjusted the provision in

this final rule.

One commenter, the HUD program officer, raised issues about the

difficulty of monitoring this provision. The purpose of this provision

is to ensure that, in funding an activity outside its boundaries, the

recipient has properly considered the purposes for which it was awarded

the funds. In most cases, HUD monitoring will simply involve making

certain that the determination has been made. Only when the HUD monitor

believes that the likely extent of the benefits to residents within the

jurisdiction is clearly not commensurate with the amount of funds spent

on the activity should it be raised as an issue with the recipient. For

example, a loan of CDBG funds to another jurisdiction for an activity

that would provide little or no benefit to the recipient's residents

would be very likely to provoke a challenge from HUD.

G. Remission of Grant Funds

This provision responds to Inspector General findings and

implements a General Accounting Office (GAO) opinion that income

generated by an ineligible CDBG-assisted activity must be returned to

the U.S. Treasury. Since, in the context of the GAO opinion,

eligibility includes meeting a national objective, this provision

should invoke a sharpened grantee focus on successful outcomes--

interest generated from CDBG-funded loans may only be kept by the

grantee when the national objective requirements are achieved.

HUD received four comments on this portion of the proposed rule. A

low-income advocacy group commented simply that it supported the

change. Another commenter, a State, had no objection, but suggested the

language ``or fail substantially to meet any other requirement of this

part'' was overly broad. However, HUD is retaining this language, as it

is standard language throughout the CDBG regulations in similar

situations.

A large metropolitan city requested a clarification on whether

return of interest is possible with CDBG funds. It gave an example of

an economic development loan that was supposed to meet the national

objective of low- and moderate-income jobs, but does not. The commenter

stated: ``Auditors declare the loan ineligible because no national

objective was met. Can the City identify CDBG funds and pay HUD the

interest earned, or is the grantee expected to use non-federal funds

for repayment?'' If a grantee received interest that is required to be

remitted to HUD pursuant to Sec. 570.500(a)(2) and used the interest

for payment of the costs of carrying out activities in its CDBG

program, it may remit CDBG funds (grants or program income) to HUD.

Grants should not be used for this purpose, however, if program income

is available. The commenter also wanted to know whether it is correct

in presuming that only interest, not principal, need be repaid in such

a case. The rule requires the interest to be remitted to the Treasury;

there is no recovery of principal amounts required for this purpose. If

HUD advises reimbursement of the principal amount using local funds,

any such payments would be available for use by the grantee under CDBG

rules and would not go to the Treasury.

One commenter, a public interest group, wants HUD to pay more

attention to the initial use for an eligible activity. HUD understands

the commenter to be objecting to consideration of the national

objective outcome in determining whether funds should be remitted.

However, this rule provides that if a grantee makes a loan that is

found not to meet a national objective, the interest may not be

retained by the grantee, whether the loan was eligible in a more narrow

sense or not. HUD intends to continue emphasizing loan programs that

are outcome-oriented.

H. Consolidated Plan Performance Standard

This rule provides performance criteria for implementing the

consolidated plan. This is important because every CDBG grantee must

certify, before receiving its annual grant, that it is carrying out its

consolidated plan--not just for its CDBG activities,

[[Page 56900]]

but for all programs and actions covered by the plan. Without a

published, regulatory performance standard, grantees are unlikely to

understand the significance of this certification.

HUD received six comments on this portion of the proposed rule.

Also, several entities commenting on the Consolidated Plan final rule,

published on January 5, 1995 (60 FR 1878), asked what standard HUD

would use to judge whether a grantee had ``carried out'' its

consolidated plan. HUD placed the standard in this rule because the

standard is driven by a CDBG-specific certification (see

Sec. 91.225(b)(3)) required by statute to be made before CDBG funds can

be awarded. A grantee making the certification affirms that it is

following its consolidated plan--in its entirety, not just the CDBG

portions--and that each CDBG-assisted activity will be consistent with

the plan. Failure to follow the consolidated plan can result in loss of

future CDBG funds. Parts of the Stewart B. McKinney Homeless Assistance

Act, including the Emergency Shelter Grants program, are governed by a

similar certification (Sec. 91.225(c)(9)), so forfeit of these funds

may also be possible if the consolidated plan is not followed.

One national public interest group commented that the proposed

standard is vague. The commenter requested clarification of the

standard and conformance of the standard with the consolidated plan.

HUD agrees that the proposed standard is general; it designed the

criteria to cover broad categories of actions (to pursue and use

resources, to make certifications of consistency, to take promised

actions, and to refrain from obstructionism) that HUD considers most

important in ensuring each plan is implemented. Within these

categories, the standard will be as general or as vague as the

descriptions of actions contained in each community plan. The same

grounds that led HUD to adopt custom-tailoring of each plan to the

needs and priorities of each community also led HUD to decide that the

suitable policy for administering the certification was to hold each

community to the standard of action the community set for itself in its

consolidated plan. The HUD review will be carried out by the same local

HUD office that is responsible for approving the plan. HUD made no

change to the rule as a result of this comment.

Two low-income advocacy organizations asked HUD to make grantees

``follow'' the consolidated plan by allocating fair share based on

needs. As HUD noted in the preamble to the Consolidated Plan final

rule, HUD declines this suggestion. HUD's goal for the consolidated

plan is to provide the framework for communities to have meaningful

plans. HUD does not wish to substitute its judgment for locally

developed plans and priorities framed through the strengthened citizen

participation process.

A national public interest organization and an urban county

commented that the proposed standard of taking all promised actions is

too high and inappropriate. Instead, they suggest a ``due diligence''

clause. HUD believes a standard that all promised actions should be

carried out will strengthen the consolidated plan process by

strengthening the confidence of citizens that the grantee really

intends to implement the actions described in the plan. The regulation

allows for consideration of events beyond the control of the grantee

and for grantee rebuttal of HUD reviews. Therefore, HUD made no change

in response to these comments.

One metropolitan city suggested this section be eliminated as

unnecessary. HUD agrees that this section would be unnecessary if the

certification was not to be reviewed. However, section 104(e) of the

Act requires HUD to review a grantee's performance to determine, among

other things, whether a grantee has ``carried out * * * its

certifications.'' Without some standard for performance review, the

consolidated plan would be an empty exercise. HUD has the

responsibility to ensure that each grantee meets all program

requirements, including the certification. Grantees have the right to

know against what standard their performance will be judged.

IV. Provisions From the November 12, 1993 Proposed Rule on

Sanctions

HUD published for comment two provisions of this final rule as a

proposed rule on November 12, 1993 (58 FR 60088). This proposed rule

covered performance reviews, timely expenditure of CDBG funds,

sanctions, and due process hearings. HUD has included the first two

topics in this final rule, but has withdrawn the other two topics.

After thoroughly considering the comments on the November 12, 1993

proposed rule, HUD decided to adjust its approach to these issues, and

HUD will be publishing another proposed rule in these areas shortly.

Therefore, this rule reflects the following changes to subpart O of

part 570--Performance Reviews. HUD has withdrawn its changes to

Secs. 570.907-913 and plans to repropose changes to these sections.

A. Performance Review Procedures

In order to clarify the relationship between HUD's review

procedures and HUD's process for resolving findings of deficiencies,

this final rule amends several of the elements of the performance

review procedures under Sec. 570.900 to: clarify what the primary

information sources will be for such reviews; provide the recipient

that has failed to comply with a program requirement an opportunity to

provide additional information; and indicate what initial actions HUD

may take.

B. Timely Performance

With respect to entitlement recipients, this final rule revises and

clarifies how HUD will review to determine if CDBG-funded activities

are being carried out in a timely manner.

HUD received two comments, both from grantees. One commenter

suggested that the measurement of timely performance be taken at a date

coincident with consolidated planning or reporting. Another commenter

recommended that program income not be coupled with the balance in the

line of credit because of the effect of balloon repayments on

timeliness calculations. This final rule at Sec. 570.902 indicates that

HUD will not only consider a recipient's line of credit balance but

also its program income on hand 60 days prior to the end of the program

year, as well as any evidence that lack of timeliness resulted from

factors beyond the grantee's reasonable control, believing that

generally a grantee should be able to plan and budget for the use of

scheduled loan repayments, including balloon repayments. HUD has

decided to continue measuring timeliness 60 days prior to the end of

the program year so that program progress can be considered prior to

the next grant award.

V. Provisions From the June 17, 1992 Interim Rule

A. Public Services Cap

This provision expands the public services limitation and rewards

entrepreneurial grantees by allowing a portion of program income to be

included in the amount available for public services. This increases

the amount of funds available for public services for grantees that

earn program income, and furthers government reinvention by maximizing

the grantees' options for fund use.

HUD received three comments on this portion of the rule. One

grantee suggested that the program income used in the calculation

should come from the time period that ends one year before

[[Page 56901]]

the beginning of the program year for which the cap is being

determined. HUD had considered this option prior to publication of the

interim rule, but rejected the time period as being overly remote from

the time period for which the action plan was being prepared. The other

two comments supported counting program income from the program year

immediately preceding the year for which the cap is being determined.

HUD selected this method for the final rule.

B. Conflict of Interest

This rule also incorporates a change to the prohibition against

conflicts of interest in the use of CDBG funds. This change furthers

government reinvention by clarifying regulatory requirements and by

limiting regulatory burdens. The conflict of interest provisions of

this rule include coverage of the subrecipient relationships that are

central to CDBG, but that are not as common in programs outside HUD's

Office of Community Planning and Development. (The regulation does not

apply to conflicts in regard to procurement contracts, which are

covered by 24 CFR part 85.) As described in the preamble to the June

17, 1992 interim rule (57 FR 27117-18), HUD believes that the conflict

rules should be limited to the prohibition of situations that provide a

financial interest or benefit.

HUD received three outside comments on the new provision, two from

national community development organizations and one from a city

official. All the commenters supported the change, believing that the

new regulation is sufficient without requiring further definition or

restriction. One commenter, employed as a community development

director in a CDBG entitlement community, offered personal experience

that his ability to serve on the boards of nonprofit corporations was

an effective use of his time. The commenter cited his belief that it

ensures better use of CDBG funds and compliance with Federal mandates

as the CDBG-funded activities are carried out. Both national

organizations expressed hope that amending the conflict of interest

regulation is a sign that HUD is moving away from ``overregulation of

public officials'' who are involved with nonprofit subrecipients. These

two commenters believe that serving on such organizations' boards has a

positive public benefit to the grantee, the subrecipient, and HUD.

