Multi-Family Housing (MFH) Direct Loan Programs
| Published date | 01 March 2022 |
| Citation | 87 FR 11275 |
| Record Number | 2022-03837 |
| Section | Rules and Regulations |
| Court | Rural Housing Service |
Federal Register, Volume 87 Issue 40 (Tuesday, March 1, 2022)
[Federal Register Volume 87, Number 40 (Tuesday, March 1, 2022)]
[Rules and Regulations]
[Pages 11275-11286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03837]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 87, No. 40 / Tuesday, March 1, 2022 / Rules
and Regulations
[[Page 11275]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
7 CFR Part 3560
[Docket No. RHS-21-MFH-0026]
RIN 0575-AD17
Multi-Family Housing (MFH) Direct Loan Programs
AGENCY: Rural Housing Service, USDA.
ACTION: Final rule.
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SUMMARY: The Rural Housing Service (RHS or Agency), an agency in the
United States Department of Agriculture (USDA) Rural Development
Mission area, published a proposed rule in the Federal Register on
September 23, 2020, to amend its regulations for the Multi-Family
Housing Direct Loans and Grants Programs to implement changes related
to the development of a sustainable plan for the Rental Assistance (RA)
program. Through this action, RHS is adopting the changes as proposed.
The regulation updates are intended to provide additional RA program
flexibility and transparency, and to improve the efficiency of managing
assets in the Direct Loan portfolio.
DATES: The final rule is effective March 31, 2022.
FOR FURTHER INFORMATION CONTACT: Jennifer Larson, Multi-Family Housing
Asset Management Division, Rural Housing Service, Stop 0782, 1400
Independence Avenue SW, Washington, DC 20250-0782. Telephone 202-720-
1615.
SUPPLEMENTARY INFORMATION:
I. Background Information
Rural Development (RD) is a mission area within the United States
Department of Agriculture (USDA) comprised of the Rural Utilities
Service (RUS), Rural Housing Service (RHS) and Rural Business-
Cooperative Service (RBCS). RD's mission is to increase economic
opportunity and improve the quality of life for all rural Americans. RD
meets its mission by providing loans, loan guarantees, grants, and
technical assistance through more than 40 programs aimed at creating
and improving housing, businesses, and infrastructure throughout rural
America. We help rural residents buy or rent safe, affordable housing
and make health and safety repairs to their homes.
The RHS Multi-Family Housing (MFH) programs, provide affordable
multi-family rental housing in rural areas by financing projects geared
for low-income, elderly and disabled individuals and families as well
as domestic farm laborers. MFH Programs extends its reach by
guaranteeing loans for affordable rental housing designed for low to
moderate-income residents in rural areas and towns. MFH Programs are
administered, subject to appropriations, by the USDA as authorized
under Sections 514, 515 and, 516 and 521 of the Housing Act of 1949, as
amended. The Agency operates a multifamily rural rental housing direct
loan program under section 515 for off-farm labor housing and section
514 for farm labor housing. The Agency also provides grants under the
section 516 farm labor housing program and section 521 provides
project-based rental assistance payments to property owners.
The RHS published a proposed rule on September 23, 2020 (85 FR
59682) to: (1) Implement programmatic changes related to development of
a ``sustainability plan'' for the Rental Assistance (RA) Program,
including new Agency flexibilities in managing the RA distribution; (2)
integrate new asset management policies; and (3) incorporate technical
corrections to clarify reference and formatting issues in the
regulation. The purpose of this action is to finalize these provisions
as proposed in the proposed rule on September 23, 2020.
RHS published an interim rule on November 26, 2004 (69 FR 69032),
with an effective date of 2/24/2005. On February 22, 2005, a delay of
effective date was published in the Federal Register (70 FR 8503) to
indefinitely delay the following sections: 3560.152(a)(1),
3560.154(a)(7), 3560.156(c)(12), and 3560.254(c)(3). The delay of
effective date remains in effect for these sections until a future
final rule is published to lift the stay.
II. Comments and Responses
The 60-day comment period for the proposed rule ended on November
23, 2020. A total of 16 comments were received. Commenters included
non-profit housing organizations or associations representing housing
providers and private citizens.
The following actions in the proposed rule will be included in the
final rule with full consideration of public comments, included below,
with the Agency's responses.
Issue 1: A Commenter pointed to include change to Sec. 3560.72 to
consistently use ``Leadership Designee,'' instead of MFH Leadership
Designee. As noted in the proposed rule, page 59684, the Agency's
intent is to change State Director to Leadership Designee to allow
flexibility for future staff. The commenter supported not limiting the
change to only ``MFH Leadership Designee,'' for even greater
flexibility.
Agency Response 1: The Agency acknowledges the commenter's support
for this modification. The Agency agrees, as the commenter stated, that
the language under Sec. 3560.72 should be amended by removing the
words 'State Director' and adding in their place 'Leadership Designee'
in the second sentence of paragraph (b).
Issue 2: Several commenters requested more contact information
about the Leadership Designee positions throughout the Agency.
Agency Response 2: The Agency has established a list of Field
Operations servicing officials for all projects available on the public
Rural Development website with email contact information provided for
each team member. The Regional Director for each region is also
provided on the public Rural Development website.
Issue 3: Several commenters requested more detail on the MFH
program eligibility requirements regarding domestic farm laborers. This
included persons legally admitted on a temporary or permanent basis,
including the U.S. Citizenship and Immigration Services (USCIS) H2A
Program for Temporary Agricultural Workers.
Agency Response 3: The proposed ``Domestic Farm Laborer''
definition reflects the Agency's compliance with the statutory
requirements of the Consolidated Appropriations Act of 2018,
permanently amending Section
[[Page 11276]]
514(f)(3)(A) of the Housing Act of 1949 (42 U.S.C. 1484(f)(3)(A)). The
Agency believes that additional clarification is not required.
Issue 4: One commenter expressed concern that clarification
regarding the Agency's authority to establish agency-held escrows in
the proposed rule did not include an explanation as to why this
authority is needed and did not place any conditions on the Agency's
exercise of this authority. The commenter urged the Agency to remove
this provision without an explanation of the need and establish
standards for when this requirement can be imposed on a borrower.
