Community Development Block Grant Program for States; Revisions to Program Income Requirements and Miscellaneous Amendments; Notice of Proposed Information Collection Requirements

SUMMARY: This rule contains proposed changes to several sections of the

regulations for the Community Development Block Grant (CDBG) Program

for States. This proposed rule would streamline and update the

regulations with regard to recent statutory changes, clarify the

program income requirements, and correct other identified deficiencies

in the State CDBG regulations. This proposed rule would also provide

States additional flexibility in their administration of the program.

DATES: Comments due date: May 12, 1997.

ADDRESSES: HUD invites interested persons to submit comments regarding

this proposed rule to the Rules Docket Clerk, Office of General

Counsel, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC 20410. Communications should refer

to the above docket number and title. Facsimile (FAX) comments are not

acceptable. A copy of each communication submitted will be available

for public inspection and copying between 7:30 a.m. and 5:30 p.m.

weekdays at the above address.

HUD also invites interested persons to submit comments on the

proposed information collection requirements in this proposed rule.

Comments must refer to the above docket number and title, and must be

sent to the Office of Information and Regulatory Affairs, Office of

Management and Budget, Attention: Desk Officer for HUD, Washington, DC

20503.

FOR FURTHER INFORMATION CONTACT: Steve Johnson, Assistant Director,

State & Small Cities Division, Room 7184, Department of Housing and

Urban Development, 451 Seventh Street, SW, Washington, DC 20410;

telephone number (202) 708-1322 (this number is not toll-free).

Hearing- or speech-impaired persons may access the number via TTY by

calling the Federal Information Relay Service at (800) 877-8339. FAX

inquiries (but not comments on the rule) may be sent to Mr. Johnson at

(202) 708-2575 (this number is not toll-free).

SUPPLEMENTARY INFORMATION

Background

This proposed rule would revise the regulations for the State

Community Development Block Grant Program (24 CFR part 570) to respond

to problems HUD has identified in the program, to implement a 1992

statutory change to the Housing and Community Development Act of 1974

(the Act) (42 U.S.C. 5301-5320), to implement changes resulting from

the Cash Management Improvement Act, and to provide additional

flexibility to States in implementing their programs. Specifically,

this rule contains: (1) Proposed changes to the requirements governing

Federal grant payments to States; (2) Various proposed changes to the

program income requirements, including the situations in which income

earned on grant funds must be remitted to the U.S. Treasury; (3) A

proposed change regarding revolving funds; (4) The proposed application

of the Entitlement regulations governing lump-sum drawdowns to the

State program; (5) The proposed application of the Entitlement

regulations governing the use of escrow accounts for rehabilitation of

residential properties to the State program; (6) A proposed change to

the conflict of interest requirements; (7) A proposed change regarding

use of CDBG funds outside the jurisdiction of the recipient; and (8) A

proposed change to the general provisions regarding a State's

administrative flexibility. Each of these proposed changes is described

below.

Federal Grant Payments

Section 570.489(c) of the State CDBG regulations describes the

requirements concerning Federal grant payments to States. Pursuant to

the Treasury Department's regulations in 31 CFR part 205, States and

units of general local government must minimize the elapsed time

between receipt of Federal funds and their disbursement for grant

activities. This regulation was based on the provisions of the

Intergovernmental Cooperation Act (31 U.S.C. 6503).

The Intergovernmental Cooperation Act has been superseded by the

Cash Management Improvement Act of 1990, as amended in 1992 (31 U.S.C.

3335, 6503), which made several fundamental changes to the manner of

Federal-State payments. The Treasury Department amended the

implementing regulations in 31 CFR part 205 on December 21, 1992 (57 FR

60676). Under the new regulations, States and the Treasury Department

enter into agreements covering all Federal programs over a certain

threshold funding level. Through these agreements, States select

specific payment techniques that are designed to prevent delays between

drawdown and disbursement of funds. For programs that are below the

threshold, States must use alternative procedures to prevent delays

between drawdown and disbursement of funds. In 1995, only two States'

CDBG allocations fell below the threshold.

Section Sec. 570.489(c)(2) of the State CDBG regulations provides

that interest earned by units of local government on funds held pending

disbursement is not program income, and they must generally return such

interest to the U.S. Treasury. The paragraph further provides, however,

that States generally do not have to return interest earned during the

time between receipt of funds and disbursement to local governments.

The December 21, 1992 amendments to 31 CFR part 205 render some of

Sec. 570.489(c) obsolete. Therefore, rather than repeat the

requirements for States in the State CDBG regulations, Sec. 570.489(c)

of this proposed rule would simply refer to the more detailed

requirements in 31 CFR part 205. However, this proposed rule would

retain the existing requirement that States ensure that units of local

government also minimize the time between receipt of CDBG funds and

their disbursement, by moving the provision to the program income

requirement section (Sec. 570.489(e)). This proposed move is further

discussed in the Program Income Requirements section of this preamble,

below.

Program Income Requirements

The proposed changes to the program income provisions that are

described in this section of the preamble respond to the amendments of

the Housing and Community Development Act of 1992 (the 1992 Act) (Pub.

L. 102-550, approved October 28, 1992; 106 Stat. 3672), HUD Inspector

General recommendations, and an opinion issued by the Comptroller

General of the United States.

Implementation of 1992 Statutory Amendments

The State CDBG regulations currently provide for several situations

in which program income received by a unit of

[[Page 11285]]

general local government after closeout of its grant from the State

would not be subject to the program income requirements in

Sec. 570.489(e). However, the 1992 Act amended section 104(j) of the

Housing and Community Development Act of 1974 (42 U.S.C. 5304(j)) to

provide that the use of program income must be governed by all normal

CDBG program requirements for as long as the program income exists.

(Another statutory change, along with several regulatory initiatives,

was reflected in the CDBG Program Economic Development Guidelines final

rule, published on January 5, 1995 (60 FR 1922)). At that time, HUD

noted that further regulatory changes were forthcoming to implement

fully the 1992 amendments to the Act. With this amendment in the 1992

Act regarding post-closeout program income, Congress intended to expand

the coverage of program requirements to all repayments that are

classified as program income. This amendment applies to all program

income generated by grants made by States from funds in Fiscal Year

(FY) 1993 and later.

A major problem that States face in implementing the statutory

amendment is that a community may continue to generate and use program

income long after the initially-funded activity is completed. States

generally close out grants to local governments upon completion of the

initially-funded activities, though closeouts may be conditioned upon

the satisfactory completion of certain other actions, such as

submission of an audit or fulfillment of job creation requirements.

This new statutory provision significantly extends States'

responsibilities in tracking program income. To provide as much

flexibility as possible within the constraints of the law, HUD proposes

to allow States to demonstrate compliance with this requirement in the

following ways:

(1) States may maintain contractual relationships with units of

general local government for as long as there is program income to be

tracked. Since, in some cases, receipt of program income by a local

government may be sporadic, a State could craft its contractual

agreements so that they terminate once a local government has exhausted

its program income, and re-activate upon receipt of new program income

at some future date.

(2) States may require local governments to obtain advance State

approval of a local plan to expend program income, in the absence of a

more formal contractual relationship. This arrangement may be well-

suited for States that presently use a ``conditional closeout''

process, in which a grant recipient has program income on hand at the

time of grant closeout or receives program income after closeout of the

grant that generated the program income.

(3) States may seek HUD approval of an alternative method for

demonstrating compliance. HUD intends that field offices, not

Headquarters, would grant such approval.