In addition, HUD received comments from two local HUD offices, one

from an office manager and another from a community planning and

development director. Although both agreed that the use of the word

``personal'' has created difficulty, one was concerned that its removal

may undermine HUD's efforts to eliminate improper lobbying and

influence peddling. The other supported the proposed change.

Both HUD commenters offered additional points for consideration.

First, both expressed concern about the introductory phrase at

Sec. 570.611(b): ``Except for the use of CDBG funds to pay salaries and

other related administrative or personnel costs. * * *'' One commenter

felt that persons outside HUD read the phrase literally, and that the

phrase could appear, by itself, to allow current board members of a

CDBG subrecipient routinely to request CDBG-paid employment with that

subrecipient and to be considered routinely for open positions, without

prior approval from HUD.

The other HUD commenter believed the application of this exception

to the grantee and its subrecipients is not clear. This commenter

expressed concern that the exception implies that subrecipient board

members or city directors would be allowed to hire family members as

staff, and that other forms of nepotism or preferential treatment could

occur (absent any local civil service rules to the contrary). The

commenter described a situation in which the paid director of a

nonprofit subrecipient leased space in a building he owned to the

nonprofit for its offices. Both his salary and the rent were paid with

CDBG funds. While the field office interpreted this as a conflict, this

could have been considered ``related administrative costs'' excepted

under the rule's introductory phrase, instead of a situation that

requires a request for an exception under the provisions of

Sec. 570.611(d) and (e). Both commenters recommended that HUD add

clarifying language expressly to indicate that receipt of a salary by

an existing CDBG-funded staff person for performing eligible activities

is not to be considered, in itself, a prohibited interest or benefit

under Sec. 570.611.

Since the existing introductory language at Sec. 570.611(b) appears

to cause confusion, HUD has deleted it. Although the commenters

suggested changing or adding clarifying language, HUD decided that the

existing restrictions at Sec. 570.206 (Program administration costs)

along with Sec. 570.611 are sufficient to prevent inappropriate

situations. Exceptions can be handled through the mechanism in

Sec. 570.611(d).

HUD received a second comment about Sec. 570.611(b), specifically

the phrase ``may obtain a financial interest or benefit from a CDBG-

assisted activity.'' The commenter expressed concern that a strict

interpretation could prohibit a covered person in a subrecipient entity

from obtaining an interest or benefit from any CDBG funded activity,

not just the one(s) administered by the subrecipient. Although such an

extreme interpretation is possible, generally a subrecipient employee

is restricted to just the activity run by the subrecipient (although a

city employee would be restricted from any CDBG activity). Thus, HUD

made no change in the current language.

A third commenter raised the suggestion that HUD should replace the

words ``contract, subcontract'' in Sec. 570.611(b) with words such as

``subrecipient agreements.'' This commenter remarked that the current

terminology confuses the application of these rules, since procurement

activities are covered in other regulations (in 24 CFR parts 84 and

85). Since the word ``agreement'' is already in Sec. 570.611 (in the

same phrase), it is not appropriate to follow this suggestion.

``Contract'' and ``subcontract,'' as defined words, are appropriate to

use in part 570 as well as parts 84 and 85, and in OMB Circular A-110.

A fourth commenter suggested that the phrase ``family or business

ties'' in Sec. 570.611(b) needs an expanded definition. This commenter

expressed concern that, without more definition, it is unclear whether

``immediate family,'' as defined in 24 CFR 85.36, is intended. The

commenter argued that, in some communities with histories of extended

family ties, it could be difficult to avoid a conflict. Similarly, the

commenter expressed concern that, without definition, the business ties

between, for example, an individual and the family doctor would be

construed to pose the same conflict of interest concern as those

between members of a partnership in a business. In response to this

concern, HUD has amended Sec. 570.611(b) to include the word

``immediate'' to clarify the extent of family to be covered. HUD has

left the term ``business'' unchanged, however, on the basis that the

exception provisions will allow for the necessary distinction.

A fifth comment concerned the existing language at Sec. 570.611(c)

(Persons covered). By not including the word ``of'' at the beginning of

the final phrase, ``subrecipients that are receiving funds under this

part,'' the commenter argued that a subrecipient would not include in

the regulation's coverage the same persons as those ``of the recipient,

or of any designated public agencies.'' It

[[Page 56902]]

could instead be construed only to mean the subrecipient as an entity

and not its employees as individuals. HUD has therefore amended the

rule at the beginning of that final phrase, ``subrecipients that,'' to

commence with the word ``of,'' to be consistent with the other two

types of entities covered.

Another commenter expressed concern that handling exceptions on a

``case-by-case basis'' has created a time-consuming exercise for both

HUD and grantees in responding to the current regulation, which the

commenter found to be too broad and vague. This commenter offered a

number of suggestions, including allowing grantees to establish

procedures ``in a manner acceptable to HUD,'' exempting specific

members and officials of subrecipients from persons covered, and

separating the regulations applicable to the grantees from those

applicable to subrecipients. HUD has clarified the conflict of interest

provision in this rule, which should eliminate many of the exception

cases that would now come to HUD for a determination. The exception

thresholds in this rule continue to include a determination by the

recipient's attorney that the conflict in question does not violate

local or State standards. HUD does not believe, however, that

permitting grant recipients to exempt some of their employees or

subrecipient employees from CDBG conflict of interest provisions is in

the best interests of the CDBG program.

In reviewing the comments, HUD determined that, although no further

substantive changes to the regulation at Sec. 570.611 are necessary,

some editorial reorganization of Sec. 570.611(d) would further clarify

the exception requirements. Therefore, this final rule adjusts the

language at Sec. 570.611(b) as specified above, and makes additional

adjustments to Sec. 570.611 (d) and (e).

C. Loans to Subrecipients

This provision expands the ways CDBG assistance may be provided to

subrecipients. It follows the principles of government reinvention by

increasing grantee flexibility.

HUD received four comments on this provision. Two of the four

commenters, an urban county and a public interest group, requested HUD

to permit the urban county to make loans to units of general local

government participating under an urban county consortium. The

commenters gave the following reasons for this proposal: (1) the change

would enhance program options and creativity; (2) the change would

allow the grantee greater leverage in monitoring an activity and

provide more opportunity for reusing funds; and (3) grants could be

continued to communities experiencing widespread distress, but loans

could be provided to better-off communities capable of repayment as an

incentive to serve low-income areas.

HUD understands that the commenters would like the units of

government participating in an urban county to be subrecipients for

almost all purposes. However, since the urban county is simply a

jurisdiction composed of a group of local governments (including a

county) joined into one entity for the purpose of receiving a CDBG

entitlement, any loan by the administering entity (the county

government) to a member of the jurisdiction is a loan by the urban

county to itself, and, as such, is not permissible.

HUD has adjusted Sec. 570.500(c), defining ``subrecipient'' to

clarify that a subrecipient may receive funds from the recipient or

from another subrecipient.

D. Program Income Generated by Loans to Subrecipients

The intent of this provision is to permit grantees to accept loan

payments derived from program income from subrecipients while

eliminating any double-counting of program income received through that

process. HUD received two comments on the revisions to program income

in relation to loans to subrecipients, one from an urban county and one

from a national public interest organization. HUD made no changes to

the rule as the result of these comments.

One commenter objected to excluding from the calculation of total

program income received any loan repayments received by grantees from

subrecipients when such payments are made from program income received

by the subrecipient. The commenter stated that while it may be

appropriate in some cases for the repayment of principal to be

classified as a ``return or transfer of grant funds,'' interest

payments should always be treated as new income. The comment suggests a

misunderstanding of what HUD intended by the new Sec. 570.500(a)(3).

This section does not classify loan repayments to grantees by

subrecipients using program income as a ``return of grant funds,'' as

that term is generally used in the CDBG program. It classifies them as

``transfer[s] of program income.''

If the funds used by a subrecipient to make principal or interest

payments on a CDBG loan it received from a grantee consist solely of

program income received by the subrecipient, no amount of those

payments to the grantee represents ``new income'' to the grantee's CDBG

program as a whole. If, however, the subrecipient uses non-CDBG funds

to make the principal or interest payments, those payments to the

grantee are ``new income'' to the CDBG program. The new

Sec. 570.500(a)(3) does not affect the treatment of such payments.

VI. Provisions From the March 28, 1990 Proposed Rule

HUD received a number of comments on the March 28, 1990 proposed

rule. This final rule will not be implementing citizen participation

changes resulting from the Housing and Community Development Act of

1987. These changes were included in the Consolidated Plan final rule,

published on January 5, 1995 (60 FR 1878). Additional CDBG citizen

participation changes, most notably requirements regarding float-funded

activities, were published in the August 10, 1994 proposed rule

discussed above. This rule will also not be implementing the

substantial reconstruction provision of the March 28, 1990 proposed

rule at this time, because pending legislative proposals would make

this change unnecessary.

A. Use of CDBG Funds for Assisting Certain Uniform Emergency Telephone

Number Systems

This provision increases grantee flexibility by implementing a new

eligibility provision. HUD received nine comments on the proposed

provisions implementing this use of CDBG funds. Two of the commenters

were national organizations, one of them having an interest in the

administration of the CDBG program generally, and the other

representing persons involved in administering emergency number

systems. Three of those commenting were officials of urban county grant

recipients under the CDBG program. Two others represented law

enforcement agencies that would presumably be involved in a uniform

emergency number system. The remaining two commenters were from

Congress--one Senator and one Representative. The commenters generally

did not provide a basis for changing the proposed provisions, and the

final rule reflects only minor clarifying changes to the proposed rule.

Two of the commenters argued that the information that grantees

would be required to submit to HUD for approval under these provisions

for the use of CDBG funds for uniform emergency telephone number

systems (ETNS) would be too costly and impractical, especially for

large metropolitan cities and urban counties. They believed that

[[Page 56903]]

since grantees can only use CDBG funds under this provision for the

activity for two years, it would not be worth the expenditure of time

and effort to gather and submit the proposed material. HUD acknowledges

this possibility, but has been unable to identify any other more

suitable ways to determine that the proposed activity meets all of the

requirements set forth in the Act. The Act requires HUD to determine

that at least 51 percent of the users of the system in question will be

low- and moderate-income persons. It is not possible for HUD to make

such a determination without factual information about the system and

its likely users. Since the commenters did not offer any other

approaches for HUD to consider, the final rule does not vary much from

the proposal.