Agency's Response 4: The proposed rule clarified that in Sec.
3560.65, the authorization of an agency-held escrow account only
applies to the Reserve Account. ``The Agency may establish an escrow
account for the collection and disbursement of reserve account funds.''
This authority was historically included in the loan documents but was
not addressed in the regulation. This provision was prompted by MFH
borrowers that had identified Supervised Bank Account requirements in
RD's regulations, which made it difficult to obtain these accounts with
commercial banks. This amendment will allow the Agency, if needed, to
establish an escrow reserve account to collect and disperse an MFH
project's funds. The Agency finds that no change to the proposed
regulatory language is needed.
Issue 5: Several commenters concurred that self-managed properties
must also sign the Management Certification. Two commenters requested
that additional tasks be mentioned as a project expense or an add-on
fee to the management fee if required of the management agent. They
also requested that outside payroll companies used to pay on-site
staff, be an allowable expense to the property.
Agency's Response 5: The Agency finds that no change is required to
the proposed rule language. The rule expands the language at Sec.
3560.102(b) to clarify that performance assessments of management
agents will be used when determining the allowable management fee, and
that the management plan should describe whether administrative
expenses are to be paid from management agent fees or project
operations, including a task list of charges covered by the fee.
Issue 6: One commenter noted the Affirmative Fair Housing Marketing
Plan (AFHMP) change in minimum required rental units to prepare and
maintain an AFHMP increased from 4 to 5 units, and requested details on
how many projects, would be affected by this change. This update allows
the Agency to align with the Affirmative Fair Housing Marketing Plan
(AFHMP) as defined in 24 CFR part 200, subpart M. Borrowers must comply
with the requirements of the Fair Housing Amendments Act of 1988, and
this section to meet their fair housing responsibilities.
Agency's Response 6: Currently, there are 95 4-unit Rural Rental
Housing and Farm Labor Housing properties in the Multi-Family Housing
portfolio. These properties will no longer be required to maintain an
AFHMP.
Issue 7: Three commenters included praise for the proposed rule's
changes to management flexibilities that would provide a more
streamlined process by which RA funds can be made available. The
commenters did not request any changes to the rule.
Agency's Response 7: The Agency acknowledges the commenters
support.
Issue 8: One commenter requested that there first be notice and
opportunity to resolve a late tenant certification submission to the
Agency, so that the owner and manager can resolve the matter amongst
themselves. The commenter did not approve of requiring the owner to pay
overage, i.e., to pay for a paperwork delay.
Agency's Response 8: The parameters established for timely tenant
certification submission are beyond the scope of the proposed rule. The
Agency notes that the timely submission of tenant certifications is a
basic responsibility of the borrower/management agent under the MFH
program's existing Loan Documents requirements. The proposed language
clarifies that the borrower may lose RA as well. No change to the
language is needed.
Issue 9: Two commenters expressed concern regarding the admission
of persons with criminal histories. They pointed to the regulations not
specifying whether a disqualification is only authorized when there was
a conviction or if a mere arrest is sufficient. Additional concern
regarded the privacy implications of checks on criminal history.
Agency's Response 9: The Agency finds that the proposed change has
no impact on allowing exceptions for denial under the U.S. Department
Housing and Urban Development (HUD) regulations in 24 CFR 5.854, 5.855,
5.856, 5.857. This also allows a time frame of 3 years from conviction.
The Borrower must establish their own standards that prohibit admission
of applicants with a criminal history, based on their determination of
reasonable cause. This qualifies the individualized assessment
requirement of an applicant's criminal background as per HUD's Office
of General Counsel Guidance on Application of Fair Housing Act
Standards to the Use of Criminal Records by Providers of Housing and
Real Estate-Related Transactions issued on April 4, 2016, and the Fair
Housing Act, 42 U.S.C. Sections 3601-19.
Issue 10: Several commenters requested that the Agency cross-
reference the existing HUD Violence Against Women Act (VAWA)
regulations or amend MFH program requirements in the lease requirement
section so that owners and residents know what their respective rights
and responsibilities are, including notices of VAWA rights,
documentation, confidentiality, evictions, and transfers.
Agency Response 10: The Agency is working to update guidance on
VAWA and will take recommendations into consideration. Additional
changes may be included at that time.
Issue 11: Three of the commenters questioned whether there were
unnecessary restrictions being placed on the eligibility for a Letter
of Priority Engagement (LOPE).
Agency's Response 11: This is a misinterpretation of the change to
this section. The regulation does not discuss the benefits for
residents specifically due to a Federally declared disaster, under the
Uniform Relocation Act. The LOPE would be based on the termination of
occupancy beyond the resident's control, such as the unavailability of
the unit due to rehabilitation, which may be due to a disaster.
Further, the proposed changes reduce restrictions on timing of LOPE
requests. This effectively adds that they do not have to wait until the
expiration of the declaration.
Issue 12: Several commenters pointed out that the change in Sec.
3560.205, regarding the notification of rent change, would better serve
tenants to include ``at least'' 30 calendar days from the date of
notification.
Agency's Response 12: The Agency agrees that this suggestion allows
more ample notification, in some instances. The proposed revision will
include ``at least'' before the 30 days from the date of notification.
Issue 13: Several commenters provided positive support for the
clarification in RA eligibility requirements, for tenants or applicants
with delinquent Agency unauthorized assistance repayment agreements.
Several commenters discussed citizenship requirements under other
[[Page 11277]]
sections of the regulation, not included in the proposed rule.
Agency's Response 13: The Agency acknowledges the commenters'
support. The citizenship requirement is not under the purview of the
published amendments. This amendment applies only to tenants with
unauthorized RA who are delinquent on their repayment agreement. This
would apply in cases where it is known that the tenant is delinquent
directly with the Agency. The requested changes would require an
additional CFR to be removed, since the existing CFR does not require
citizenship requirements. We will be providing more guidance on
implementation on future handbook updates.