States may select different approaches for different types of grant

recipients. For example, a State that distributes some of its funds on

a formula basis and some on a competitive basis might select option

number 1, above, for those units of local government that receive

funding every year, and option number 2 for other grant recipients. A

State might also blend the first two options by requiring a plan for

the use of program income by local governments as part of its

contractual agreement with units of general local government.

Program income is a significant resource in the State CDBG program,

and it constitutes a major multiplier of the benefits that the CDBG

program provides to citizens and beneficiaries. For example, during

Fiscal Years 1992-1994, the cumulative amount of program income

received by all States averaged over $43.2 million per year; that is

more than double the average yearly allocation amount to States during

that period ($20.2 million). This represents only that portion of

program income that was returned to the States by units of general

local government. HUD has not previously required States to report on

program income retained at the local level. However, consistent with

the 1992 amendments, HUD now proposes in Sec. 570.489(e)(4) to require

States' annual performance reports to include the use of program income

held by local governments.

HUD recognizes that implementation of this statutory change may

significantly affect the reuse of a large dollar volume of income

retained by local governments. Because States have not previously

reported to HUD on locally-retained income (whether classified as

program income or as miscellaneous revenue), HUD cannot accurately

predict the financial implications of this proposed rule change. HUD

welcomes comments on the amount of income that will now be subject to

program income requirements, and on resulting effects on what such

funds are used for.

Continuing Applicability of Previous Regulations

In the last few years, there have been a succession of regulatory

changes to the State CDBG program income requirements. Presently,

States must administer multiple sets of requirements, each of which

applies to program income received during different time periods.

Program income received prior to December 9, 1992 was subject to the

requirements laid out in various policy memoranda issued subsequent to

the issuance of amended State CDBG regulations on April 8, 1982 (47 FR

15297). HUD formalized those policies in a final rule published in the

Federal Register on November 9, 1992 (57 FR 53397). Program income

generated from grants made by States with Fiscal Year 1993 and later

funds is subject to the 1992 statutory amendments as well as the

requirements of the November 9, 1992 final rule. Finally, the January

5, 1995 CDBG Program Economic Development Guidelines final rule (60 FR

1922) included an expanded list of revenues that are not considered

program income.

States have reported that tracking different requirements as they

apply to different funding years is complicated and time-consuming,

especially for program income retained at the local level. Repayments

of loans made from one grant to a given community may be subject to

different requirements than repayments of loans made from a subsequent

year's grant to the same community. This results in an increased

record-keeping burden on both the State and local governments. The

complexity and burden are compounded when program income is used to

make additional loans, which, in turn, generate more program income. It

is not clear to some States whether program income is subject to the

requirements in effect at the time the State awarded the initial grant

to the locality, or to the requirements in effect when the program

income is received.

To address this confusion, HUD is proposing to clarify the

continuing applicability of previous program income requirements to

program income retained by localities. (The problem does not occur with

program income returned to States for redistribution. Since State-held

program income is redistributed according to the method of distribution

in effect at the time that it is redistributed, such program income is

treated the same as a State's regular allocation of funds for that

year; this includes being subject to the same other CDBG program

requirements.) This proposed rule would provide that program income

that results from an activity funded from FY 1992 and earlier funds

remains subject to the requirements as they currently exist. The new

provision in this proposed rule

[[Page 11286]]

would apply to FY 1993 and later funds. If a local government

commingles program income from pre-1993 grants with program income from

a newer grant, the new provision in this proposed rule would apply to

all the program income, as the local government would not be able to

distinguish which income came from which grant.

Some States have reported that reducing the number of different

program income requirements would also simplify compliance with the

requirements. In response to these suggestions, this proposed rule

would provide an alternative to the ``continuing applicability''

provision described in the previous paragraph. States would have the

option of applying these new provisions to all program income held by

units of local government, regardless of the source year of the funding

that generated the program income. Subjecting all outstanding locally-

held program income to these proposed requirements would greatly

simplify the tracking of program income and would reduce confusion over

which set of requirements applies to which program income dollars.

However, the proposed requirements would be more restrictive.

Application of the new requirements to pre-FY 1993 funding could mean

that some funds would be reclassified as program income rather than

miscellaneous revenue, which could reduce local governments'

flexibility in expending such funds. Furthermore, applying the new

rules to previously-generated program income would probably require

amending the existing grant contracts with units of local government,

which would reduce any staff time savings resulting from simplified

tracking of program income.

However, the potential administrative benefits to States and local

governments may outweigh the negative impact of reduced local

flexibility in enough cases to justify this option. HUD particularly

welcomes comments on the practical implications of this option, on the

net savings of staff time resulting from the option, and the effects on

State grant recipients.

Miscellaneous Improvements and Updates

States have requested several clarifications of the program income

requirements, and HUD has discovered other areas that call for

regulatory redress. In substantially updating the program income

requirements contained in Sec. 570.489(e), HUD is proposing to

incorporate the following changes.

(1) Selling off loan portfolios in order to expedite the receipt of

program income. In order to maximize available financial resources,

communities are increasingly selling portfolios of loans on the

secondary market, or selling obligations secured by loan portfolios.

Several communities have recently requested HUD's approval to ``net

out'' of the proceeds from such sales the various legal and other costs

that are incurred when a grantee sells or securitizes a portfolio.

There are similarities between such situations and the currently-

allowed provision whereby costs incidental to the generation of program

income from the rental or use of CDBG-assisted real or personal

property may be netted out of the gross income received. Therefore,

this proposed rule would amend Sec. 570.489(e)(1) (vi) and (vii) to

allow legal and other costs associated with the sale or securitization

of CDBG-funded loans to be netted out before the amount of program

income is determined. This provision, however, would be limited to

costs that are not already eligible as general administrative costs of

either the State or the unit of general local government.

(2) $25,000 per year exception. Section 104(j) of the Act allows

the Secretary to exempt from the program income requirements amounts

that are so small that the tracking thereof would pose an

administrative burden. In the CDBG Program Economic Development

Guidelines final rule (January 5, 1995; 60 FR 1922), HUD raised this

threshold in Sec. 570.489(e)(2) from $10,000 to $25,000 per year per

unit of general local government. Some confusion apparently exists over

how to apply this threshold. This proposed rule would revise the

wording of this paragraph slightly to clarify that this threshold

applies only to program income retained by a unit of general local

government and its subrecipients; the threshold applies separately to

each unit of local government. As with the currently-existing rule,

this provision would not apply to program income that a unit of local

government earns but returns to the State.

(3) Remission of grant funds. This proposed rule would add

Sec. 570.489(e)(2)(v), listing certain types of interest earnings that

are not considered to be program income. Two of these provisions would

respond to HUD Inspector General findings and implement an opinion of

the Comptroller General of the United States that income generated by

an ineligible CDBG-assisted activity must be returned to the U.S.

Treasury. Since, in the context of the Comptroller General opinion,

eligibility includes meeting a national objective, this provision

should invoke a sharpened grantee focus on successful outcomes;

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

grantee when the assisted activities meet the national objective

requirements.

The third provision (at Sec. 570.489(e)(2)(v)(C)) requiring that

most interest earned by units of general local government on grant

advances (prior to disbursement of the funds for activities) be

returned to the U.S. Treasury, already appears in the State CDBG

regulations at Sec. 570.489(c)(2). Concordant with the proposed

revision of Sec. 570.489(c) (described above), this proposed rule would

move the requirement to Sec. 570.489(e)(2)(v) to complete the listing

of what is not program income. This proposed rule would simultaneously

update this provision to note that interest earned on escrow accounts,

unlike interest earned on lump sum drawdowns, must be returned to the

Treasury.

HUD issued comparable provisions in a final rule for the

Entitlement CDBG program, published on November 9, 1995 (60 FR 56893).