However, some of the commenters appeared to misunderstand how the

proposed provision would operate in the CDBG program. The proposal

would only come into play with respect to those emergency number

systems that serve a geographical area that does not contain a high

enough percentage of low- and moderate-income persons to qualify under

the present regulations. (See Sec. 570.208(a)(1) as it existed before

this rule.) For emergency systems serving areas having percentages of

such persons amounting to 51 percent or more, or where the service

area's percentage is less than 51 percent but still falls within the

community's ``highest quartile'' (see Sec. 570.208(a)(1)(ii)), there

would be no need for the grantee to submit information to HUD or for

HUD to make any of the determinations called for in this rule.

One commenter believed the requirement that the CDBG contribution

to the cost of the system be limited in proportion to the percentage of

low- and moderate-income persons residing in the service area

constituted a ``method and perhaps a test of proportional accounting.''

This may have been a reference to HUD's announced intention several

years ago to seek legislation aimed at changing the benefit accounting

method for the program, which HUD subsequently decided not to pursue.

However, HUD derived this portion of the proposed rule directly from

the statute, and does not have any intention to change the method of

accounting used generally in the CDBG program.

Two commenters suggested that HUD adopt a rule on the use of CDBG

funds for ETNS that would allow all communities the opportunity to use

funds to develop, establish, and operate ETNS to meet their own

specific needs. The commenters were concerned that the proposed rule

limited the usage to communities in which more than 51 percent of the

residents of the area were low- and moderate-income (except for those

communities covered by the ``highest quartile'' provision in the

regulations). However, this is not the case. HUD designed the proposed

rule to allow communities to use CDBG funds for ETNS in areas in which

less than 51 percent of the residents are low- and moderate-income, if

51 percent of the users of the system will be low- and moderate-income.

(In making this determination, HUD will assume that the distribution of

income among the callers generally reflects the distribution of income

among the entire population residing in the same area where the callers

reside.)

For example, a community has an ETNS that covers three census

tracts (tracts A, B, and C) with low- and moderate-income residents

consisting of 20 percent for tract A, 80 percent for tract B, and 40

percent for tract C. (The percentages of low- and moderate-income

persons are derived by dividing the total number of low- and moderate-

income persons per census tract by the total number of persons within

the census tract.) A total of 95 calls were received: 15 calls from

tract A, 50 from tract B, and 30 from tract C. HUD would presume that 3

of the calls from tract A, 40 calls from tract B, and 12 calls from

tract C were from low- and moderate-income persons (20% x 15 = 3;

80% x 50 = 40; and 40% x 30 = 12). Thus, HUD would consider 55 of the

95 calls to be from low- and moderate-income persons, which is

equivalent to 57.89 percent, exceeding the minimum required threshold

of 51 percent.

One commenter, a rural county, suggested that rural communities be

allowed to apply directly to HUD for CDBG funds for ETNS. The Housing

and Community Development Act of 1974 requires States to distribute

CDBG funds to nonentitled areas, unless a State has elected not to

carry out the CDBG program. Only two States, Hawaii and New York, have

made such an election. Therefore, nonentitled communities may not

receive funds directly from HUD in the other States. This commenter

also stated that grants for ETNS in the rural counties in its State had

not been included in the State's most recent final statement. Because

this provision has not yet been made a part of the regulations, a State

would not have been expected to include activities qualifying under

this provision in its final statement. For years, however, States have

been able to make grants to be used for ETNS serving areas in which at

least 51 percent of the residents are low- and moderate-income.

Another commenter sought clarification concerning the extent to

which CDBG funds may be used to support an ETNS. The statute itself

limits the percentage of the total cost of the ETNS development,

establishment, or operation that is to be provided using CDBG funds to

be no higher than the percentage of low- and moderate-income persons

residing in the area served by the system. For example, using the same

hypothetical situation as described above, assume that the grantee's

jurisdiction consists of three census tracts (tract A having 20

percent, tract B having 80 percent, and tract C having 40 percent low-

and moderate-income persons), and that the ETNS would serve the entire

community. Also assume that tracts A and C each contain 100 people,

while tract B contains only 80. Thus, the number of low- and moderate-

income persons residing in these tracts would be 20 persons in tract A,

64 in tract B, and 40 in tract C. The total number of low- and

moderate-income persons in the service area would be 124 out of a total

of 280 persons. The percentage of low- and moderate-income persons in

the service area would then equal 44.3 percent. CDBG funds for

developing, establishing, and operating an ETNS during a one- or two-

year period could therefore not exceed 44.3 percent of the total cost

of developing, establishing, or operating the system. If it is assumed

that the grantee only wanted to assist the operation of the system for

one year, and that such an operation would cost $100,000 in total, CDBG

funds in an amount not to exceed $44,300 could be used for this

purpose.

The same commenter also asked what research had been done before

the proposed rule was developed, arguing that the guidelines would have

been quite different had research been done regarding what segment of

the population actually used ETNS. HUD sought information from various

State, local, and national organizations before developing the proposed

rule. None of them was aware of any data already available that would

demonstrate that any particular percentage of the total users of an

ETNS would likely be of low or moderate income. In fact, one national

organization suggested that interested communities should be required

to gather data over a three-year period to determine the

characteristics of the system's users. HUD determined, however, that

such a requirement would be unnecessarily onerous for grantees, and

decided instead that one year's

[[Page 56904]]

experience would be adequate for this purpose.

One of the commenters, a grantee, sought clarification on several

issues not related to applying for approval of an ETNS under the

proposed provisions. Noting apparent inconsistencies in the preamble to

the proposed rule, the grantee asked which HUD office was to be making

the required HUD determinations that: (1) The system will contribute

substantially to the safety of the residents of the area served by the

system; (2) not less than 51 percent of the use of the system will be

by persons of low- and moderate-income; and (3) other Federal funds

received by the recipient are not available for the development,

establishment, and operation of the system due to the insufficiency of

the amount of the funds, restrictions on the use of the funds, or the

prior commitment of the funds for other purposes by the recipient. This

determination is to be made by the appropriate local HUD office.

This commenter also asked about HUD's definition of ``emergency

services.'' HUD did not propose a definition of emergency services,

believing that communities would only include services that involve

emergency situations under their respective ETNS. HUD believes the

emergency services that would typically be included in an ETNS are

police, fire, and ambulance services. However, it recognizes that

larger communities could be expected to include others, such as a

suicide hotline. The same commenter also argued that, particularly in

some rural communities, information on the number of calls received

over the preceding 12-month period and the location from which those

calls were made may not be available. This final rule provides that the

grantee is to submit ``information that serves as a basis for HUD to

determine whether 51 percent of the use of the system will be by low-

and moderate-income persons.'' The information on past users discussed

by the commenter is to be supplied ``as available.'' HUD is unaware of

any basis upon which it could make the required determination about the

income levels of likely users of a ETNS other than that specified in

the rule. However, the grantee may submit whatever it believes could be

used for this purpose, and HUD will review it as necessary to make a

judgment about its usefulness. Since HUD expects that a grantee not

having the past-use data mentioned in the rule may contemplate

expending considerable effort to acquire other data for submission to

HUD for this purpose, the rule suggests that the grantee make known its

planned methodology to HUD in advance, in order to find out if HUD

would consider the planned methodology to be acceptable as a basis for

making its required determination.

The same commenter also recommended that the requirement that 51

percent of the users be low- and moderate-income should be reduced,

pointing to the provision in Sec. 570.208(a)(3)(i)(B) that permits as

little as 20 percent occupancy by low- and moderate-income residents in

cases in which CDBG funds are used to assist newly constructed,

multifamily, nonelderly rental housing. However, the statute provides

specific requirements for activities that benefit an area generally,

such as an ETNS. These requirements are more exacting than those

required for housing activities. For an ETNS that cannot qualify under

the provisions in the regulations as they existed before this rule, the

requirement to determine that at least 51 percent of the users will be

low- and moderate-income persons is statutory and cannot be changed by

regulation.

The commenter also thought that HUD should consider permitting ETNS

to be carried out in Urban Development Action Grant (UDAG) eligible

areas, because these areas qualify as distressed communities. However,

the UDAG program has been terminated, and HUD no longer determines

community distress levels for that program. Moreover, a designation of

UDAG eligibility could not necessarily be substituted for the

determination of income status of the likely users of an ETNS for the

community, which the statute requires for this purpose.

One commenter stated that, given the regulatory requirements in the

proposed rule, it was unlikely that significant amounts of CDBG funds

would be spent on ETNS. While this may be the case, HUD does not have

flexibility under the statute to reduce the requirements associated

with this provision to increase the likelihood of use of CDBG funds.

B. Use of CDBG Funds To Pay Special Assessments

This provision increases grantee flexibility, furthering the

principles of reinventing government, by allowing assistance for an

eligible activity to consist solely of special assessments made on

behalf of low- and moderate-income households. HUD received four

comments on this proposed provision. None of the comments provided a

basis for changing the rule. One commenter suggested that when CDBG

funds are used just for the special assessments and are not used to pay

for the construction of the public improvement directly, the project

should not be subject to all the requirements of the CDBG program, such

as Davis-Bacon and citizen participation. However, there is no

eligibility category under which CDBG funds can be used for paying a

special assessment except for the eligibility of the improvement for

which the assessment is made. Thus, even when the only form of CDBG

usage assisting a public improvement is in paying for special

assessments levied for that improvement, all of the CDBG program rules

are triggered with respect to the construction (see

Sec. 570.200(c)(3)).

Two commenters suggested that HUD amend this provision to limit the

use of CDBG funds for the payment of assessments. One suggested that it

should be limited to payments on behalf of low-income households,

instead of both low- and moderate-income households, in order to avoid

the use of CDBG funds in what they described as the ``better parts of

town.'' However, the statutory provision itself authorizes the use of

funds for both categories of households, and HUD does not believe there

is a need to so limit the regulatory provision. The second commenter

suggested that the rule allow the use of CDBG funds to pay for the

assessments for the very lowest-income households among those assessed,

without having to pay the assessments on behalf of all of the low- and

moderate-income households involved. To the degree that the statute

allows, the regulations do provide for an exception only with respect

to moderate-income households in certain circumstances. Given the clear

statutory provisions, HUD cannot allow additional payment limitations

based on income.