Issue 14: Several commenters provided positive support for the
update in the proposed rule regarding the optional use of the remaining
obligation balances of RA units, identified in Sec. 3560.259(a)(2) and
(3), for renewal purposes. However, some commenters were concerned that
the ability to use ``inactive'' RA obligations will assist fewer
residents (MFH tenants).
Agency's Response 14: The Agency acknowledges these concerns. The
ability, however, to use ``inactive'' remaining RA obligations will
assist more residents, rather than less residents. Further, the use of
these ``inactive'' funds would not decrease the overall RA budget so in
following years, new units of RA could be offered. By utilizing these
funds, the Agency is protecting properties from payment shortfalls
where the predicted amount of RA was misjudged. Furthermore, RA is
funded through dollar amount and not by unit amount.
Issue 15: Several commenters stated opposition to the proposed
change to Sec. 3560.259, which clarifies that when any RA units have
not been used for a 6-month period (for Section 515 properties) or 12
months (for Section 514 properties), they will be eligible for
transfer. These commenters believed that this may reduce the total
number of RA units and restrict eligible uses of RA. Additional concern
regarded restricting the unused RA obligations to be used only for
``renewal purposes''. The inference is that this would reduce the
number of RA units available for servicing or preservation.
Agency's Response 15: The Agency notes these concerns about the
ability to use ``inactive'' RA obligations. This amendment will allow
the Agency the flexibility to assist more residents, rather than fewer.
Furthermore, the use of these ``inactive'' funds would not decrease the
overall RA budget, so in following years new units of RA could be
offered. By utilizing these funds, the Agency is protecting properties
from payment shortfalls, where the predicted amount of RA was
misjudged. Furthermore, RA is funded through dollar amount and not by
unit amount. RA is not tied to a specific unit within the property;
revolving vacancies would not affect whether there was unused RA over a
6-month period.
Issue 16: Some commenters suggested that the Agency include various
project and management expenses, as allowable project expenses.
Agency's Response 16: The Agency acknowledges the need for
consistency when appropriate; and acknowledges the need for clarity in
eligible Section 514 and 515 property expenses. Property expenses are
monitored by the Agency to ensure they are proper and reasonable; but
as expenses increase, more income is needed, which results in rent
increases and additional cost to rental assistance. Borrowers have
often sought clarification on how expenses should be treated.
Implementing this change will improve compliance, reduce unnecessary
and unsupportable expenses, and result in stronger, more financially
stable properties.
Issue 17: A commenter suggested non-ad valorem and special
assessments need to be included as allowable project expenses as they
are frequently included in a project's received tax notices.
Agency's Response 17: The Agency agrees with the comments and will
include clarification to staff in the internal agency guidance to
clarify that ``expenses relating to controlling or reducing taxes'' may
include special assessments and service charges which are not based
upon the value of the property and mileage.
Issue 18: One commenter requested a clarification of why asset
management costs incurred by a non-profit entity must be prorated
across all entities, and why this does not extend to all project
owners. Other commenters requested more information on regulatory
requirements not included in the proposed rule.
Agency's Response 18: The Agency appreciates the opportunity to
address the issue on non-profit entities' asset management fee
reimbursement of specifically identified costs. Specifically, for-
profit entities are excluded due to the availability of financial
means, such as the Return to Owner, to cover these costs.
The Agency acknowledges the additional questions on this section of
the regulation, although not currently being revised. This will be
taken under future consideration.
Issue 19: One commenter offered support for the requirement that
needed capital improvements be completed within a reasonable time
frame. The commenter requested guidance on what would be considered a
``reasonable time frame,'' particularly emergency improvements.
Agency's Response 19: The Agency appreciates the support on this
revision, and notes that ``reasonable time frame'' allows flexibility
for the property manager, the borrower, and the property.
Issue 20: One commenter objected to a conversion of project loans
from the Daily Interest Accrual System (DIAS) to the Predetermined
Amortization Schedule System (PASS). The commenter added that many
owners are anticipating their loan maturity under DIAS, would be
materially harmed if they de facto have their loan terms extended by a
slower pay-down or recasting of principal and interest payments.
Agency's Response 20: The Agency notes the commenter's concerns
about borrowers under the DIAS loan terms. The Agency finds that no
change is needed since the proposed rule only shortens the sentence to
``loan servicing action''.
Issue 21: One commenter noted that the proposed rule changes from
``will'' to ``may'' in Sec. 3560.656, which authorizes the Agency to
offer an incentive to avoid prepayment. They noted that it would imply
that the Agency will exercise discretion in offering incentives. The
commenter believes that would be contrary to the current law.
Other commenters opposed the change, as they saw it as inconsistent
with the mandatory obligation that Congress adopted for the express
purpose of preserving and retaining to the maximum extent practicable.
They commented that the Agency should abandon this change and continue
to offer incentives to all owners seeking to prepay their loans.
Agency's Response 21: The Agency is implementing section
502(c)(4)(B) of the Housing Act, which uses the term ``may.'' The
Agency finds that this correction is necessary, to align regulations
with the Housing Act.
III. Summary of Changes
To increase transparency, improve efficiency in managing portfolio
assets, and ensure compliance with program requirements; RHS will
implement the following updates to 7 CFR part 3560 for the Section 514
Farm Labor Direct Loan, Section 515 Multi-family Housing Direct Loan,
Section 516 Farm Labor Grant,
[[Page 11278]]
and Section 521 Rental Assistance Program.
(1) Update language to Sec. 3560.259(d) regarding the optional use
of the remaining obligation balances of units identified in Sec.
3560.259(a)(2) and (3) for renewal purposes.
(2) Update Sec. 3560.259(a)(4) to clarify that when any rental
assistance units have not been used for a 6-month period (for Section
515 properties) or 12 months (for Section 514 properties) they will be
eligible for transfer.
(3) The definitions of Domestic farm laborer, Management agreement,
and Management fee will be revised to reflect requirements in the
Consolidated Appropriations Act, 2018 (Pub. L. 115-141, March 23, 2018)
permanently amending Section 514(f)(3)(A) of the Housing Act of 1949
(42 U.S.C. 1484(f)(3)(A)) that the FLH tenant eligibility includes ``a
person legally admitted to the United States and authorized to work in
agriculture.''