In responding to public comments in that rulemaking, HUD provided

guidance on the extent and applicability of these provisions. Readers

with a particular interest in these provisions may wish to read the

preamble to the November 9, 1995 final rule (60 FR 56892).

(4) Program income generated by loans to subrecipients. This

proposed rule would clarify, in Sec. 570.489(e)(2)(iv), that units of

general local government may receive program income from subrecipients,

while eliminating any double-counting of program income received

through that process. This proposed rule would classify such repayments

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 unit of general local government 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 local

government are ``new income'' to the CDBG program; this proposed rule

would not affect the treatment of such payments. HUD added a similar

provision to the Entitlement program regulations in the November 9,

1995 final rule (60 FR 56893).

(5) Program income retained at the local level. Section 104(j) of

the Act

[[Page 11287]]

allows a State to require that a unit of general local government pay

the State any income to be used by the State to fund additional

eligible community development activities, except that the State must

waive this requirement to the extent that such income is applied to

``continue the activity from which such income is derived.''

HUD gives States the flexibility to define the phrase ``continue

the activity from which such income is derived.'' HUD is aware of

situations in which States found that a unit of local government failed

to use program income in accordance with other program requirements, or

was not making any efforts to expend its program income to continue the

activity. HUD does not believe that Congress intended the above

provision to override other programmatic requirements to the extent

that a community must be allowed to retain the program income in

egregious cases. This proposed rule, in Sec. 570.489(e)(3)(ii)(A),

would clarify that a State's definition of what constitutes

``continuing the activity from which such income is derived'' can

include consideration of whether the program income is not being used

(or is unlikely to be used) to continue the activity in a timely manner

or in accordance with other program requirements.

In some situations, a State may determine that a unit of local

government will use program income to continue the activity from which

the income is derived, but that the amount of program income on hand

exceeds projected cash needs for the near future. For example,

community Y has a demand for about two housing rehabilitation loans per

month, but has enough program income on hand to fund 10 average-sized

loans. A State could require the unit of local government to return

some or all the program income to the State's CDBG program income

account until such time as it is needed by the local government. The

State could disburse these funds to other units of general local

government in the meantime rather than drawing funds from its line of

credit.

When the local government needs its program income, the State could

disburse the funds from the program account, or as necessary draw an

equivalent amount from the State's line of credit for disbursal to the

local government. This would increase the effective ``buying power'' of

a State's CDBG funds, because the funds would be expended sooner. The

reduced interest losses to the U.S. Treasury would be a potential side

benefit, as States would need to draw funds from their line of credit

somewhat less frequently. States would have the flexibility to define

the time period over which cash needs for program income would be

projected, and the appropriate level of program income that could be

retained in the local government's own program account.

(6) State administrative costs. States may include program income

in the base of funds against which they may deduct $100,000 plus up to

2 percent for State administrative costs. This is easily done for

program income that is returned to the State, as those funds are

already in the State's hands. States may find it more difficult to

claim a portion of locally-held program income within their

administrative costs allowance. Therefore, this proposed rule would

provide, in Sec. 570.489(e)(3)(ii), that a State could require a unit

of general local government to return, for the State's use, up to 2

percent of program income retained at the local level.

Revolving Loan Funds

Revolving funds are typically established and administered in the

following manner. A loan is made with CDBG funds (e.g., to a business

to expand). Payments on that loan (i.e., principal, interest, or both)

constitute program income that is credited as CDBG program income on

the local government's books and held in an account independent of

other program accounts. The program income in that account, including

interest earned on the funds while on deposit pending their reuse,

becomes the source of financing for additional loans of the same type.

Hence, the term ``revolving fund'' has been used to describe such a

fund. Revolving funds are used most frequently in connection with

housing rehabilitation and economic development projects that involve

loans.

A number of States have found regional revolving loan funds to be

an efficient means of collecting and redistributing program income held

at the local level. Such loan funds are often operated by a non-or

quasi-governmental organization that administers programs as a

subrecipient of the local government(s) to which HUD awarded grants.

(Since these regional entities are usually not units of general local

government, they may not directly receive CDBG funding.) Any program

income they administer still belongs to the unit(s) of general local

government whose grant(s) generated the program income. Successive

reuses of program income must continue to be traceable back to

individual localities' grants. This presents a problem if a regional

loan fund is administering program income generated by multiple

communities' grants.

Regional loan fund operators may wish to use program income to fund

activities anywhere in their service area, regardless of which

community the program income belongs to. However, while units of

general local government may use CDBG funds for activities outside

their jurisdictional boundaries, each such community must determine

that it is meeting its community development needs by doing so. It may

be difficult for community A to reasonably conclude that its citizens

benefit by having its program income used for an activity in community

B, 60 miles away.

Despite these problems, HUD supports efforts to establish regional

loan funds. Economies of scale can often be achieved in the

administration of such programs. Regional economic development efforts

may be more cognizant of the regional nature of rural economies, and

better positioned to act accordingly. Assessing the benefits of

individual economic development projects may also make sense from a

regional perspective, as employees of businesses in rural communities

frequently commute from residences in other communities.

To provide flexibility, the present State CDBG regulations in

Sec. 570.489(f)(2) offer three options regarding revolving loan funds.

First, States may make awards to combinations of governments. Under

such an arrangement, program income can be reused within the

jurisdiction of any of the participating local governments. Second, if

both the activities and the regional entity that carries out the

activities qualify under section 105(a)(15) of the Act, repayments

generated from these activities are not within the definition of

``program income,'' and so are not subject to program requirements.

Third, a State may itself operate a statewide revolving fund to

redistribute to units of general local government program income

returned to the State.

This proposed rule, in Sec. 570.489(f)(2), would expand upon this

third option by allowing a State to operate one or more revolving funds

on a regional or statewide basis. Providing that the State determines

that the program income will not be used to continue the same activity,

a State can presently require program income generated from grant-

funded activities to be returned to the State. With the proposed

change, a State could, in essence, designate a regional revolving loan

fund as a ``State'' revolving fund. A State could, pursuant to this

proposal, require such program

[[Page 11288]]

income to be repaid to a State-designated regional revolving fund. The

State could then contract with a regional entity to administer the fund

(including the distribution of program income to local governments) on

behalf of the State. Because the program income belongs to the State,

the regional entity could, under the auspices of the State and its

method of distribution, distribute it to any other eligible unit of

local government covered by the regional revolving fund. The community

whose initial grant generated the program income would have no further

responsibility for the reuse of the program income. Subsequent

repayments of program income would belong to the State, rather than

belonging to a unit of local government, and the regional fund entity

could award the funds, on behalf of the State, to units of general

local government anywhere within the region. Any State choosing this

approach would, of course, need to describe its process in the method

of distribution contained in its consolidated plan.

Lump Sum Drawdowns

Section 104(h) of the Act allows units of local government to make

lump sum drawdowns of CDBG funds to establish revolving loan funds for

property rehabilitation activities. Paragraph (2) of that section

requires HUD to establish standards governing lump sum drawdowns. Such

standards exist in the CDBG Entitlement program regulations in

Sec. 570.513; however, HUD has never created comparable regulations for

the State CDBG program. This proposed rule would amend Sec. 570.513 so

that its requirements could apply both to the Entitlement CDBG program

and the State CDBG program; certain adaptations would be necessary to

recognize the States' review and determination responsibilities, which

HUD itself fulfills in the Entitlement program. With this proposed

rule, HUD does not intend to make any substantive changes to the

requirements of Sec. 570.513 as they apply in the Entitlement program.