VII. Statutory Amendment Provisions

Title I of the Housing and Community Development Act (the Act) has

been amended a number of times since 1987. Several self-implementing

changes to the Act affecting the CDBG program are included in this rule

merely to conform the regulations with statutory provisions. This

furthers government reinvention by bringing the CDBG rule current with

all its authorizing legislation, as grantees have requested. An updated

entitlement CDBG rule will simplify program administration for CDBG

entitlement grantee staff who currently must research back and forth

among various statutes and outdated regulations, handbooks, and

guidance to determine activity eligibility and program standards. The

statutory additions largely increase grantee options and enhance CDBG

flexibility.

[[Page 56905]]

A. National Affordable Housing Act

Subtitle A of title IX of the Cranston-Gonzalez National Affordable

Housing Act (Pub. L. 101-625, approved November 28, 1990) (the NAHA)

amends the Housing and Community Development Act of 1974 (the Act).

Section 903 of the NAHA amends section 102 of the Act, which includes

the definitions of ``metropolitan city'' and ``urban county.'' HUD has

amended the definition of ``metropolitan city'' in Sec. 570.3 to

reflect the statute. No amendment is needed to the definition of

``urban county'' in Sec. 570.3, because the regulation includes any

other county eligible under section 102(a)(6) of the Act.

Section 904 of the NAHA amends section 102(a)(12) of the Act, which

includes the definition of ``extent of growth lag,'' to provide for

boundary changes for a metropolitan city or urban county as a result of

annexation. HUD has amended Sec. 570.3 to add the new statutory

language. In Sec. 570.3, however, HUD refers to the more appropriate

1990 census, rather than the 1980 census to which section 102(a)(12)

refers. This modification is required by section 102(b) of the Act.

Section 912 of the NAHA amends section 109 of the Act to prohibit

discrimination on the basis of religion. HUD has amended Sec. 570.602

to add the term ``religion.''

B. Housing and Community Development Act of 1992

Section 807 of the Housing and Community Development Act of 1992

(Pub. L. 102-550, approved October 28, 1992) (the 1992 Act) amends

section 105(a) of the Act to establish two new categories of eligible

CDBG activities: the provision of technical assistance to public or

private entities to increase their capacity to carry out eligible

neighborhood revitalization or economic development activities as

outlined in a new Sec. 570.201(p), and the provision of assistance to

institutions of higher education for carrying out eligible activities.

Provision of technical assistance to public or nonprofit entities

to increase their capacity to carry out eligible neighborhood

revitalization or economic development activities is specifically

exempted from the 20 percent limitation on planning and administrative

costs under Secs. 570.205 and 570.206. Since this new provision became

effective upon enactment, any costs incurred after October 28, 1992 for

building such capacity should be considered eligible under the new

provision and not subject to the 20 percent limitation, provided that

the use of such funds after the effective date can be shown to meet one

of the national objectives.

Since this provision of the statute clarifies that the capacity

building must be linked to CDBG-eligible neighborhood revitalization or

economic development activities, a grantee must determine the

eligibility of the activity for which it is attempting to build

capacity. It must also determine which national objective can

reasonably be expected to be met once the entity has received the

technical assistance and undertakes the activity. For example, a

grantee may provide CDBG record-keeping, work write-up, loan

underwriting, and rehabilitation inspection training to a nonprofit

organization that anticipates carrying out a housing rehabilitation

loan program. The grantee's contract with the nonprofit should identify

the eligible activity and the national objective expected to be met by

the rehabilitation program that is to be undertaken as a result of this

capacity building effort. In determining the national objective to be

met, the grantee should: (1) Review the nature of the organization, the

type and eligibility of the activity expected to be carried out, the

location of the activity, and the entity's expected (or traditional)

clientele; and (2) as a result of the review, have a reasonable

expectation that the activity to be undertaken by the nonprofit entity

would comply with a national objective. For example, the grantee might

reasonably conclude that the contemplated activity would meet the

national objective of benefit to low- and moderate-income persons based

on a review of the nonprofit's charter that showed the organization's

activities would be directed toward and benefit the low- and moderate-

income persons in the neighborhood in which it operates. HUD makes

conforming changes to reflect the recipient determinations at

Secs. 570.200(e) and 570.506(c).

The 1992 Act also added a new paragraph 105(a)(22) to the Act.

CDBG funds may now be used by colleges and universities that have the

demonstrated capacity to use the funds for eligible activities. HUD

intends to permit grantees to make this determination of demonstrated

capacity using their own judgment. A grantee determination is the most

effective way to meet this requirement, since the grantee is most

familiar with the entities to which it proposes to give CDBG funds and

is therefore in the best position to make a judgment of capacity. This

rule adds a new paragraph Sec. 570.201(q), and makes conforming changes

to reflect the recipient determinations at Secs. 570.200(e) and

570.506(c).

Section 807(b) of the 1992 Act amended section 907(b)(2) of the

NAHA by extending the date that use of funds for direct homeownership

assistance is eligible under the CDBG program to October 1, 1994. In

addition, the date to which the Secretary of HUD may, under certain

circumstances, extend such eligibility was changed to October 1, 1995.

HUD received three comments in response to the publication of the

direct homeownership assistance provision in the June 17, 1992 interim

rule. All three commenters supported the extension. Two commenters

recommended extending it beyond the original NAHA date of October 1,

1992 and making it a permanent eligible use of CDBG funds. HUD

published a Federal Register notice on September 30, 1994 (59 FR 49954)

extending the provision to October 1, 1995, and this final rule amends

the regulations to reflect that date. Although the provision terminated

when the extension period ended, HUD has requested that Congress change

the statute to reinstate the activity's eligibility. Thus, HUD has

retained the provision for now, although it is not in effect. HUD also

made a conforming change to Sec. 570.506.

Section 807(c)(1) of the 1992 Act amended section 105(g)(2) of the

Act to authorize training, technical assistance, or other support

services to increase the capacity of small businesses,

microenterprises, the recipient, or subrecipient to carry out CDBG

economic development activities. These costs were not to be included in

the limitation on administration and planning expenditures. This

provision was effective upon enactment. The Economic Development

Guidelines, published on January 5, 1995 (60 FR 1922), incorporated

into the CDBG regulations at Sec. 570.201(o) the portions of the

statute dealing with the microenterprises. This rule adds a new

Sec. 570.201(o)(4), allowing capacity building for the grantee and

subrecipient as microenterprise activities.

Section 807(e) of the 1992 Act amended section 105(a)(3) of the Act

with respect to the current restrictions on areas in which CDBG funds

may be used for code enforcement activities, and now permits grantees

to take into account privately funded development. Previously, CDBG-

funded code enforcement was only permitted in deteriorated or

deteriorating areas in which such enforcement, together with public

improvements and services to be provided, would be expected to arrest

the decline of the area. This rule

[[Page 56906]]

amends Sec. 570.202(c) to permit consideration of private improvements

in determining areas in which CDBG-assisted code enforcement may be

provided. Section 570.202(c) now also clarifies that only the costs of

inspections, not the costs of any improvements done as a result, are

eligible in this category.

Section 809 of the 1992 Act amends section 105(a)(13) of the Act to

make eligible the use of CDBG funds to pay for the reasonable

administrative costs related to establishing and administering a

Federally approved Enterprise Zone. While this authority became

effective upon enactment, its utility is dependent on the implementing

regulations at 24 CFR part 597, published January 12, 1995 (60 FR

3434), for the Federal Empowerment Zone and Enterprise Community

legislation. This rule adds a new paragraph (i) to Sec. 570.206 to

provide authority for such costs for officially designated Federal

Empowerment Zones and Enterprise Communities (EZ/EC).

C. Residential Lead-Based Paint Hazard Reduction Act of 1992

The Residential Lead-Based Paint Hazard Reduction Act of 1992 is

title X of the 1992 Act. This final rule includes one statutory

provision from this Act requiring little or no regulatory elaboration.

The provision allows for evaluation and reduction of lead-based paint

hazards as a separate activity. While reduction of lead-based paint

hazards has always been a CDBG-eligible activity (provided the activity

could meet a national objective), evaluation was heretofore only

eligible in conjunction with a rehabilitation activity. Section

570.202(f) provides authority for evaluation as a rehabilitation

activity in itself.

D. Multifamily Housing Property Disposition Reform Act

The Multifamily Housing Property Disposition Reform Act of 1994

(Pub. L. 103-233, approved April 11, 1994) (the 1994 Act) included two

eligibility enhancements and expanded CDBG waiver authority for

disaster areas. Section 234 of the 1994 Act added section 122 to the

Act to provide flexibility to the CDBG program for disaster areas. This

rule adds this provision to the regulatory waiver provisions at

Sec. 570.5. When a CDBG recipient designates its CDBG funds to address

the damage in an area for which the President has declared a disaster

under title IV of the Robert T. Stafford Disaster Relief and Emergency

Assistance Act (42 U.S.C. 5170-5189b), the Secretary may suspend all

requirements for purposes of assistance under section 106 of the Act

for that area, except for those related to public notice of funding

availability, nondiscrimination, fair housing, labor standards,

environmental standards, and requirements that activities benefit

persons of low- and moderate-income.

To use this provision, a CDBG recipient may designate funds from

existing or future grants to address damage in a Presidentially

declared disaster area and request the Secretary to waive provisions of

law or regulation for the purpose of making such funds available for

disaster recovery purposes. Local HUD offices receiving disaster

recovery waiver requests will expedite the forwarding of such requests,

together with local office reviews and recommendations, to the

Assistant Secretary for Community Planning and Development for

consideration.

Assuming HUD grants the waivers, the activities being carried out

with the designated funds would operate under different requirements

than the regular CDBG program. Therefore, the grantee will be required

to annotate its performance report in such a way that activities for

which waivers have been granted are distinguishable from regular

program activities. Also, the grantee will be required to annotate and

describe the activity in such a way in its annual action plan or

amended action plan, as appropriate, that the activity is clearly

distinguishable as a designated disaster recovery activity.

Section 207 of the 1994 Act also amended section 105(a)(13) of the

Act to allow payment of reasonable administrative costs and carrying

charges related to administering the HOME program under title II of the

NAHA. This provision is included together with the EZ/EC provision at

Sec. 570.206(i). The costs covered by these provisions do not include

planning costs under Sec. 570.205. All administrative costs, whether

used to administer the EZ/EC, HOME, or CDBG programs, are summed before

applying the CDBG 20 percent limit on planning and administration

expenditures. Activities may not be carried out under Sec. 570.206(g),

which currently is not available because of its link to a Housing

Assistance Plan (HAP) that is no longer in effect for any grantees. HUD

is currently exploring possible ways to update this provision.