(4) Adding a paragraph at Sec. 3560.65 to allow the Agency to
establish an escrow account to collect and disperse funds. This will
allow the Agency to establish agency-held escrows which historically
was provided for in the loan documents but was not addressed in the
regulation.
(5) In Sec. 3560.303(a)(1), the Agency will require that the
annual project budget include anticipated expenditures on the project's
long-term capital needs as specified in Sec. 3560.103(c) and will
provide a metric for the Agency to determine current or future rent
increase requests based on the Borrower's utilization of the reserve
account. This will ensure that borrowers are utilizing project revenue
for ongoing capital improvements needed to maintain compliance and
reduced risk of the property.
(6) A change will be made to Sec. 3560.303(c) to add payables as a
priority for budget expenditures. This will allow for the Agency to
ensure that all payables are being paid from project revenues in a
timely manner and not accrued, without agency consent, causing
increased costs and penalties and adding risk.
(7) In Sec. 3560.303, the Agency will clarify what are allowable
project expenses and provide for a comparable ``reasonableness'' test
by the Agency. Generally, expenses charged to project operations for
expenses, must be reasonable, typical, necessary and show a clear
benefit to the residents of the property.
(8) In Sec. 3560.303(b)(1)(vii), the Agency will add the
requirements for a non-profit entity to pro-rate certain organizational
reimbursable costs across all properties owned by that entity.
(9) In Sec. 3560.105(f)(10), the Agency will clarify that if an
insurance deductible is met, there is no need to track with a
replacement reserve account.
(10) The Agency has updated the wording of ``State Director'' to
``Leadership Designee'' to allow for future staff flexibility.
(11) Update Sec. 3560.152 by removing term ``elderly units in
mixed housing''.
(12) The Agency will revise Sec. 3560.154 to correct ``sex'' to
``gender'' and update policy on criminal activity for admissions.
(13) Update Sec. 3560.205 to include the notification of all
household members of rent change effective at least 30 days from date
of notification.
(14) Section 3560.252 will now include the Agency's housing voucher
program to allow for the proper allowance of rental subsidies.
(15) In Sec. 3560.402 the Agency will clarify that any loan
servicing action will require DIAS accounts to be converted to the
current PASS system of accounting.
Executive Order 12866
The Office of Management and Budget (OMB) has designated this final
rule as not significant under Executive Order 12866.
Executive Order 12988, Civil Justice Reform
This final rule has been reviewed under Executive Order 12988. In
accordance with this rule: (1) Unless otherwise specifically provided,
all State and local laws that conflict with this rule will be
preempted; (2) no retroactive effect will be given to this rule except
as specifically prescribed in the rule; and (3) administrative
proceedings of the National Appeals Division of the Department of
Agriculture (7 CFR part 11) must be exhausted before bringing suit in
court that challenges action taken under this rule.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act (UMRA), Public Law
104-4, establishes requirements for Federal Agencies to assess the
effects of their regulatory actions on State, local, and tribal
Governments and on the private sector. Under section 202 of the UMRA,
Federal Agencies generally must prepare a written statement, including
cost-benefit analysis, for proposed and Final Rules with ``Federal
mandates'' that may result in expenditures to State, local, or tribal
Governments, in the aggregate, or to the private sector, of $100
million or more in any one year. When such a statement is needed for a
rule, section 205 of the UMRA generally requires a Federal Agency to
identify and consider a reasonable number of regulatory alternatives
and adopt the least costly, more cost-effective, or least burdensome
alternative that achieves the objectives of the rule.
This final rule contains no Federal mandates (under the regulatory
provisions of title II of the UMRA) for State, local, and tribal
Governments or for the private sector. Therefore, this rule is not
subject to the requirements of sections 202 and 205 of the UMRA.
National Environmental Policy Act
In accordance with the National Environmental Policy Act of 1969,
Public Law 91-190, this final rule has been reviewed in accordance with
7 CFR part 1970 (``Environmental Policies and Procedures''). The Agency
has determined that (i) this action meets the criteria established in 7
CFR 1970.53(f); (ii) no extraordinary circumstances exist; and (iii)
the action is not ``connected'' to other actions with potentially
significant impacts, is not considered a ``cumulative action'' and is
not precluded by 40 CFR 1506.1. Therefore, the Agency has determined
that the action does not have a significant effect on the human
environment, and therefore neither an Environmental Assessment nor an
Environmental Impact Statement is required.
Executive Order 13132, Federalism
The policies contained in this rule do not have any substantial
direct effect on States, on the relationship between the National
Government and the States, or on the distribution of power and
responsibilities among the various levels of government. This rule does
not impose substantial direct compliance costs on State and local
governments; therefore, consultation with States is not required.
Regulatory Flexibility Act
The final rule has been reviewed with regard to the requirements of
the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has
determined and certified by signature on this document that this rule
will not have a significant economic impact on a substantial number of
small entities since this rulemaking action does not involve a new or
expanded program nor does it require any more action on the part of a
small business than required of a large entity.
[[Page 11279]]
Executive Order 12372, Intergovernmental Review of Federal Programs
These loans are subject to the provisions of Executive Order 12372,
which require intergovernmental consultation with State and local
officials. RHS conducts intergovernmental consultations for each loan
in accordance with 2 CFR part 415, subpart C.
Executive Order 13175, Consultation and Coordination With Indian Tribal
Governments
Executive Order 13175 imposes requirements on RHS in the
development of regulatory policies that have tribal implications or
preempt tribal laws. RHS has determined that the rule does not have a
substantial direct effect on one or more Indian tribe(s) or on either
the relationship or the distribution of powers and responsibilities
between the Federal Government and Indian tribes. Thus, this rule is
not subject to the requirements of Executive Order 13175. If tribal
leaders are interested in consulting with RHS on this rule, they are
encouraged to contact USDA's Office of Tribal Relations or RD's Native
American Coordinator at: [email protected] to request such a consultation.
Programs Affected
The programs affected by this regulation are listed in the
Assistance Listing Catalog (formerly Catalog of Federal Domestic
Assistance) under number 10.427--Rural Rental Assistance Payments.