HUD reminds States that use of lump sum drawdowns is limited to the

rehabilitation of privately-owned properties. This can include

residential, commercial, and industrial properties; however, this would

not include other forms of economic development assistance. Interest

earned on lump sum drawdowns is classified as program income, and so is

not subject to the return-of-interest provision in the existing

Sec. 570.489(c)(2) and the proposed Sec. 570.489(e)(2)(v).

Use of Escrow Accounts for Rehabilitation

Similarly, Sec. 570.511 allows Entitlement communities to establish

escrow accounts for funding loans and grants for the rehabilitation of

privately-owned residential property. Again, HUD has never created

comparable regulations for the State CDBG Program. This proposed rule

would amend Sec. 570.511 so that its requirements could apply both to

the Entitlement CDBG program and the State CDBG program, including

appropriate adaptations respecting the role of States. With this

proposed rule, HUD does not intend to make any substantive changes to

the requirements of Sec. 570.511 as they apply in the Entitlement

program.

Paragraph (c) of Sec. 570.511 of the Entitlement regulations

concerns remedies for noncompliance. That paragraph gives HUD the

authority to require a recipient to discontinue the use of escrow

accounts. As adapted to apply to the State CDBG program in this

proposed rule, the paragraph would indicate that States have authority

under Sec. 570.492(b) to discontinue a local government's use of escrow

accounts if a State determines that a unit of general local government

has failed to use an escrow account in accordance with Sec. 570.511.

The escrow accounts provision is more limited in applicability than

the lump sum drawdown provision; escrow accounts may be utilized only

for the rehabilitation of primarily residential privately-owned

properties. Furthermore, interest earned on grant funds placed in

escrow accounts is not program income; it must be returned to the U.S.

Treasury.

Conflict of Interest Provisions

HUD recently amended the conflict of interest provisions in the

Entitlement program regulations (Sec. 570.611) in a final rule

published on November 9, 1995 (60 FR 56893). The amendments to

Sec. 570.611 in the November 9, 1995 final rule were in response to

public comments HUD received on the conflict of interest requirements

during the course of the rulemaking.

The State CDBG conflict of interest provisions in Sec. 570.489(h)

date from a November 9, 1992 final rule (57 FR 53397). In today's

proposed rule, HUD would make minor changes to these provisions to make

them consistent with Sec. 570.611 of the CDBG Entitlement regulations.

The introductory discussion of Sec. 570.489(h)(2) describes the

general principle concerning conflicts of interest as applicable

``[e]xcept for eligible administrative or personnel costs.'' HUD

deleted this introduction from the Entitlement program regulations in

the November 9, 1995 final rule, based on public comments that

expressed confusion over the phrase. Several commenters described

potentially troublesome situations that could arise from the inclusion

of the phrase. HUD is not aware of any problems that have arisen in the

State CDBG program as a result of the present wording. However, to

promote consistency of regulatory approach between the two programs,

this proposed rule would delete the reference to administrative or

personnel costs from the regulations for the State program. HUD

specifically requests comments from interested parties on what effect

(if any) this deletion would have on the program. Commenters may wish

to read the preamble to the November 9, 1995 final rule for further

discussion of this issue (60 FR 56901).

This proposed rule would make several other wording changes in

Sec. 570.489(h)(2) concerning prohibited conflicts of interest. These

changes would eliminate a redundant phrase, eliminate confusion over

what sort of benefit a person might receive in a contract that would be

nonfinancial in nature, and clarify that family ties of greatest

concern are those with immediate family members.

Spending Funds Outside the Jurisdiction of the Recipient

This portion of the proposed rule would revise Sec. 570.486(b).

Under the existing regulations, CDBG-funded activities may serve

beneficiaries living outside the jurisdiction of the unit of general

local government if the unit of government determines that the activity

is meeting its needs under the Act. Two emerging trends suggest that

further regulation in this area is appropriate. In both situations,

citizens may not be aware that funds that were supposed to benefit one

community are being spent to benefit another.

First, States and units of general local government are

increasingly using regional organizations to administer revolving loan

funds on behalf of local governments. These regional entities, which

may administer grants from multiple localities, often seek the

flexibility to use program income generated from these grants anywhere

within their service area, regardless of which community's grant

generated the program income. This presents a problem. Local

governments cannot completely abdicate to regional entities their

responsibility to ensure that program income generated from their

[[Page 11289]]

grant is used to meet the community's needs.

Second, HUD is aware of a number of situations in which States

awarded or planned to award a grant to one community, but the benefits

of the activities would occur in a different community or throughout a

much larger area. In some cases, one small community would receive a

grant for an activity that would be carried out on a regional or even

statewide basis. In other cases, suburban communities would receive

funding for projects, and the principal benefit would accrue to a

nearby Entitlement community. HUD does not believe it is appropriate

for one community to serve as a ``flag of convenience'' grant recipient

when only a small portion of the benefits will accrue to residents of

that jurisdiction. In such situations, the more appropriate approach is

for a State to make a grant to a ``combination of governments,'' as is

specifically provided for in the Act. In situations involving

activities located in Entitlement communities, HUD believes it is

appropriate for Entitlement communities to participate in funding such

projects commensurate with the benefits their citizens receive.

This proposed rule would add to the existing regulations a

requirement that reasonable benefits must accrue to residents within

the jurisdiction of the grant recipient. Since HUD is aware that

activities located outside a State grant recipient's jurisdiction may

indeed provide substantial benefits to the citizens within the

jurisdiction, this proposed rule would not prohibit such activities.

The rule would simply require that the State grant recipient consider

whom the funds will benefit; in making a determination that such a

project meets the community's needs, the community should ensure that

the benefits to its residents are sufficient to justify the project.

HUD would not question the determination (or the State's acceptance

thereof) unless it is clearly unreasonable. This proposed rule would

not limit the amount or percentage of funds that may assist such an

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

benefit their residents. The recipient would be responsible for

determining the reasonableness of the benefits in such cases. A

parallel change was recently finalized in the CDBG Entitlement

regulations, in the November 9, 1995 final rule (60 FR 56892).

State Authority to Impose Additional Provisions

This proposed rule would add a new provision to reinforce States'

administrative flexibility. This new provision would authorize States

to apply to participating units of general local government additional

requirements or requirements that are more restrictive than those

established by HUD. Such authority is implicit in the States' ability

to administer the CDBG program, but HUD has never explicitly stated

this in the regulations. States cannot impose any additional

requirements that would be plainly inconsistent with the Act or with

other statutory or regulatory provisions that apply to the State CDBG

program. HUD proposes this provision in association with several of

today's other proposed changes to portray more clearly State

responsibilities and authority.

Findings and Certifications

Paperwork Reduction Act Statement

The information collection requirements in Sec. 570.489(e)(4) of

this proposed rule have been submitted to the Office of Management and

Budget (OMB) for review under section 3507(d) of the Paperwork

Reduction Act of 1995 (44 U.S.C. 3507(d)) and 5 CFR 1320.11. An agency

may not conduct or sponsor, and a person is not required to respond to,

a collection of information unless the collection displays a valid

control number.

As required under 5 CFR 1320.8(d)(1), HUD and OMB are seeking

comments from members of the public and affected agencies concerning

the proposed collection of information to:

(1) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information will have practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of

the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to

be collected; and

(4) Minimize the burden of the collection of information on those

who are to respond; including through the use of appropriate automated

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses. Interested persons are

invited to submit comments according to the instructions in the Dates

and Addresses sections in the preamble of this proposed rule.

This document also provides the following information:

Title of Proposal: Revisions to State CDBG Program Income

Requirements and Miscellaneous Amendments.