Section 207 of the 1994 Act also amended section 105(a)(21) of the

Act, authorizing housing services, such as housing counseling in

connection with tenant-based rental assistance and affordable housing

projects assisted under title II of the NAHA, energy auditing,

preparation of work specifications, loan processing, inspections,

tenant selection, management of tenant-based rental assistance, and

other services related to assisting owners, tenants, contractors, and

other entities participating or seeking to participate in housing

activities assisted under title II of the NAHA.

These activities have been eligible since the enactment of CDBG

amendments in 1992, but otherwise ineligible CDBG assistance in support

of the HOME program was subject to the 20 percent limit on

administrative and planning expenditures. The current amendment removes

this restriction. This rule includes this provision at Sec. 570.201(k).

Any costs of delivering the housing services made eligible under

the amended section 105(a)(21) are eligible. CDBG grantees using the

two programs together should be reminded that the eligibility and

benefit requirements of the two programs differ, that the HOME term

``project'' and the CDBG term ``activity'' are not synonymous, and that

care should be exercised in management and documentation of blended

activities. To simplify this process, this rule adds a new paragraph at

Sec. 570.208(a)(3)(iii), which states that when CDBG funds are used for

housing services eligible under Sec. 570.201(k), such funds shall be

considered to benefit low- and moderate-income persons when the housing

for which the services are provided is to be occupied by low- and

moderate-income households. Documentation demonstrating that the HOME

project (or projects) supported by the CDBG housing services activity

meets the HOME income targeting criteria at 24 CFR 92.252 and 92.254

should be sufficient to demonstrate compliance with this provision.

VIII. Miscellaneous Technical Updates and Corrections

This rule replaces the obsolete references in subpart J to OMB

Circular A-110 with references to 24 CFR part 84, and this rule updates

the references to OMB Circular A-87 to reflect recent revisions to that

document. In conjunction with this update, HUD is clarifying and

broadening the rule at Sec. 570.200(h) defining pre-agreement (now pre-

award) costs. The current CDBG rule authorizes a few types of costs

that may be incurred prior to execution of the annual grant agreement;

this rule permits grantees to incur any cost that meets certain

standards (e.g., the activity is included

[[Page 56907]]

in the consolidated plan and citizens have been informed) and then

charge the costs to the grant after the effective date of the grant

agreement. Further, until now when a cost was not one of the types

specified in the rule, the grantee had to request a pre-agreement cost

waiver from HUD Headquarters. Under this rule, a grantee wishing to

incur a cost that does not meet the new, broader standards may request

certain pre-award cost exceptions from the local HUD office. This

change furthers reinvention by providing local jurisdictions greater

flexibility to determine use of resources and by devolving

responsibility for decisionmaking to the local offices, thereby greatly

limiting the number of cases that will need the Assistant Secretary's

approval.

Another technical change is to replace the term ``handicapped'' in

Secs. 570.208 and 570.506 with terms compatible with available income

data on persons with a disability provided by the Bureau of the Census'

Current Population Reports. The data, issued in 1993 from the Survey of

Income and Program Participation, provide a basis for a national

presumption that adults meeting the Census criteria for severe

disability meet the low- and moderate-income national objective under

the CDBG program. The Census definition of severe disability only

applies in the CDBG program for purposes of making presumptions about

income levels for groups of disabled persons; it does not apply for

purposes of meeting responsibilities under section 504 of the

Rehabilitation Act of 1973, the Americans With Disabilities Act, or the

Architectural Barriers Act. Therefore, HUD is changing the terminology

in this rule to clarify the distinction between the income presumption

provision and the civil rights requirements. Also, this rule adds the

term ``persons living with AIDS'' to Sec. 570.208(a)(2)(i)(A), because

reliable national data has become available from the Center for Disease

Control in Atlanta to support a reasonable presumption that at least 51

percent of such persons in a given geographic area are low- and

moderate-income. This rule also clarifies provisions under which the

use of CDBG funds is authorized for the removal of barriers to

accessibility for elderly and disabled persons. Section 105(a)(5) of

the Act makes eligible the use of program funds for special projects

directed to the removal of material and architectural barriers that

restrict the mobility and accessibility of elderly and handicapped

persons. Under current law and regulation, this provision has very

limited usefulness and has caused confusion. HUD believes that it is

important that the rules clearly state how CDBG funds may be used for

barrier removal. The real questions arise with respect to national

objective compliance. Virtually all public facilities and improvements

serve an area generally and are thus subject to the limitations imposed

by section 105(c)(2) of the Act. This provision states that activities

that serve an area generally may be considered to address the national

objective of benefit to low- and moderate-income persons only if the

percentage of residents in the service area who are of such income

meets certain minimum levels. In the regulations, this limitation is

implemented at Sec. 570.208(a)(1). Where accessibility barriers exist

in a facility or improvement that serves an area that does not meet

this requirement, the use of CDBG funds to remove such barriers can be

problematic. Many years ago, to provide a way to authorize the use of

CDBG funds to remove barriers in such cases, Sec. 570.208(a)(2) was

added to the regulations allowing use of CDBG funds for the following

to be considered to meet the national objective of benefit to low- and

moderate-income persons:

``(ii) A special project directed to removal of material and

architectural barriers which restrict the mobility and accessibility

of elderly or handicapped persons to publicly owned and privately

owned non-residential buildings, facilities and improvements and the

common areas of residential structures containing more than one

dwelling unit.''

This presumption assumes that the principal benefit will go to elderly

and disabled persons, and that the general public will not also benefit

substantially from the activity, since if it did the activity might not

meet the general rule that the majority of the beneficiaries must be

low- and moderate-income persons. A number of recent policy cases have

arisen from grantee confusion about the current language. To clarify

the eligibility of architectural barrier removal, this rule removes the

separate eligibility category at Sec. 570.201(k) and describes in

Sec. 570.201(c) and Sec. 570.202(b) that architectural barrier removal

is an eligible activity. This rule also changes Sec. 570.208(a)(2) to

clarify in which circumstances the limited clientele presumption may be

applied to such activities.

Another technical change at Secs. 570.304(a), 570.429(g), and 24

CFR 91.500 restores language inadvertently deleted by the Consolidated

Plan final rule, and clarifies that HUD retains authority under the

CDBG program to require additional assurances from grantees when

substantial evidence exists that a certification of future performance

is not valid. This CDBG authority is in addition to the current

Consolidated Plan final rule (based on the Comprehensive Housing

Affordability Strategy statutory language) that simply provides for

certifications to be wholly accepted or wholly rejected. Requiring

additional assurances and potentially delaying or limiting the

grantee's access to funds may trigger CDBG due process hearing

requirements. Therefore HUD will coordinate such actions between HUD

local offices and Headquarters.

Another technical change reinstates the applicability of the

Architectural Barriers Act of 1968 (42 U.S.C. 4151-4157) (the ABA) to

the CDBG Entitlement program. The ABA requires certain Federal and

Federally funded buildings and other facilities to be designed,

constructed, or altered in accordance with standards that ensure

accessibility to, and use by, persons with physical disabilities. HUD's

original regulations implementing the CDBG program required compliance

with accessibility standards issued pursuant to the ABA. (See former 24

CFR 570.606, 39 FR 40148, November 13, 1974; 42 FR 33020, June 28,

1977.) By final rule published September 23, 1983, and made effective

November 2, 1983 (48 FR 43538), HUD amended its regulations governing

the CDBG program to reflect changes made in the Act by the Housing and

Community Development Act of 1980 (Pub. L. 96-399, approved October 8,

1980), and the Housing and Community Development Amendments of 1981

(Pub. L. 97-35, approved August 13, 1981). The purpose of the amending

regulations, as noted by HUD in the proposed rule published October 4,

1982 (47 FR 43900), was to eliminate requirements not mandated by

statute. On this basis, HUD eliminated the requirement that the CDBG

program comply with the ABA accessibility standards (47 FR 43909, 48 FR

43549). HUD stated that the CDBG program was not statutorily subject to

the accessibility standards of the ABA because the CDBG statute does

not provide authority for imposing design, construction, or alteration

standards on CDBG-funded facilities, as required by section 4151(3) of

the ABA, and that it had imposed the ABA standards on the CDBG program

as an administratively adopted requirement (47 FR 43909). HUD noted,

however, that some facilities constructed or altered with CDBG

assistance would remain subject to accessibility standards

[[Page 56908]]

by reason of the applicability of section 504 of the Rehabilitation Act

of 1973.

Since HUD's decision in 1983 to remove compliance with the ABA as a

CDBG program requirement, two significant events caused HUD to

reconsider this decision. The first event was the passage of the Fair

Housing Amendments Act of 1988 (Pub. L. 100-430, approved September 13,

1988) (Fair Housing Act), which amended Title VIII of the Civil Rights

Act of 1968 to add prohibitions against discrimination in housing on

the basis of handicap and familial status. The Fair Housing Act also

made it unlawful to design and construct certain multifamily dwellings

for first occupancy after March 13, 1991 in a manner that makes them

inaccessible to persons with disabilities. Further, the Fair Housing

Act made it unlawful to refuse to permit, at the expense of the person

with a disability, reasonable modifications to existing premises

occupied or to be occupied by such person if such modifications are

necessary to afford such person full enjoyment of the premises.

The second event was the passage of the Americans with Disabilities

Act (Pub. L. 101-336, approved July 26, 1990) (ADA), which provides

comprehensive civil rights to individuals with disabilities in the

areas of employment, public accommodations, State and local government

services, and telecommunications. The ADA provides that discrimination

includes a failure to design and construct facilities for first

occupancy no later than January 26, 1993 that are readily accessible to

and usable by individuals with disabilities. Further, the ADA requires

the removal of architectural barriers and communication barriers that

are structural in nature in existing facilities, where such removal is

readily achievable--that is, easily accomplishable and able to be

carried out without much difficulty or expense. (See the final rule

implementing the ADA published by the Department of Justice on July 26,

1991 (56 FR 35544, 35568)).

The Fair Housing Act and the ADA indicate a clear policy that

housing and commercial facilities and public accommodations should be

``readily accessible and usable by'' individuals with disabilities. In

light of these developments and to foster consistency in the

administration of HUD's programs, this final rule reinstates compliance

with the ABA as a CDBG program requirement.