Paperwork Reduction Act
The information collection requirements contained in this
regulation have been approved by OMB and have been assigned OMB control
number 0575-0189. This final rule contains no new reporting and
recordkeeping requirements that would require approval under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).
E-Government Act Compliance
RHS is committed to complying with the E-Government Act by
promoting the use of the internet and other information technologies in
order to provide increased opportunities for citizen access to
Government information, services, and other purposes.
Non-Discrimination Statement
In accordance with Federal civil rights laws and U.S. Department of
Agriculture (USDA) civil rights regulations and policies, the USDA, its
Mission Areas, agencies, staff offices, employees, and institutions
participating in or administering USDA programs are prohibited from
discriminating based on race, color, national origin, religion, sex,
gender identity (including gender expression), sexual orientation,
disability, age, marital status, family/parental status, income derived
from a public assistance program, political beliefs, or reprisal or
retaliation for prior civil rights activity, in any program or activity
conducted or funded by USDA (not all bases apply to all programs).
Remedies and complaint filing deadlines vary by program or incident.
Program information may be made available in languages other than
English. Persons with disabilities who require alternative means of
communication to obtain program information (e.g., Braille, large
print, audiotape, American Sign Language) should contact the
responsible Mission Area, agency, or staff office; the USDA TARGET
Center at (202) 720-2600 (voice and TTY); or the Federal Relay Service
at (800) 877-8339.
To file a program discrimination complaint, a complainant should
complete a Form AD-3027, USDA Program Discrimination Complaint Form,
which can be obtained online at https://www.ocio.usda.gov/document/ad-3027, from any USDA office, by calling (866) 632-9992, or by writing a
letter addressed to USDA. The letter must contain the complainant's
name, address, telephone number, and a written description of the
alleged discriminatory action in sufficient detail to inform the
Assistant Secretary for Civil Rights (ASCR) about the nature and date
of an alleged civil rights violation. The completed AD-3027 form or
letter must be submitted to USDA by:
(1) Mail: U.S. Department of Agriculture, Office of the Assistant
Secretary for Civil Rights, 1400 Independence Avenue SW, Washington, DC
20250-9410; or
(2) Fax: (833) 256-1665 or (202) 690-7442; or
(3) Email: [email protected].
USDA is an equal opportunity provider, employer, and lender.
List of Subjects in 7 CFR Part 3560
Accounting, Administrative practice and procedure, Aged, Conflict
of interest, Government property management, Grant programs--housing
and community development, Insurance, Loan programs--agriculture, Loan
programs--housing and community development, Low and moderate income
housing, Migrant labor, Mortgages, Nonprofit organizations, Public
housing, Rent subsidies, Reporting and recordkeeping requirements,
Rural areas.
For the reasons set forth in the preamble, the Rural Housing
Service amends 7 CFR part 3560 as follows:
PART 3560--DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS
0
1. The authority citation for part 3560 continues to read as follows:
Authority: 42 U.S.C. 1480.
Subpart A--General Provisions and Definitions
Sec. 3560.8 [Amended]
0
2. Amend Sec. 3560.8 by removing the words ``State Director'' and
adding in their place ``Leadership Designee'' in the last sentence.
0
3. Amend Sec. 3560.11 as follows:
0
a. Remove the acronym ``MFHMFH'' wherever it appears in the section and
adding ``MFH'' in its place; and
0
b. Revise the definitions of ``Domestic farm laborer'', ``Management
agreement'', and ``Management fee''.
The revisions read as follows:
Sec. 3560.11 Definitions.
* * * * *
Domestic farm laborer. A person who, consistent with the
requirements in Sec. 3560.576(b)(2), receives a substantial portion of
his or her income from farm labor employment (not self-employed) in the
United States, Puerto Rico, or the Virgin Islands and either is a
citizen of the United States or resides in the United States, Puerto
Rico, or the Virgin Islands after being legally admitted for permanent
residence, or a person legally admitted to the United States and
authorized to work in agriculture. This definition may include the
immediate family members residing with such a person.
* * * * *
Management agreement. A written agreement between a borrower and an
identity-of-interest (IOI) management agent or independent fee
management agent setting forth the management agent's responsibilities
and fees for management services.
Management fee. The compensation provided to a management agent for
services provided in accordance with an approved management
certification, Form RD 3560-13, ``Multi-Family Project Borrower's/
Management Agent's Management Certification.''
* * * * *
[[Page 11280]]
Subpart B--Direct Loan and Grant Origination
0
4. Amend Sec. 3560.65 by adding paragraph (d) to read as follows:
Sec. 3560.65 Reserve account.
* * * * *
(d) The agency may establish an escrow account for the collection
and disbursement of reserve account funds.
Sec. 3560.72 [Amended]
0
5. Amend Sec. 3560.72 by removing the words ``State Director'' and
adding in their place ``Leadership Designee'' in the second sentence of
paragraph (b).
Subpart C--Borrower Management and Operations Responsibilities
0
6. Amend Sec. 3560.102 as follows:
0
a. Revise paragraph (b);
0
b. Remove the word ``and'' at the end of paragraph (g)(1)(ii);
0
c. Remove ``any of the above.'' at the end of paragraph (g)(1)(iii) and
adding ``anyone listed in paragraphs (g)(1)(i) and (ii) of this
section;'' in its place;
0
d. Add paragraph (g)(1)(iv); and
0
e. Revise paragraphs (i) and (j).
The revisions and addition read as follows:
Sec. 3560.102 Housing project management.
* * * * *
(b) Management plan. Borrowers must develop and maintain a
management plan for each housing project covered by their loan or
grant. The management plan must establish the systems and procedures
necessary to ensure that housing project operations comply with Agency
requirements in this part. The management plan should describe whether
administrative expenses are to be paid from management agent fees or
project operations, including a task list of charges covered by the fee
as outlined in paragraph (i)(3)(i)(A) of this section. The management
plan must meet the standards set out in this part.
* * * * *
(g) * * *
(1) * * *
(iv) Any borrower's entity control, or interest held or possessed
by a person's spouse, parent, child, grandchild, or sibling or other
relation by blood or marriage is attributed to that person for the
determination under this paragraph (g)(1).