OMB Control Number: HUD is seeking OMB approval for the information

collection requirements identified in this proposed rule. OMB will

assign a control number for these State CDBG program information

collection requirements upon granting approval. This proposed

information collection would be in addition to the information

collection requirements presently contained in the consolidated plan

and covered under control number 2506-0117.

Description of the Need for the Information and Proposed Use: This

rule proposes to revise the program income requirements governing the

State CDBG program, along with miscellaneous other changes.

Form Numbers: Not applicable. No forms are required by HUD in the

State CDBG program.

Members of Affected Public: States, units of general local

government.

Estimation of the Total Number of Hours Needed to Prepare the

Information Collection including Number of Respondents, Frequency of

Response, and Hours of Response:

Changes in State CDBG requirements affect both State and local

government staff. State staff review reports submitted by local

governments, make on-site compliance reviews, and report to HUD on the

uses of CDBG funds. Local government staff collect information to

demonstrate compliance with program requirements and report to the

State on the use of funds.

Two proposed changes in this rule would affect the amount of time

spent by States and local governments in administering CDBG funds:

locally-held program income subject to all CDBG requirements for as

long as it exists; and States reporting on locally-held program income

in their Consolidated Plan Reports. Several factors determine the

burden that these proposed changes would impose on States and local

governments. Housing rehabilitation and economic development activities

are more likely to generate program income than are public facilities

or public service activities. Activities that provide loans are more

likely to generate program income than are activities providing grants

or forgivable loans. The number, size, rate, and terms of loans made

determine the amount of program income generated per year.

Some States require locally-retained program income to be used in

compliance with some or all CDBG program income requirements, whether

or not HUD's regulations require such compliance. In those States, the

proposed rule will result in little or no additional local compliance

burden. However, additional staff time will be needed by the States

themselves to

[[Page 11290]]

report to HUD on the use of such program income.

The following figures represent additional increments of time and

cost beyond those normally involved in the State CDBG program. In

developing these estimates, HUD consulted with a representative sample

of States; the figures represent a melding of HUD estimates with

States' estimates to produce a national average.

All States together fund about 3,000 grants per year, consisting of

about 11,000 activities. However, only about 20 percent of these

activities are of types that are likely to generate income. As noted

above, many of those income-generating activities are either not

subject to program income requirements, or are already subject to

program income requirements and will see no change under the proposed

rule. Thus, HUD believes the number of State grants that will be

subject to additional recordkeeping and reporting efforts is a

relatively small portion of all State grants.

States make new grant awards to units of local government every

year; however, States' grant contracts with units of general local

government usually remain in force for several years. The burden

estimates shown for local governments thus represent the net burden

increase over the duration of its contractual relationship with the

State, rather than annual figures. The burden estimates for States are

average annual figures.

----------------------------------------------------------------------------------------------------------------

Number of Total hours

Burden of collection frequency respondents per response Total hours

----------------------------------------------------------------------------------------------------------------

Local recordkeeping and reporting to state on program income:

Ongoing..................................................... 550 60 33,000

State recordkeeping and reporting on program income:

Annually.................................................... 49 80 3,920

-----------------------------------------------

Total..................................................... 599 .............. 36,920

----------------------------------------------------------------------------------------------------------------

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this proposed

rule under Executive Order 12866, Regulatory Planning and Review,

issued by the President on September 30, 1993. OMB determined that this

proposed rule is a ``significant regulatory action,'' as defined in

section 3(f) of the Order (although not economically significant, as

provided in section 3(f)(1) of the Order). Any changes made in this

rule subsequent to its submission to OMB are identified in the docket

file, which is available for public inspection between 7:30 a.m. and

5:30 p.m. in the Office of the Rules Docket Clerk, Office of General

Counsel, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC.

Environmental Impact

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations at 24 CFR part 50,

which implement section 102(2)(C) of the National Environmental Policy

Act of 1969. The Finding of No Significant Impact is available for

public inspection during regular business hours in the Office of the

Rules Docket Clerk, Office of General Counsel, Room 10276, Department

of Housing and Urban Development, 451 Seventh Street, SW, Washington,

DC 20410.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this proposed rule before publication and

by approving it certifies that this proposed rule does not have a

significant economic impact on a substantial number of small entities.

The proposed rule is limited to the effecting of relatively minor

procedural amendments that would update the State CDBG regulations to

recognize statutory amendments and clarify the regulations to address

past confusion.

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 proposed 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 proposed rule is not subject to review under the

order. The proposed rule is limited to making relatively minor

procedural amendments that would update the State CDBG regulations to

recognize statutory amendments and clarify the regulations to address

past confusion. In general, this proposed rule would provide more

flexibility and clarity in the regulations for States and units of

general local government.

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this proposed rule does

not have potential for significant impact on 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 proposed rule, as

those policies and programs relate to family concerns.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub.

L. 104-4, approved March 22, 1995; 109 Stat. 48) establishes

requirements for Federal agencies to assess the effects of their

regulatory actions on State, local, and tribal governments and the

private sector. This proposed rule would not impose any Federal

mandates on any State, local, or tribal governments, or on the private

sector within the meaning of the UMRA. The provisions of this proposed

rule would primarily clarify program procedures or provide States

additional flexibility in administering block grant funds.

List of Subjects in 24 CFR Part 570

Administrative practice and procedure, American Samoa, Community

development block grants, Grant programs--education, Grant programs--

housing and community development, Guam, Indians, 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, for the reasons stated in the preamble, 24 CFR part

570 is proposed to be amended as follows:

[[Page 11291]]

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

1. The authority citation for part 570 continues to read as

follows:

Authority: 42 U.S.C. 3535(d) and 5300-5320.

2. Section 570.480 is amended by adding a new paragraph (e) to read

as follows:

Sec. 570.480 General.

* * * * *

(e) A State may, in its administration of the program, apply

additional or more restrictive provisions to units of general local

government participating in the State's program, providing that such

provisions are not plainly inconsistent with the Act or other statutory

or regulatory provisions applicable to the State CDBG program.

3. Section 570.486 is amended by revising paragraph (b) to read as

follows:

Sec. 570.486 Local government requirements.

* * * * *

(b) Activities serving beneficiaries outside the jurisdiction of

the unit of general local government. CDBG-funded activities may serve

beneficiaries outside the jurisdiction of the unit of general local

government that receives the grant, provided that reasonable benefits

from the activity will accrue to residents within the jurisdiction of

the grant recipient, and provided that the unit of general local

government determines that the activity is meeting its needs in

accordance with section 106(d)(2)(D) of the Act (42 U.S.C.

5306(d)(2)(D)).

4. Section 570.489 is amended by:

a. Revising paragraph (c);

b. Revising paragraph (e);

c. Revising the first sentence of paragraph (f)(2);

d. Revising paragraphs (h)(2) and (h)(3);

e. Adding a new paragraph (n); and

f. Adding a new paragraph (o); to read as follows:

Sec. 570.489 Program administrative requirements.

* * * * *

(c) Federal grant payments. The State's requests for payment, and

the Federal Government's payments upon such requests, must comply with

31 CFR part 205. The State must use procedures to minimize the time

elapsing between the transfer of grant funds and disbursement of funds

by the State to units of general local government. Units of general

local government must also use procedures to minimize the time elapsing

between the transfer of funds by the State and disbursement for CDBG

activities.