Compliance with the requirements of the ABA will be applicable to

funds allocated or reallocated under the CDBG Entitlement, State, and

HUD-administered Small Cities programs and the Section 108 Loan

Guarantee program, after the effective date of this final rule.

Assisted facilities must meet the requirements of the Uniform Federal

Accessibility Standards for alterations if the alterations are financed

in whole or in part by CDBG funds made available after the effective

date of this final rule. Although alterations made without the use of

Federal funds would not have to comply with the accessibility

requirements of the ABA, alterations made to these facilities, in most

instances, will have to comply with the accessibility requirements of

the public accommodations provisions of the ADA. This final rule makes

this regulatory change at Sec. 570.614(a).

This final rule also provides a specific listing at Sec. 570.614(b)

for the ADA. The ADA is (and has been) covered by the grantee's annual

certification that it will comply with ``applicable laws.'' The

addition of the specific provision highlighting the ADA is being made

for consistency with other applicable laws for which HUD has

enforcement responsibilities. The Federal Communications Commission has

enforcement authority for enforcing the portion of the ADA applicable

to emergency telephone numbering systems (the CDBG-eligibility of which

is highlighted and enhanced in this regulation) and to common carriers.

This final rule replaces an obsolete reference to the Small Cities

Application in Sec. 570.405(e) on Insular Areas with a requirement that

insular area applicants submit a final application and certifications

to the appropriate HUD office in a form prescribed by HUD. This rule

clarifies how HUD-administered Small Cities in New York will be treated

under the consolidated plan. Section 570.423(a) has been revised to

state clearly that New York HUD-administered Small Cities applicants

that submit an abbreviated consolidated plan must prepare and publish a

proposed application and comply with the citizen participation

requirements of Sec. 570.431 whether or not their application contains

housing activities. HUD has previously determined that the Insular area

grantees were subject to Sec. 570.200(a)(3), which requires compliance

with the primary objective of the Act. HUD is specifically adding

insular areas recipients to this section to enhance clarity.

IX. Other Matters

A. Executive Order 12866

The Office of Management and Budget (OMB) reviewed this rule under

Executive Order 12866, Regulatory Planning and Review, issued by the

President on September 30, 1993. Any changes made in this rule

subsequent to its submission to OMB are identified in this docket file,

which is available for public inspection between 7:30 a.m. and 5:30

p.m. weekdays in the Office of the Rules Docket Clerk, Office of the

General Counsel, Room 10276, Department of Housing and Urban

Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

B. Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this rule before publication and by

approving it certifies that this rule does not have a significant

economic impact on a substantial number of small entities. This rule

does not affect the portion of the CDBG regulations that affects small

entities.

C. Environmental Impact

A Finding of No Significant Impact with respect to the environment

was made in accordance with HUD regulations in 24 CFR part 50 that

implement section 102(2)(C) of the National Environmental Policy Act of

1969 (42 U.S.C. 4332). The finding is available for public inspection

between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules

Docket Clerk at the address provided under the section of this preamble

entitled ``Executive Order 12866.''

D. Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule will not have substantial direct effects on

States or their political subdivisions, or the relationship between the

Federal government and the States, or on the distribution of power and

responsibilities among the various levels of government. As a result,

the rule is not subject to review under the Order. This rule is limited

to implementing statutory provisions and responding to identified

deficiencies in the CDBG program.

E. Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on

[[Page 56909]]

family formation, maintenance, and general well-being, and thus is not

subject to review under the Order. No significant change in existing

HUD policies or programs will result from promulgation of this rule, as

those policies and programs relate to family concerns.

List of Subjects

24 CFR Part 91

Aged, Grant programs--housing and community development, Homeless,

Individuals with disabilities, Low and moderate income housing,

Reporting and recordkeeping requirements.

24 CFR Part 570

Administrative practice and procedure, American Samoa, Community

development block grants, Grant programs--education, Grant programs--

housing and community development, Guam, Indians, Lead poisoning, Loan

programs--housing and community development, Low and moderate income

housing, New communities, Northern Mariana Islands, Pacific Islands

Trust Territory, Pockets of poverty, Puerto Rico, Reporting and

recordkeeping requirements, Small cities, Student aid, Virgin Islands.

Accordingly, 24 CFR part 91 is amended; and part 570 is amended by

adopting the interim rule published June 17, 1992 (57 FR 27116) as

final, and is further amended, as follows:

PART 91--CONSOLIDATED SUBMISSIONS FOR COMMUNITY PLANNING AND

DEVELOPMENT PROGRAMS

1. The authority citation for part 91 continues to read as follows:

Authority: 42 U.S.C. 3535(d), 3601-3619, 5301-5315, 11331-11388,

12701-12711, 12741-12756, and 12901-12912.

2. Section 91.500 is amended by revising paragraph (b) introductory

text to read as follows:

Sec. 91.500 HUD approval action.

* * * * *

(b) Standard of review. HUD may disapprove a plan or a portion of a

plan if it is inconsistent with the purposes of the Cranston-Gonzalez

National Affordable Housing Act (42 U.S.C. 12703), if it is

substantially incomplete, or, in the case of certifications applicable

to the CDBG program under Sec. 91.225 (a) and (b), if it is not

satisfactory to the Secretary in accordance with Sec. 570.304 or

Sec. 570.429(g) of this title, as applicable. The following are

examples of consolidated plans that are substantially incomplete:

* * * * *

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

3. The authority citation for part 570 continues to read as

follows:

Authority: 42 U.S.C. 3535(d) and 5300-5320.

4. Section 570.2 is amended by revising the second sentence to read

as follows:

Sec. 570.2 Primary objective.

* * * Consistent with this primary objective, not less than 70

percent of CDBG funds received by the grantee under subparts D, F, and

M of this part, and under section 108(q) of the Housing and Community

Development Act of 1974 shall be used in accordance with the applicable

requirements for activities that benefit persons of low and moderate

income.

5. Section 570.3 is amended by revising the definitions of ``CDBG

funds'', ``Extent of growth lag'', ``Low- and moderate-income

household'', ``Low- and moderate-income person'', ``Low-income

household'', ``Low-income person'', ``Metropolitan city'', ``Moderate-

income household'', and ``Moderate-income person'', and by adding a new

definition of ``Income'' in alphabetical order, to read as follows:

Sec. 570.3 Definitions.

* * * * *

CDBG funds means Community Development Block Grant funds, including

funds received in the form of grants under subparts D or F of this

part, funds awarded under section 108(q) of the Housing and Community

Development Act of 1974, loans guaranteed under subpart M of this part,

urban renewal surplus grant funds under subpart N of this part, and

program income as defined in Sec. 570.500(a).

* * * * *

Extent of growth lag means the number of persons who would have

been residents in a metropolitan city or urban county, in excess of the

current population of the metropolitan city or urban county, if such

metropolitan city or urban county had a population growth rate between

1960 and the date of the most recent population count available from

the United States Bureau of the Census referable to the same point or

period in time equal to the population growth rate for that period of

all metropolitan cities. Where the boundaries for a metropolitan city

or urban county used for the 1990 census have changed as a result of

annexation, the current population used to compute extent of growth lag

shall be adjusted by multiplying the current population by the ratio of

the population based on the 1990 census within the boundaries used for

the 1990 census to the population based on the 1990 census within the

current boundaries.

* * * * *

Income. For the purpose of determining whether a family or

household is low- and moderate-income under subpart C of this part,

grantees may select any of the three definitions listed below for each

activity, except that integrally related activities of the same type

and qualifying under the same paragraph of Sec. 570.208(a) shall use

the same definition of income. The option to choose a definition does

not apply to activities that qualify under Sec. 570.208(a)(1) (Area

benefit activities), except when the recipient carries out a survey

under Sec. 570.208(a)(1)(iv). Activities qualifying under

Sec. 570.208(a)(1) generally must use the area income data supplied to

recipients by HUD. The three definitions are as follows:

(1)(i) ``Annual income'' as defined under the Section 8 Housing

Assistance Payments program at 24 CFR 813.106 (except that if the CDBG

assistance being provided is homeowner rehabilitation under

Sec. 570.202, the value of the homeowner's primary residence may be

excluded from any calculation of Net Family Assets); or

(ii) Annual Income as reported under the Census long-form for the

most recent available decennial Census. This definition includes:

(A) Wages, salaries, tips, commissions, etc.;

(B) Self-employment income from own nonfarm business, including

proprietorships and partnerships;

(C) Farm self-employment income;

(D) Interest, dividends, net rental income, or income from estates

or trusts;

(E) Social Security or railroad retirement;

(F) Supplemental Security Income, Aid to Families with Dependent

Children, or other public assistance or public welfare programs;

(G) Retirement, survivor, or disability pensions; and

(H) Any other sources of income received regularly, including

Veterans' (VA) payments, unemployment compensation, and alimony; or

(iii) Adjusted gross income as defined for purposes of reporting

under Internal Revenue Service (IRS) Form 1040 for individual Federal

annual income tax purposes.

[[Page 56910]]

(2) Estimate the annual income of a family or household by

projecting the prevailing rate of income of each person at the time

assistance is provided for the individual, family, or household (as

applicable). Estimated annual income shall include income from all

family or household members, as applicable. Income or asset enhancement

derived from the CDBG-assisted activity shall not be considered in

calculating estimated annual income.

* * * * *

Low- and moderate-income household means a household having an

income equal to or less than the Section 8 low-income limit established

by HUD.

Low- and moderate-income person means a member of a family having

an income equal to or less than the Section 8 low-income limit

established by HUD. Unrelated individuals will be considered as one-

person families for this purpose.

Low-income household means a household having an income equal to or

less than the Section 8 very low-income limit established by HUD.

Low-income person means a member of a family that has an income

equal to or less than the Section 8 very low-income limit established

by HUD. Unrelated individuals shall be considered as one-person

families for this purpose.

* * * * *

Metropolitan city means:

(1) A city within a metropolitan area that is the central city of

such area, as defined and used by the Office of Management and Budget.

(2) Any other city within a metropolitan area that has a population

of 50,000 or more.

(3)(i) Any city that was classified as a metropolitan city for at

least two years pursuant to paragraph (1) or (2) of this definition

shall remain classified as a metropolitan city.

(ii) Any unit of general local government that becomes eligible to

be classified as a metropolitan city, and was not classified as a

metropolitan city in the immediately preceding fiscal year, may, upon

submission of written notification to HUD, defer its classification as

a metropolitan city for all purposes under the Act, if it elects to

have its population included in an urban county.