* * * * *
(i) Management fees. Management fees will be an allowable expense
to be paid from the housing project's general operating account only if
the fee is approved by the Agency as a reasonable cost to the housing
project and documented on the management certification. Management fees
must be developed in accordance with the following:
(1) The management fee may compensate the management entity for the
following costs and services:
(i) Supervision by the management agent and its staff (time,
knowledge, and expertise) of overall operations and capital
improvements of the site.
(ii) Hiring, supervision, and termination of on-site staff.
(iii) General maintenance of project books and records (general
ledger, accounts payable and receivable, payroll, etc.). Preparation
and distribution of payroll for all on-site employees, including the
costs of preparing and submitting all appropriate tax reports and
deposits, unemployment and workers' compensation reports, and other
IRS- or state-required reports.
(iv) In-house training provided to on-site staff by the management
company.
(v) Preparation and submission of proposed annual budgets and
negotiation of approval with the Agency.
(vi) Preparation and distribution of the Agency forms and routine
financial reports to borrowers.
(vii) Preparation and distribution of required year-end reports to
the Agency.
(viii) Preparation of requests for reserve withdrawals, rent
increases, or other required adjustments.
(ix) Arranging for preparation by outside contractors of utility
allowance analysis.
(x) Preparation and implementation of Affirmative Fair Housing
Marketing Plans as well as general marketing plans and efforts.
(xi) Review of tenant certifications and submission of monthly
rental assistance requests, and overage. Submission of payments where
required.
(xii) Preparation, approval, and distribution of operating
disbursements; oversight of project receipts; and reconciliation of
deposits.
(xiii) Overhead of management agent, including:
(A) Establish, maintain, and control an accounting system
sufficient to carry out accounting supervision responsibilities.
(B) Maintain agent office arrangements, staff, equipment,
furniture, and services necessary to communicate effectively with the
properties, to include consultation and support to site-staff, the
Agency and with the borrowers.
(C) Postage expenses unrelated to site operation.
(D) Expense of telephone and facsimile communication, unrelated to
site operations.
(E) Direct costs of insurance (fidelity bonds covering central
office staff, computer and data coverage, general liability, etc.)
directly related to protection of the funds and records of the
borrower. Insurance coverage for agent's office and operations
(Property, Auto, Liability, Errors and Omissions, Casualty, Workers
Compensation, etc.).
(F) Central office staff training and ongoing certifications.
(G) Maintenance of all required profession and business licenses
and permits. (This does not include project site office permits or
licenses.)
(H) Travel of agent staff to the properties for on-site inspection,
training, or supervision activities.
(I) Agent bookkeeping for their own business.
(xiv) Attendance at meetings (including travel) with tenants,
owners, and the Agency or other governmental agency.
(xv) Development, preparation, and revision of management plans,
agreements, and management certifications.
(xvi) Directing the investment of project funds into required
accounts.
(xvii) Maintenance of bank accounts and monthly reconciliations.
(xviii) Preparation, request for, and disbursement of borrower's
initial operating capital (for new projects) as well as administration
of annual owner's return on investment.
(xix) Account maintenance, settlement, and disbursement of security
deposits.
(xx) Working with auditors for initial Agency annual financial
reports.
(xxi) Storage of records, to include electronic records, and
adherence to records retention requirements.
(xxii) Assist on-site staff with tenant relations and problems.
Provide assistance to on-site staff in severe actions (eviction, death,
insurance loss, etc.).
(xxiii) Oversight of general and preventive maintenance procedures
and policies.
(xxiv) Development and oversight of asset replacement plans.
(xxv) Oversight of preparation of section 504 reviews, development
of plans, and implementation of improvements necessary to comply with
plans and section 504 requirements.
(2) Management fees may consist of a base per occupied revenue
producing unit fee and add-on fees for specific housing project
characteristics. Management entities may be eligible to receive the
full base per occupied unit
[[Page 11281]]
fee for any month or part of a month during which the unit is occupied.
(i) Periodically, the Agency will develop a range of base per
occupied unit fees that will be paid in each state. The Agency will
develop the fees based on a review of housing industry data. The final
base for occupied unit fees for each state will be made available to
all borrowers.
(ii) Periodically, the Agency will develop the amount and
qualifications to receive add-on fees. The final set of qualifications
will be made available to all borrowers.
(3) Management plans and agreements must describe if administrative
expenses are to be paid from the management fee or paid for as a
project cost.
(i) A task list should be used to identify which services are
included in the management fee, which services are included in project
operations, and which are pro-rated along with the methodology used to
pro-rating of expenses between management agent fees and project
operations. Some property responsibilities are completed at the
property and some offsite. Agent responsibilities may be performed at
the property, the management office, or at some other location.
(ii) Disputes may arise as to who performs certain services. The
management plan and job descriptions should normally provide sufficient
clarity to avoid or resolve any such disputes; however, sometimes
clarifications and supporting materials may be required to resolve
disputes. The decision must be made based on the most complete
evaluation of the facts presented.
(j) Management certification. (1) As a condition of approval of
project management, including borrowers who self-manage, borrower and
management agents must execute an Agency-approved certification
certifying that:
(i) Borrowers and management agent agree to operate the housing
project in accordance with the management plan;
(ii) Borrowers and the management agent will comply with Agency
requirements, loan or grant agreements, applicable local, State,
Tribal, and Federal laws and ordinances, and contract obligations, will
certify that no payments have been made to anyone in return for
awarding the management contract to the management agent, and will
agree that such payments will not be made in the future;
(iii) Borrowers and the management agent will comply with Agency
notices or other policy directives that relate to the management of the
housing project;
(iv) Management agreement between the borrower and management agent
complies with the requirements of this section;
(v) Allowable management fees are assessed and paid out of the
housing projects' general operating account. Borrowers and management
agents will comply with Agency requirements regarding management fees
as specified in paragraph (i) of this section, and allocation of
management costs between the management fee and the housing project
financial accounts specified in Sec. 3560.302(c)(3);
(vi) The borrower and the management agent will not purchase goods
and services from entities that have an identity-of-interest (IOI) with
the borrower or the management agent until the IOI relationship has
been disclosed to the Agency according to paragraph (g) of this
section, not denied by the Agency under paragraph (d)(3) of this
section, and it has been determined that the costs are as low as or
lower than arms-length, open-market purchases; and
(vii) The borrower and the management agent agree that all records
related to the housing project are the property of the housing project
and that the Agency, OIG, or GAO may inspect the housing records and
the records of the borrower, management agent, and suppliers of goods
and services having an IOI with the borrower or with a management agent
acting as an agent of the borrower upon demand.