* * * * *

(e) Program income. (1) For the purposes of this subpart, ``program

income'' is defined as gross income received by a State, a unit of

general local government, or a subrecipient of a unit of general local

government that was generated from the use of CDBG funds, except as

provided in paragraph (e)(2) of this section. When income is generated

by an activity that is only partially assisted with CDBG funds, the

income must be prorated to reflect the percentage of CDBG funds used

(e.g., a single loan supported by CDBG funds and other funds; a single

parcel of land purchased with CDBG funds and other funds). Program

income includes, but is not limited to, the following:

(i) Proceeds from the disposition by sale or long term lease of

real property purchased or improved with CDBG funds;

(ii) Proceeds from the disposition of equipment purchased with CDBG

funds;

(iii) Gross income from the use or rental of real or personal

property acquired by the unit of general local government or a

subrecipient of a unit of general local government with CDBG funds,

less the costs incidental to the generation of the income;

(iv) Gross income from the use or rental of real property, owned by

the unit of general local government or a subrecipient of a unit of

general local government, that was constructed or improved with CDBG

funds, less the costs incidental to the generation of the income;

(v) Payments of principal and interest on loans made using CDBG

funds, except as provided in paragraph (e)(2)(iv) of this section;

(vi) Proceeds from the sale of loans made with CDBG funds, less

legal and other costs associated with the sale of loans that are not

otherwise eligible under sections 105(a)(13) or 106(d)(3)(A) of the Act

(42 U.S.C. 5305(a)(13), 5306(d)(3)(A));

(vii) Proceeds from the sale of obligations secured by loans made

with CDBG funds, less legal and other costs associated with the sale of

obligations that are not otherwise eligible under sections 105(a)(13)

or 106(d)(3)(A) of the Act (42 U.S.C. 5305(a)(13), 5306(d)(3)(A));

(viii) Interest earned on funds held in a revolving fund account;

(ix) Interest earned on program income pending disposition of the

income;

(x) Funds collected through special assessments made against

properties owned and occupied by households not of low and moderate

income, if the special assessments are used to recover all or part of

the CDBG portion of a public improvement; and

(xi) Gross income paid to a unit of general local government or

subrecipient from the ownership interest in a for-profit entity

acquired in return for the provision of CDBG assistance.

(2) ``Program income'' does not include the following:

(i) Any income received by a unit of general local government and

its subrecipients during a twelve-month period, provided that the total

of such income is less than $25,000. (This provision does not apply to

funds paid to the State for redistribution to other units of local

government.)

(ii) Amounts generated by activities that are eligible under

section 105(a)(15) of the Act (42 U.S.C. 5305(a)(15)) and are carried

out by an entity under the authority of section 105(a)(15) of the Act;

(iii) Amounts generated by activities that are financed by a loan

guaranteed under section 108 of the Act (42 U.S.C. 5308) and meet one

or more of the public benefit criteria specified in

Sec. 570.482(f)(3)(v), or are carried out in conjunction with a grant

under section 108(q) of the Act (42 U.S.C. 5308(q)) in an area

determined by HUD to meet the eligibility requirements for designation

as an Empowerment Zone or Enterprise Community pursuant to either 24

CFR part 597, subpart B or 7 CFR part 25, subpart B (as applicable).

Such exclusion does not apply if CDBG funds are used to repay the

guaranteed loan. When such a guaranteed loan is partially repaid with

CDBG funds, the amount generated must be prorated to reflect the

percentage of CDBG funds used. Amounts generated by activities financed

with loans guaranteed under section 108 of the Act (42 U.S.C. 5308)

that are not defined as ``program income'' will be treated as

miscellaneous revenue and will not be subject to any of the

requirements of this part. However, such treatment does not affect the

right of the Secretary to require the Section 108 borrower to pledge

such amounts as security for the guaranteed loan. The determination

whether such amounts constitute program income is governed by the

provisions of the contract required at Sec. 570.705(b)(1).

(iv) Payments of principal and interest made by a subrecipient to a

unit of general local government, toward a loan from the local

government to the subrecipient, when program income received by the

subrecipient is being

[[Page 11292]]

used for such payments. (By making such payments, the subrecipient is

deemed to have transferred program income to the unit of general local

government.)

(v) Interest earned on the following; such interest must be

remitted to HUD for transmittal to the U.S. Treasury, and will not be

reallocated under section 106 (c) or (d) of the Act (42 U.S.C. 5306

(c), (d)):

(A) Interest earned on loans or other forms of assistance provided

with CDBG funds that are used for activities determined by HUD either

to be ineligible or to fail to meet a national objective in accordance

with the requirements of Secs. 570.482 or 570.483, or section 105(a) of

the Act (42 U.S.C. 5305(a)), or that fail substantially to meet any

other requirement of this subpart or the Act;

(B) Interest earned on the investment of amounts reimbursed to the

CDBG program account prior to the use of the reimbursed funds for

eligible purposes; and

(C) Interest earned by units of general local government on grant

funds before disbursement of the funds for activities, except that the

unit of general local government may keep interest payments of up to

$100 per year for administrative expenses and may deduct service

charges for escrow accounts pursuant to paragraph (o) of this section.

(Interest earned on lump sum deposits pursuant to paragraph (n) of this

section is not subject to the provisions of paragraph (e)(2)(v)(C) of

this section.)

(3) (i) Program income paid to the State. Except as described in

paragraph (e)(3)(ii)(A) of this section, the State may require the unit

of general local government that receives or will receive program

income to return the program income to the State. Program income that

is paid to the State is treated as additional CDBG funds subject to the

requirements of this subpart. Except for program income retained and

used by the State for administrative costs under Sec. 570.489(a),

program income paid to the State must be distributed to units of

general local government in accordance with the method of distribution

in the action plan under 24 CFR part 91 that is in effect at the time

the program income is distributed. To the maximum extent feasible, the

State must distribute program income before it makes additional

withdrawals from the Treasury, except as provided in paragraph (f) of

this section.

(ii) Program income retained by a unit of general local government.

The State may permit the unit of general local government that receives

or will receive program income to retain the program income. In any

case in which the State allows the unit of general local government to

retain program income, the State may require the unit of local

government to pay to the State an amount not to exceed 2 percent of the

program income received, for use by the State in accordance with

Sec. 570.489(a).

(A) The State must permit the unit of general local government to

retain the program income if the program income will be used to

continue the activity from which it was derived.

(1) The State will determine when an activity will be considered to

be continued. In making such a determination, the State may consider

whether the unit of local government is or will be unable to comply

with the requirements of paragraph (e)(3)(ii) of this section or other

requirements of this part, and whether the program income-funded

activity is unlikely to be completed within a reasonable time period.

(2) When the State determines that the program income will be used

to continue the activity from which it was derived, but that the amount

of program income held by the unit of local government exceeds

projected cash needs for the near future, the State may require the

local government to return all or part of the program income to the

State's line of credit until such time as the program income is needed

by the unit of general local government.

(B) Program income that is received and retained by the unit of

general local government is treated as additional CDBG funds and is

subject to all applicable requirements of this subpart for the duration

of the program income's existence. The State has the option of

selecting its approach for demonstrating compliance by units of local

government with this paragraph (e)(ii)(B). The three approaches from

which the State may select are:

(1) Maintaining contractual relationships with units of local

government for the duration of the existence of the program income.

(2) Requiring advance State approval of either a State grant

recipient's plan for the use of program income, or of each use of

program income by grant recipients.

(3) With prior HUD approval, other approaches that demonstrate that

the State will ensure compliance with the requirements of this subpart

by units of local government.

(C) The provisions of paragraph (e)(3)(ii)(B) of this section apply

to all activities funded with funds from fiscal year (FY) 1993 and

later. All activities funded with FY 1992 and earlier funds are subject

to Sec. 570.489(e)(3)(ii) as it existed immediately before [INSERT

EFFECTIVE DATE OF FINAL RULE]. At its option, a State may apply the

provisions of paragraph (e)(3)(ii)(B) of this section to FY 1992 and

earlier funds.