(iii) Notwithstanding paragraph (3)(i) of this definition, a city

may elect not to retain its classification as a metropolitan city.

(iv) Any city classified as a metropolitan city under this

definition, and that no longer qualifies as a metropolitan city in a

fiscal year beginning after fiscal year 1989, shall retain its

classification as a metropolitan city for the fiscal year in which the

city ceases to qualify, and for the succeeding fiscal year, except that

in the succeeding fiscal year the amount of the grant to that city

shall be 50 percent of the amount calculated under section 106(b) of

the Act, the remaining 50 percent shall be added to the amount

allocated under section 106(d) of the Act to the State in which the

city is located, and the city shall be eligible, in that succeeding

fiscal year, to receive a distribution from the State allocation under

section 106(d) of the Act.

* * * * *

Moderate-income household means a household having an income equal

to or less than the Section 8 low-income limit and greater than the

Section 8 very low-income limit, established by HUD.

Moderate-income person means a member of a family that has an

income equal to or less than the Section 8 low-income limit and greater

than the Section 8 very low-income limit, established by HUD. Unrelated

individuals shall be considered as one-person families for this

purpose.

* * * * *

6. Section 570.5 is revised to read as follows:

Sec. 570.5 Waivers.

(a) The Secretary may waive any requirement of this part not

required by law whenever it is determined that undue hardship will

result from applying the requirement and when application of the

requirement would adversely affect the purposes of the Act.

(b) For funds designated under this part by a recipient to address

the damage in an area for which the President has declared a disaster

under title IV of the Robert T. Stafford Disaster Relief and Emergency

Assistance Act (42 U.S.C. 5170-5189b), the Secretary may suspend all

requirements for purposes of assistance under section 106 of the Act

for that area, except for those related to public notice of funding

availability, nondiscrimination, fair housing, labor standards,

environmental standards, and requirements that activities benefit

persons of low- and moderate-income.

7. Section 570.200 is amended by revising the second sentence of

paragraph (a)(3), paragraph (a)(5), the second sentence of paragraph

(d)(1), the third sentence of paragraph (e), and paragraphs (g) and

(h), to read as follows:

Sec. 570.200 General policies.

(a) * * *

(3) Compliance with the primary objective. * * * Consistent with

this objective, Entitlement, HUD-administered Small Cities, and Insular

area recipients must ensure that, over a period of time specified in

their certification not to exceed three years, not less than 70 percent

of the aggregate of CDBG fund expenditures shall be for activities

meeting the criteria under Sec. 570.208(a) or Sec. 570.208(d)(5) or (6)

for benefiting low- and moderate-income persons. * * *

* * * * *

(5) Cost principles. Costs incurred, whether charged on a direct or

an indirect basis, must be in conformance with OMB Circulars A-87,

``Cost Principles for State, Local and Indian Tribal Governments''; A-

122, ``Cost Principles for Non-profit Organizations''; or A-21, ``Cost

Principles for Educational Institutions,'' as applicable.\1\ All items

of cost listed in Attachment B of these Circulars that require prior

Federal agency approval are allowable without prior approval of HUD to

the extent they comply with the general policies and principles stated

in Attachment A of such circulars and are otherwise eligible under this

subpart C, except for the following:

\1\ These circulars are available from the American Communities

Center by calling the following toll-free numbers: (800) 998-9999 or

(800) 483-2209 (TDD).

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(i) Depreciation methods for fixed assets shall not be changed

without HUD's specific approval or, if charged through a cost

allocation plan, the Federal cognizant agency.

(ii) Fines and penalties (including punitive damages) are

unallowable costs to the CDBG program.

(iii) Pre-award costs are limited to those authorized under

paragraph (h) of this section.

* * * * *

(d) * * *

(1) Employer-employee type of relationship. * * * In no event,

however, shall such compensation exceed the equivalent of the daily

rate paid for Level IV of the Executive Schedule. * * *

* * * * *

(e) Recipient determinations required as a condition of

eligibility. * * * A written determination is required for any activity

carried out under the authority of Secs. 570.201(f), 570.201(i)(2),

570.201(p), 570.201(q), 570.202(b)(3), 570.202(f)(2), 570.206(f),

570.209, and 570.309.

* * * * *

(g) Limitation on planning and administrative costs. No more than

20 percent of the sum of any grant, plus

[[Page 56911]]

program income, shall be expended for planning and program

administrative costs, as defined in Secs. 570.205 and 507.206,

respectively. Recipients of entitlement grants under subpart D of this

part shall conform with this requirement by limiting the amount of CDBG

funds obligated for planning plus administration during each program

year to an amount no greater than 20 percent of the sum of its

entitlement grant made for that program year (if any) plus the program

income received by the recipient and its subrecipients (if any) during

that program year.

(h) Reimbursement for pre-award costs. The effective date of the

grant agreement is the program year start date or the date that the

consolidated plan is received by HUD, whichever is later. For a Section

108 loan guarantee, the effective date of the grant agreement is the

date of HUD execution of the grant agreement amendment for the

particular loan guarantee commitment.

(1) Prior to the effective date of the grant agreement, a recipient

may incur costs or may authorize a subrecipient to incur costs, and

then after the effective date of the grant agreement pay for those

costs using its CDBG funds, provided that:

(i) The activity for which the costs are being incurred is included

in a consolidated plan action plan or an amended consolidated plan

action plan (or application under subpart M of this part) prior to the

costs being incurred;

(ii) Citizens are advised of the extent to which these pre-award

costs will affect future grants;

(iii) The costs and activities funded are in compliance with the

requirements of this part and with the Environmental Review Procedures

stated in 24 CFR part 58;

(iv) The activity for which payment is being made complies with the

statutory and regulatory provisions in effect at the time the costs are

paid for with CDBG funds;

(v) CDBG payment will be made during a time no longer than the next

two program years following the effective date of the grant agreement

or amendment in which the activity is first included; and

(vi) The total amount of pre-award costs to be paid during any

program year pursuant to this provision is no more than the greater of

25 percent of the amount of the grant made for that year or $300,000.

(2) Upon the written request of the recipient, HUD may authorize

payment of pre-award costs for activities that do not meet the criteria

at paragraph (h)(1)(v) or (h)(1)(vi) of this section, if HUD

determines, in writing, that there is good cause for granting an

exception upon consideration of the following factors, as applicable:

(i) Whether granting the authority would result in a significant

contribution to the goals and purposes of the CDBG program;

(ii) Whether failure to grant the authority would result in undue

hardship to the recipient or beneficiaries of the activity;

(iii) Whether granting the authority would not result in a

violation of a statutory provision or any other regulatory provision;

(iv) Whether circumstances are clearly beyond the recipient's

control; or

(v) Any other relevant considerations.

* * * * *

8. Section 570.201 is amended by adding a parenthetical sentence

following the first full sentence in paragraph (c); by revising the

first two sentences of the introductory text of paragraph (e),

paragraph (k), and the introductory text of paragraph (n); and by

adding new paragraphs (o)(4), (p), and (q) to read as follows:

Sec. 570.201 Basic eligible activities.

* * * * *

(c) * * * (However, activities under this paragraph may be directed

to the removal of material and architectural barriers that restrict the

mobility and accessibility of elderly or severely disabled persons to

public facilities and improvements, including those provided for in

Sec. 570.207(a)(1).) * * *

* * * * *

(e) Public services. Provision of public services (including labor,

supplies, and materials) including but not limited to those concerned

with employment, crime prevention, child care, health, drug abuse,

education, fair housing counseling, energy conservation, welfare (but

excluding the provision of income payments identified under

Sec. 570.207(b)(4)), homebuyer downpayment assistance, or recreational

needs. To be eligible for CDBG assistance, a public service must be

either a new service or a quantifiable increase in the level of an

existing service above that which has been provided by or on behalf of

the unit of general local government (through funds raised by the unit

or received by the unit from the State in which it is located) in the

12 calendar months before the submission of the action plan. * * *

* * * * *

(k) Housing services. Housing services, as provided in section

105(a)(21) of the Act (42 U.S.C. 5305(a)(21)).

* * * * *

(n) Homeownership assistance. Until October 1, 1995, CDBG funds may

be used to provide direct homeownership assistance to low- and

moderate-income households to:

* * * * *

(o) * * *

(4) Assistance under this paragraph (o) may also include training,

technical assistance, or other support services to increase the

capacity of the recipient or subrecipient to carry out the activities

under this paragraph (o).

(p) Technical assistance. Provision of technical assistance to

public or nonprofit entities to increase the capacity of such entities

to carry out eligible neighborhood revitalization or economic

development activities. (The recipient must determine, prior to the

provision of the assistance, that the activity for which it is

attempting to build capacity would be eligible for assistance under

this subpart C, and that the national objective claimed by the grantee

for this assistance can reasonably be expected to be met once the

entity has received the technical assistance and undertakes the

activity.) Capacity building for private or public entities (including

grantees) for other purposes may be eligible under Sec. 570.205.

(q) Assistance to institutions of higher education. Provision of

assistance by the recipient to institutions of higher education when

the grantee determines that such an institution has demonstrated a

capacity to carry out eligible activities under this subpart C.

9. Section 570.202 is amended by:

a. Removing ``and'' at the end of paragraph (a)(3);

b. Redesignating paragraph (a)(4) as paragraph (a)(5);

c. Adding a new paragraph (a)(4);

d. Removing ``and'' at the end of paragraph (b)(9), and removing

the period at the end of paragraph (b)(10) and adding ``; and'' in its

place;

e. Adding new paragraphs (b)(11) and (f); and

f. Revising paragraph (c), to read as follows:

Sec. 570.202 Eligible rehabilitation and preservation activities.

(a) * * *

(4) Nonprofit-owned nonresidential buildings and improvements not

eligible under Sec. 570.201(c); and

* * * * *

(b) * * *

(11) Improvements designed to remove material and architectural

[[Page 56912]]

barriers that restrict the mobility and accessibility of elderly or

severely disabled persons to buildings and improvements eligible for

assistance under paragraph (a) of this section.

(c) Code enforcement. Costs incurred for inspection for code

violations and enforcement of codes (e.g., salaries and related

expenses of code enforcement inspectors and legal proceedings, but not

including the cost of correcting the violations) in deteriorating or

deteriorated areas when such enforcement together with public or

private improvements, rehabilitation, or services to be provided may be

expected to arrest the decline of the area.