(2) A certification will be executed each time new management is
proposed and/or a management agreement is executed or renewed. Any
amendment to a management certification must be approved by the Agency
and the borrower.
* * * * *
0
7. Amend Sec. 3560.104 by revising paragraph (b)(1) to read as
follows:
Sec. 3560.104 Fair housing.
* * * * *
(b) * * *
(1) Borrowers with housing projects that have five or more rental
units must prepare and maintain an Affirmative Fair Housing Marketing
Plan (AFHMP) as defined in 24 CFR part 200, subpart M.
* * * * *
0
8. Amend Sec. 3560.105 by revising paragraphs (c)(4) and (f)(10) to
read as follows:
Sec. 3560.105 Insurance and taxes.
* * * * *
(c) * * *
(4) If the best insurance policy a borrower can obtain at the time
the borrower receives the loan or grant contains a loss deductible
clause greater than that allowed by paragraph (f)(9) of this section,
the insurance policy and an explanation of the reasons why more
adequate insurance is not available must be submitted to the Agency
prior to loan or grant approval.
* * * * *
(f) * * *
(10) Deductible amounts (excluding flood, windstorm, earthquake and
sinkhole insurance, or mine subsidence insurance) must be accounted for
in the replacement reserve account, unless the deductible does not
exceed the maximum deductible allowable as indicated in paragraph
(f)(9)(i) of this section. Borrowers who wish to increase the
deductible amount must deposit an additional amount to the reserve
account equal to the difference between the Agency's maximum deductible
and the requested new deductible. The Borrower will be required to
maintain this additional amount so long as the higher deductible is in
force.
* * * * *
Subpart D--Multi Family Housing Occupancy
0
9. Amend Sec. 3560.152 by revising paragraphs (c) heading and
introductory text, (c)(1) introductory text, and (e)(2)(iv) to read as
follows:
Sec. 3560.152 Tenant eligibility.
* * * * *
(c) Requirements for elderly housing, congregate housing, and group
homes. In addition to the requirements of paragraph (a) of this
section, the following occupancy requirements apply to elderly housing
and congregate housing or group homes:
(1) For elderly housing and congregate housing, the following
provisions apply:
* * * * *
(e) * * *
(2) * * *
(iv) Since tenant certifications are used to document interest
credit and rental assistance eligibility and are a basic responsibility
of the borrower under the loan documents, borrowers who fail to submit
annual or updated tenant certification forms within the time period
specified in paragraph (e)(2)(iii) of this section will be charged
overage, as specified in Sec. 3560.203(c) and lost rental assistance.
Unauthorized assistance, if any, will be handled in accordance with
subpart O of this part.
* * * * *
0
10. Amend Sec. 3560.154 by revising paragraphs (a)(9) introductory
text and (j) to read as follows:
[[Page 11282]]
Sec. 3560.154 Tenant selection.
(a) * * *
(9) Race, ethnicity, and gender designation. The following
disclosure notice shall be used:
* * * * *
(j) Criminal activity. Borrowers will deny admission for criminal
activity or alcohol abuse by household members in accordance with the
provisions of 24 CFR 5.854, 5.855, 5.856, and 5.857.
0
11. Amend Sec. 3560.156 as follows:
0
a. Revise paragraph (c)(1);
0
b. Remove ``and'' at the end of paragraph (c)(6)(iii);
0
c. Remove the period at the end of paragraph (c)(6)(iv) and add ``;
and'' in its place;
0
d. Add paragraph (c)(6)(v); and
0
e. Revise paragraphs (c)(15) and (16).
The revisions and addition read as follows:
Sec. 3560.156 Lease requirements.
* * * * *
(c) * * *
(1) Leases for tenants who hold a Letter of Priority Entitlement
(LOPE) issued according to Sec. 3560.660(c) and are temporarily
occupying a unit for which they are not eligible must include a clause
establishing the tenant's responsibility to move when a suitable unit
becomes available in the housing project.
* * * * *
(6) * * *
(v) The Violence Against Women Reauthorization Act of 2013 and any
amendments thereto.
* * * * *
(15) Leases, including renewals, must include the following
language:
``It is understood that the use, or possession, manufacture, sale,
or distribution of an illegal controlled substance (as defined by
local, State, Tribal or Federal law) while in or on any part of this
apartment complex premises or cooperative is an illegal act. It is
further understood that such action is a material lease violation. Such
violations (hereafter called a ``drug violation'') may be evidenced
upon the admission to or conviction of the use, possession,
manufacture, sale, or distribution of a controlled substance (as
defined by local, State, Tribal, or Federal law) in any local, State,
Tribal or Federal court.
The landlord may require any lessee or other adult member of the
tenant household occupying the unit (or other adult or non-adult person
outside the tenant household who is using the unit) who commits a drug
violation to vacate the leased unit permanently, within timeframes set
by the landlord, and not thereafter to enter upon the landlord's
premises or the lessee's unit without the landlord's prior consent as a
condition for continued occupancy by the remaining members of the
tenant's household. The landlord may deny consent for entry unless the
person agrees to not commit a drug violation in the future and is
either actively participating in a counseling or recovery program,
complying with court orders related to a drug violation, or has
successfully completed a counseling or recovery program.
The landlord may require any lessee to show evidence that any non-
adult member of the tenant household occupying the unit, who committed
a drug violation, agrees not to commit a drug violation in the future,
and to show evidence that the person is either actively seeking or
receiving assistance through a counseling or recovery program,
complying with court orders related to a drug violation, or has
successfully completed a counseling or recovery program within
timeframes specified by the landlord as a condition for continued
occupancy in the unit.