(D) The State must require units of general local government, to

the maximum extent feasible, to disburse program income that is subject

to the requirements of this subpart before requesting additional funds

from the State for activities, except as provided in paragraphs (f),

(n), and (o) of this section.

(4) The State must report on the receipt and use of all program

income (whether retained by units of local government or paid to the

State) in its annual performance and evaluation report.

(f) * * *

(2) The State may establish one or more revolving funds to

distribute funds to units of general local government throughout a

State or a region of the State to carry out specific, identified

activities. * * *

* * * * *

(h) * * *

(2) Conflicts prohibited. The general rule is that no persons

described in paragraph (h)(3) of this section, who exercise or have

exercised any functions or responsibilities with respect to CDBG

activities assisted under this subpart or who are in a position to

participate in a decisionmaking process or gain inside information with

regard to such activities, may obtain a financial interest or benefit

from the activity, or have a financial interest in any contract,

subcontract, or agreement with respect thereto, or the proceeds

thereunder, either for themselves or for those with whom they have

immediate family or business ties, during their tenure or for one year

thereafter.

(3) Persons covered. The conflict of interest provisions in

paragraph (h)(2) of this section apply to any person who is an

employee, agent, consultant, officer, or elected official or appointed

official of the State, or of a unit of general local government, or of

any designated public agencies, or subrecipients that are receiving

funds under this part.

* * * * *

(n) Lump sum drawdowns. The requirements for States and units of

general local government regarding lump sum drawdowns to finance

property rehabilitation activities are in Sec. 570.513.

(o) Use of escrow accounts for rehabilitation of privately owned

residential property. The requirements for States and units of general

local

[[Page 11293]]

government regarding the use of escrow accounts for rehabilitation of

privately owned residential property are in Sec. 570.511.

5. Section 570.511 is revised to read as follows:

Sec. 570.511 Use of escrow accounts for rehabilitation of privately

owned residential property.

(a) Limitations. A recipient may withdraw funds (or, as applicable,

a State may allow units of general local government to withdraw funds)

from its letter of credit for immediate deposit into an escrow account

for use in funding loans and grants for the rehabilitation of privately

owned residential property. The following limitations apply to the use

of escrow accounts for residential rehabilitation loans grants closed

after September 7, 1990. (For the State CDBG program, the following

limitations apply to the use of escrow accounts for residential

rehabilitation loans and grants closed after [INSERT EFFECTIVE DATE OF

FINAL RULE]):

(1) The use of escrow accounts under this section is limited to

loans and grants for the rehabilitation of primarily residential

properties containing no more than four dwelling units (and accessory

neighborhood-scale nonresidential space within the same structure, if

any, e.g., a store front below a dwelling unit).

(2) An escrow account must not be used unless the contract between

the property owner and the contractor selected to do the rehabilitation

work specifically provides that payment to the contractor shall be made

through an escrow account. No deposit to the escrow account can be made

until after the contract has been executed between the property owner

and the rehabilitation contractor.

(i) For the CDBG Entitlement program, the escrow account must be

maintained by the recipient, by a subrecipient as defined in

Sec. 570.500(c), by a public agency designated under Sec. 570.501(a),

or by an agent under a procurement contract governed by the

requirements of 24 CFR 85.36.

(ii) For the State CDBG program, the escrow account must be

maintained by the unit of general local government, by an agent under a

procurement contract governed by the requirements of Sec. 570.489(g),

or by a nonprofit entity authorized under section 105(a)(15) of the Act

(42 U.S.C. 5305(a)(15)).

(3) All funds withdrawn under this section must be deposited into

one interest earning account with a financial institution. Separate

bank accounts may not be established for individual loans and grants.

(4) The amount of funds deposited into an escrow account must be

limited to the amount expected to be disbursed within 10 working days

from the date of deposit. If the escrow account, for whatever reason,

at any time contains funds exceeding 10 days' cash needs, the recipient

must immediately transfer (or, as applicable, the State must ensure

that a unit of general local government immediately transfers) the

excess funds to its program account. In the program account, the excess

funds must be treated as funds erroneously drawn in accordance with the

requirements of U.S. Treasury Financial Manual, paragraph 6-2075.30.

(5) Funds deposited into an escrow account must be used only to pay

the actual costs of rehabilitation incurred by the owner under the

contract with a private contractor. Other eligible costs related to the

rehabilitation loan or grant, e.g., the recipient's (or, as applicable,

the unit of general local government's) administrative costs (as

defined for the Entitlement CDBG program under Sec. 570.206) or

rehabilitation services costs under Sec. 570.202(b)(9) if applicable,

are not permissible uses of escrowed funds. Such other eligible

rehabilitation costs must be paid under normal CDBG payment procedures

(e.g., from withdrawals of grant funds under the recipient's (or

State's, as applicable) letter of credit with the Treasury).

(b) Interest. Interest earned on escrow accounts established in

accordance with this section, less any service charges for the account,

must be remitted to HUD (for transmittal to the U.S. Treasury) at least

quarterly but not more frequently than monthly. Interest earned on

escrow accounts is not required to be remitted to HUD to the extent the

interest is attributable to the investment of program income.

(c) Remedies for noncompliance. If HUD determines that a recipient

has failed (or, as applicable, if a State determines that a unit of

general local government has failed) to use an escrow account in

accordance with this section, HUD may, in addition to imposing any

other sanctions provided for under this part, require the recipient to

discontinue the use of escrow accounts, in whole or in part (or, as

applicable, the State may, under the authority of Sec. 570.492(b),

require the unit of general local government to discontinue the use of

escrow accounts, in whole or in part).

6. Section 570.513 is revised to read as follows:

Sec. 570.513 Lump sum drawdown for financing of property

rehabilitation activities.

Subject to the conditions prescribed in this section (and section

104(h) of the Act (42 U.S.C. 5304(h), as applicable)), recipients may

draw down funds (or, as applicable, States may allow units of general

local government to draw down funds) from the letter of credit in a

lump sum to establish a rehabilitation fund in one or more private

financial institutions for the purpose of financing the rehabilitation

of privately owned properties. The fund may be used in conjunction with

various rehabilitation financing techniques, including loans, interest

subsidies, loan guarantees, loan reserves, or such other uses as may be

approved by HUD consistent with the objectives of this section. The

fund may also be used for making grants, but only for the purpose of

leveraging non-CDBG funds for the rehabilitation of the same property.

(a) Limitation on drawdown of grant funds. (1) The funds that a

recipient deposits (or, as applicable, that a State allows a unit of

general local government to deposit) to a rehabilitation fund must not

exceed the grant amount that the recipient (or State, as applicable)

reasonably expects will be required, together with anticipated program

income from interest and loan repayments, for the rehabilitation

activities during the period specified in the agreement with the

financial institution(s) (described in paragraph (b)(2) of this

section), based on:

(i) Prior level of rehabilitation activity; or

(ii) Rehabilitation staffing and management capacity during the

period specified in the agreement to undertake activities; or

(iii) For purposes of the State CDBG program only, estimated demand

for rehabilitation activity.

(2) No grant funds may be deposited under this section solely for

the purpose of investment, notwithstanding that the interest or other

income is to be used for the rehabilitation activities.

(3) The recipient's (or, as applicable, the unit of general local

government's) rehabilitation program administrative costs and the

administrative costs of the financial institution may not be funded

through lump sum drawdown. Such costs must be paid from periodic letter

of credit withdrawals in accordance with standard procedures or from

program income, other than program income generated by the lump sum

deposit.