* * * * *

(f) Lead-based paint hazard evaluation and reduction. Lead-based

paint hazard evaluation and reduction as defined in section 1004 of the

Residential Lead-Based Paint Hazard Reduction Act of 1992 (42 U.S.C.

4851b).

10. Section 570.206 is amended by adding paragraph (i) to read as

follows:

Sec. 570.206 Program administration costs.

* * * * *

(i) Whether or not such activities are otherwise assisted by funds

provided under this part, reasonable costs equivalent to those

described in paragraphs (a), (b), (e), and (f) of this section for

overall program management of:

(1) A Federally designated Empowerment Zone or Enterprise

Community; and

(2) The HOME program under title II of the Cranston-Gonzalez

National Affordable Housing Act (42 U.S.C. 12701 note).

11. Section 570.207 is amended by:

a. Amending the second sentence of paragraph (a)(1) by removing the

citation ``Sec. 570.201(k)'' and by adding in its place the citation

``Sec. 570.201(c)''; and

b. Revising the first sentence of paragraph (b)(2)(i) and paragraph

(b)(4), to read as follows:

Sec. 570.207 Ineligible activities.

* * * * *

(b) * * *

(2) * * *

(i) Maintenance and repair of publicly owned streets, parks,

playgrounds, water and sewer facilities, neighborhood facilities,

senior centers, centers for persons with a disabilities, parking and

other public facilities and improvements. * * *

* * * * *

(4) Income payments. The general rule is that CDBG funds may not be

used for income payments. For purposes of the CDBG program, ``income

payments'' means a series of subsistence-type grant payments made to an

individual or family for items such as food, clothing, housing (rent or

mortgage), or utilities, but excludes emergency grant payments made

over a period of up to three consecutive months to the provider of such

items or services on behalf of an individual or family.

12. Section 570.208 is amended by:

a. Redesignating paragraphs (a)(1)(iii), (a)(1)(iv), and (a)(1)(v)

as paragraphs (a)(1)(v), (a)(1)(vi), and (a)(1)(vii), respectively;

b. Adding new paragraphs (a)(1)(iii), (a)(1)(iv), and (a)(3)(iii);

c. Revising the second sentence of paragraph (a)(2)(i)(A),

paragraph (a)(2)(ii), and the second sentence of paragraph (a)(3)

introductory text;

d. Amending the second sentence of paragraph (a)(4)(vi)(F)(2) by

removing the phrase ``final statement'' and by adding in its place the

phrase ``action plan under part 91 of this title''; and

e. Amending paragraphs (d)(5)(i), (d)(6)(i), and (d)(7) by removing

the citation ``paragraph (a)(1)(v) of this section'' and by adding in

its place the citation ``paragraph (a)(1)(vii) of this section''; to

read as follows:

Sec. 570.208 Criteria for national objectives.

(a) * * *

(1) * * *

(iii) An activity to develop, establish, and operate for up to two

years after the establishment of, a uniform emergency telephone number

system serving an area having less than the percentage of low- and

moderate-income residents required under paragraph (a)(1)(i) of this

section or (as applicable) paragraph (a)(1)(ii) of this section,

provided the recipient obtains prior HUD approval. To obtain such

approval, the recipient must:

(A) Demonstrate that the system will contribute significantly to

the safety of the residents of the area. The request for approval must

include a list of the emergency services that will participate in the

emergency telephone number system;

(B) Submit information that serves as a basis for HUD to determine

whether at least 51 percent of the use of the system will be by low-

and moderate-income persons. As available, the recipient must provide

information that identifies the total number of calls actually received

over the preceding 12-month period for each of the emergency services

to be covered by the emergency telephone number system and relates

those calls to the geographic segment (expressed as nearly as possible

in terms of census tracts, enumeration districts, block groups, or

combinations thereof that are contained within the segment) of the

service area from which the calls were generated. In analyzing this

data to meet the requirements of this section, HUD will assume that the

distribution of income among the callers generally reflects the income

characteristics of the general population residing in the same

geographic area where the callers reside. If HUD can conclude that the

users have primarily consisted of low- and moderate-income persons, no

further submission is needed by the recipient. If a recipient plans to

make other submissions for this purpose, it may request that HUD review

its planned methodology before expending the effort to acquire the

information it expects to use to make its case;

(C) Demonstrate that other Federal funds received by the recipient

are insufficient or unavailable for a uniform emergency telephone

number system. For this purpose, the recipient must submit a statement

explaining whether the lack of funds is due to the insufficiency of the

amount of the available funds, restrictions on the use of such funds,

or the prior commitment of funds by the recipient for other purposes;

and

(D) Demonstrate that the percentage of the total costs of the

system paid for by CDBG funds does not exceed the percentage of low-

and moderate-income persons in the service area of the system. For this

purpose, the recipient must include a description of the boundaries of

the service area of the emergency telephone number system, the census

divisions that fall within the boundaries of the service area (census

tracts or enumeration districts), the total number of persons and the

total number of low- and moderate-income persons within each census

division, the percentage of low- and moderate-income persons within the

service area, and the total cost of the system.

(iv) An activity for which the assistance to a public improvement

that provides benefits to all the residents of an area is limited to

paying special assessments (as defined in Sec. 570.200(c)) levied

against residential properties owned and occupied by persons of low and

moderate income.

* * * * *

(2) * * *

(i) * * *

(A) * * * Activities that exclusively serve a group of persons in

any one or a combination of the following categories may be presumed to

benefit persons, 51 percent of whom are low- and moderate-income:

abused children, battered spouses, elderly persons, adults meeting the

Bureau of the Census'

[[Page 56913]]

Current Population Reports definition of ``severely disabled,''

homeless persons, illiterate adults, persons living with AIDS, and

migrant farm workers; or

* * * * *

(ii) An activity that serves to remove material or architectural

barriers to the mobility or accessibility of elderly persons or of

adults meeting the Bureau of the Census' Current Population Reports

definition of ``severely disabled'' will be presumed to qualify under

this criterion if it is restricted, to the extent practicable, to the

removal of such barriers by assisting:

(A) The reconstruction of a public facility or improvement, or

portion thereof, that does not qualify under paragraph (a)(1) of this

section;

(B) The rehabilitation of a privately owned nonresidential building

or improvement that does not qualify under paragraph (a) (1) or (4) of

this section; or

(C) The rehabilitation of the common areas of a residential

structure that contains more than one dwelling unit and that does not

qualify under paragraph (a)(3) of this section.

* * * * *

(3) * * * This would include, but not necessarily be limited to,

the acquisition or rehabilitation of property by the recipient, a

subrecipient, a developer, an individual homebuyer, or an individual

homeowner; conversion of nonresidential structures; and new housing

construction. * * *

* * * * *

(iii) When CDBG funds are used for housing services eligible under

Sec. 570.201(k), such funds shall be considered to benefit low- and

moderate-income persons if the housing units for which the services are

provided are HOME-assisted and the requirements at 24 CFR 92.252 or

92.254 are met.

* * * * *

13. Section 570.301 is added to read as follows:

Sec. 570.301 Activity locations and float-funding.

The consolidated plan, action plan, and amendment submission

requirements referred to in this section are those in 24 CFR part 91.

(a) For activities for which the grantee has not yet decided on a

specific location, such as when the grantee is allocating an amount of

funds to be used for making loans or grants to businesses or for

residential rehabilitation, the description in the action plan or any

amendment shall identify who may apply for the assistance, the process

by which the grantee expects to select who will receive the assistance

(including selection criteria), and how much and under what terms the

assistance will be provided, or in the case of a planned public

facility or improvement, how it expects to determine its location.

(b) Float-funded activities and guarantees. A recipient may use

undisbursed funds in the line of credit and its CDBG program account

that are budgeted in statements or action plans for one or more other

activities that do not need the funds immediately, subject to the

limitations described below. Such funds shall be referred to as the

``float'' for purposes of this section and the action plan. Each

activity carried out using the float must meet all of the same

requirements that apply to CDBG-assisted activities generally, and must

be expected to produce program income in an amount at least equal to

the amount of the float so used. Whenever the recipient proposes to

fund an activity with the float, it must include the activity in its

action plan or amend the action plan for the current program year. For

purposes of this section, an activity that uses such funds will be

called a ``float-funded activity.''

(1) Each float-funded activity must be individually listed and

described as such in the action plan.

(2)(i) The expected time period between obligation of assistance

for a float-funded activity and receipt of program income in an amount

at least equal to the full amount drawn from the float to fund the

activity may not exceed 2.5 years. An activity from which program

income sufficient to recover the full amount of the float assistance is

expected to be generated more than 2.5 years after obligation may not

be funded from the float, but may be included in an action plan if it

is funded from CDBG funds other than the float (e.g., grant funds or

proceeds from an approved Section 108 loan guarantee).

(ii) Any extension of the repayment period for a float-funded

activity shall be considered to be a new float-funded activity for

these purposes and may be implemented by the grantee only if the

extension is made subject to the same limitations and requirements as

apply to a new float-funded activity.

(3) Unlike other projected program income, the full amount of

income expected to be generated by a float-funded activity must be

shown as a source of program income in the action plan containing the

activity, whether or not some or all of the income is expected to be

received in a future program year (in accordance with 24 CFR

91.220(g)(1)(ii)(D)).

(4) The recipient must also clearly declare in the action plan that

identifies the float-funded activity the recipient's commitment to

undertake one of the following options:

(i) Amend or delete activities in an amount equal to any default or

failure to produce sufficient income in a timely manner. If the

recipient makes this choice, it must include a description of the

process it will use to select the activities to be amended or deleted

and how it will involve citizens in that process; and it must amend the

applicable statement(s) or action plan(s) showing those amendments or

deletions promptly upon determining that the float-funded activity will

not generate sufficient or timely program income;

(ii) Obtain an irrevocable line of credit from a commercial lender

for the full amount of the float-funded activity and describe the

lender and terms of such line of credit in the action plan that

identifies the float-funded activity. To qualify for this purpose, such

line of credit must be unconditionally available to the recipient in

the amount of any shortfall within 30 days of the date that the float-

funded activity fails to generate the projected amount of program

income on schedule;

(iii) Transfer general local government funds in the full amount of

any default or shortfall to the CDBG line of credit within 30 days of

the float-funded activity's failure to generate the projected amount of

the program income on schedule; or

(iv) A method approved in writing by HUD for securing timely return

of the amount of the float funding. Such method must ensure that funds

are available to meet any default or shortfall within 30 days of the

float-funded activity's failure to generate the projected amount of the

pro

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