(b) Standards to be met. The following standards apply to all lump

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sum drawdowns of CDBG funds for rehabilitation:

(1) Eligible rehabilitation activities. The rehabilitation fund

must be used to finance the rehabilitation of privately owned

properties (including the acquisition of properties for rehabilitation)

eligible under the general policies in Sec. 570.200, if applicable, and

the specific provisions of either Sec. 570.202 or Sec. 570.203, if

applicable; or, for purposes of the State CDBG program, as eligible

under section 105 (a)(4), (a)(5), (a)(14), (a)(15) or (a)(17) of the

Act (42 U.S.C. 5305(a)).

(2) Requirements for agreement. The recipient (or unit of general

local government, as applicable) must execute a written agreement with

one or more private financial institutions for the operation of the

rehabilitation fund. The agreement must specify the obligations and

responsibilities of the parties, the terms and conditions on which CDBG

funds are to be deposited and used or returned, the anticipated level

of rehabilitation activities by the financial institution, the rate of

interest and other benefits to be provided by the financial institution

in return for the lump sum deposit, and such other terms as are

necessary for compliance with the provisions of this section. Except

for purposes of the State CDBG program, upon execution of the

agreement, the recipient must provide a copy to the HUD field office

for its records and use in monitoring; the recipient must also provide

to HUD any modifications made during the term of the agreement. For

purposes of the State CDBG program, a State may require State approval

of any local agreement or modification.

(3) Period to undertake activities. The agreement must be fully

executed before the lump sum deposit is made. Except for purposes of

the State CDBG program, the agreement must provide that the

rehabilitation fund may only be used for authorized activities during a

period of no more than two years. For purposes of the State CDBG

program, States may set maximum time limits on the duration of lump sum

drawdown agreements, but in no case can an agreement remain in effect

after the date that a grant to a unit of general local government is

closed out; the agreement must specify the time period for which the

agreement is in effect.

(4) Time limit on use of deposited funds. (This paragraph (b)(4) of

this section does not apply to the State CDBG program). Use of the

deposited funds for rehabilitation financing assistance must start

(e.g., first loan must be made, subsidized or guaranteed) within 45

days of the deposit. In addition, substantial disbursements from the

fund must occur within 180 days of the receipt of the deposit. (Where

CDBG funds are used as a guarantee, the funds that must be

substantially disbursed are the guaranteed funds.) For a recipient with

an agreement specifying two years to undertake activities, the

disbursement of 25 percent of the fund (deposit plus any interest

earned) within 180 days will be regarded as meeting this requirement.

If a recipient with an agreement specifying two years to undertake

activities determines that it has had substantial disbursement from the

fund within the 180 days although it had not met this 25 percent

threshold, the justification for the recipient's determination must be

included in the program file. If a recipient does not start using the

funds within 45 days, or substantial disbursement from such fund does

not occur within 180 days, the recipient may be required by HUD to

return all or part of the deposited funds to the recipient's letter of

credit.

(5) Program activity. Recipients (or States, as applicable) must

review the level of program activity under each agreement on a yearly

basis. If activity is substantially below that anticipated, the

recipient must return program funds to its letter of credit (or the

State must require that the unit of general local government return

program funds to the State's letter of credit, as applicable).

(6) Termination of agreement. (i) In the case of substantial

failure by a private financial institution to comply with the terms of

a lump sum drawdown agreement under the Entitlement CDBG program, the

recipient must terminate its agreement, provide written justification

for the action, withdraw all unobligated deposited funds from the

private financial institution, and return the funds to the recipient's

letter of credit.

(ii) For purposes of the State CDBG program, a State must develop

and implement standards to ensure that, in cases of substantial failure

by a private financial institution or a unit of general local

government to comply with the terms of a lump sum drawdown agreement,

all unobligated deposited funds will be withdrawn from the private

financial institution and returned to the State's letter of credit.

(7) Return of unused deposits. At the end of the period specified

in the agreement for undertaking activities, all unobligated deposited

funds must be returned to the recipient's (or State's, as applicable)

letter of credit unless the recipient (or unit of general local

government, as applicable) enters into a new agreement conforming to

the requirements of this section. In addition, the recipient (or State,

as applicable) must reserve the right to withdraw any unobligated

deposited funds as required by HUD (or, for purposes of the State CDBG

program, as determined by HUD or the State) in the exercise of

corrective or remedial actions authorized under Secs. 570.910(b),

570.911, 570.912, or 570.913 (or, for purposes of the State CDBG

program, under this section, Secs. 570.492, 570.493, 570.495, or

570.496).

(8) Rehabilitation loans made with non-CDBG funds. If the deposited

funds or program income derived from deposited funds are used to

subsidize or guarantee repayment of rehabilitation loans made with non-

CDBG funds, or to provide a supplemental loan or grant to the borrower

of the non-CDBG funds, the rehabilitation activities are considered to

be CDBG-assisted activities subject to the requirements applicable to

such activities, except that repayment of non-CDBG funds is not treated

as program income.

(9) Provision of consideration. In consideration for the lump sum

deposit by the recipient (or unit of general local government, as

applicable) in a private financial institution, the deposit must result

in appropriate benefits in support of the recipient's (or, as

applicable, unit of general local government's) rehabilitation program.

Minimum requirements for such benefits are:

(i) Recipients (or units of general local government, as

applicable) must require the financial institution to pay interest on

the lump sum deposit.

(A) The interest rate paid by the financial institution cannot be

lower than three points below the rate on one-year Treasury obligations

at constant maturity.

(B) When an agreement sets a fixed interest rate for the entire

term of the agreement, the rate should be based on the rate at the time

the agreement is executed.

(C) The agreement may provide for an interest rate that would

fluctuate periodically during the term of the agreement, but the

established rate cannot be lower than three points below the rate on

one-year Treasury obligations at constant maturity.

(ii) In addition to the payment of interest, the financial

institution must provide at least one of the following benefits:

(A) Leverage of the deposited funds so that the financial

institution commits private funds for the loans in the rehabilitation

program in an amount substantially in excess of the amount of the lump

sum deposit;

(B) Commitment of private funds by the financial institution for

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rehabilitation loans at below market interest rates, at higher than

normal risk, or with longer than normal repayment periods; or

(C) Provision of administrative services in support of the

rehabilitation program by the participating financial institution at no

cost or at lower than actual cost.

(c) Program income. Interest earned on lump sum deposits and

payments on loans made from such deposits are program income and,

during the period of the agreement, must be used for rehabilitation

activities under the provisions of this section.

(d) Outstanding findings. Notwithstanding any other provision of

this section, a recipient may not enter into a new agreement (or, as

applicable, a State may not allow a unit of general local government to

enter into a new agreement) during any period of time in which an audit

or monitoring finding on a previous lump sum drawdown agreement remains

unresolved.

(e) Prior notification. (This paragraph (e) of this section does

not apply to the State CDBG program.) The recipient must submit written

notification to the HUD field office of the amount of funds to be

deposited with a private financial institution, before making the

deposit under the provisions of this section.

(f) Recordkeeping requirements. (This paragraph (f) of this section

does not apply to the State CDBG program.) The recipient must maintain

in its files a copy of the written agreement and related documents

establishing conformance with this section and concerning performance

by a financial institution in accordance with the agreement.

Dated: March 5, 1997.

Howard Glaser,

Acting Assistant Secretary for Community Planning and Development.

[FR Doc. 97-6024 Filed 3-10-97; 8:45 am]

BILLING CODE 4210-29-P