Should a further drug violation be committed by any non-adult
person occupying the unit the landlord may require the person to be
severed from tenancy as a condition for continued occupancy by the
lessee.
If a person vacating the unit, as a result of the above policies,
is one of the lessees, the person shall be severed from the tenancy and
the lease shall continue among any other remaining lessees and the
landlord. The landlord may also, at the option of the landlord, permit
another adult member of the household to be a lessee.
Should any of the above provisions governing a drug violation be
found to violate any of the laws of the land the remaining enforceable
provisions shall remain in effect. The provisions set out above do not
supplant any rights of tenants afforded by law.''
(16) Leases for rental units accessible to individuals with
disabilities occupied by those not needing the accessibility features
must establish the tenant's responsibility to move to another unit
within 30-days of written notification that the unit is needed by an
eligible qualified person with disabilities who requires the
accessibility features of the unit. Additionally, the lease clause must
ensure that the household may remain in the rental unit with
accessibility features until an appropriately sized vacant unit within
the project becomes available and then must move or vacate within 30
days of notification from borrower.
* * * * *
0
12. Amend Sec. 3560.158 by revising paragraph (d)(3) introductory text
to read as follows:
Sec. 3560.158 Changes in tenant eligibility.
* * * * *
(d) * * *
(3) After the death of a tenant or co-tenant in elderly housing,
the surviving members of the household, regardless of age but taking
into consideration the conditions of paragraph (d)(1) of this section,
may remain in the rental unit in which they were residing at the time
of the tenant's or co-tenant's death, even if the household is over
housed according to the housing project's occupancy rules except as
follows:
* * * * *
0
13. Amend Sec. 3560.159 by revising paragraph (c) to read as follows:
Sec. 3560.159 Termination of occupancy.
* * * * *
(c) Other terminations. Should occupancy be terminated due to
conditions which are beyond the control of the tenant, such as a
condition related to required repair or rehabilitation of the building,
or a natural disaster, and prior to expiration of the disaster
declaration, the tenants who are affected by such a circumstance are
entitled to benefits under the Uniform Relocation Act and may request a
Letter of Priority Entitlement (LOPE) from the Agency. If tenants need
additional time to secure replacement housing, the Agency may, at the
tenant's request, extend the LOPE entitlement period.
* * * * *
Subpart E--Rents
0
14. Amend Sec. 3560.205 by revising paragraph (e) to read as follows:
Sec. 3560.205 Rent and utility allowance changes.
* * * * *
(e) Approval. If the Agency approves a rent or utility allowance
increase request on which the comments were solicited, tenants or
members receiving notice of a proposed rent or utility allowance change
in accordance with paragraph (d)(2) of this section shall be notified
of the rent or utility allowance change to be effective, at least 30
calendar days from the date of the notification.
* * * * *
0
15. Amend Sec. 3560.207 by revising paragraph (b) to read as follows:
Sec. 3560.207 Annual adjustment factors for Section 8 units.
* * * * *
[[Page 11283]]
(b) Establishing rents in housing with HUD rent assistance.
Borrowers will set basic, note, and HUD contract rents for housing
receiving HUD project-based Section 8 assistance, as specified in Sec.
3560.202(c).
* * * * *
Subpart F--Rental Subsidies
0
16. Amend Sec. 3560.252 as follows:
0
a. Redesignate paragraphs (b)(2) through (4) as paragraphs (b)(3)
through (5), respectively, and add new paragraph (b)(2); and
0
b. Revise paragraph (c)(2) introductory text.
The addition and revisions read as follows:
Sec. 3560.252 Authorized rental subsidies.
* * * * *
(b) * * *
(2) Agency housing vouchers;
* * * * *
(c) * * *
(2) Tenants with subsidies from sources other than the Agency may
be eligible for Agency rental assistance if all the following
conditions are met.
* * * * *
0
17. Amend Sec. 3560.254 by revising paragraphs (c)(1), (2), (4), and
(5) and adding paragraph (c)(6) to read as follows:
Sec. 3560.254 Eligibility for rental assistance.
* * * * *
(c) * * *
(1) With very low- or low-incomes who are eligible to live in MFH;
(2) Whose net tenant contribution to rent determined in accordance
with Sec. 3560.203(a)(1) is less than the basic rent for the unit;
* * * * *
(4) Who meet the occupancy rules/policies established by the
borrower in accordance with Sec. 3560.155(e);
(5) Who have a signed, unexpired tenant certification form on file
with the borrower; and
(6) Who is not delinquent on any Agency unauthorized assistance
repayment agreements.
0
18. Revise Sec. 3560.258 to read as follows:
Sec. 3560.258 Terms of agreement.
(a) Term of agreement. Rental assistance agreements will have a
term of the later of 12 months from the first disbursement of the
obligation or when funds under the agreement are exhausted.
(b) Replacing expiring obligations. Rental assistance agreements
may be renewed in accordance with Sec. 3560.255(a)(1).
0
19. Amend Sec. 3560.259 by revising paragraphs (a)(3) and (4) and
adding paragraph (d) to read as follows:
Sec. 3560.259 Transferring rental assistance.
(a) * * *
(3) After a liquidation, prepayment, or natural maturity;
(4) To the extent permitted by law, when any rental assistance
units have not been used for a 6-month period (Section 515) or a 12-
month period (Section 514 or 516); or
* * * * *
(d) Agency use of obligation balances. In lieu of transferring
rental assistance units, the Agency may elect to utilize the remaining
obligation balances of units identified in paragraphs (a)(2) and (3) of
this section for renewal purposes.
Subpart G--Financial Management
0
20. Amend Sec. 3560.302 by revising paragraphs (c)(3)(ii) and (iii)
and (c)(5)(i), (ii), and (iv) to read as follows:
Sec. 3560.302 Accounting, bookkeeping, budgeting, and financial
management systems.
* * * * *
(c) * * *
(3) * * *
(ii) Real estate tax and insurance account (if not part of the
general operating account or unless escrowed by the Agency);
(iii) Reserve account (unless escrowed by the Agency in accordance
with Sec. 3560.65);
* * * * *
(5) * * *
(i) All housing project funds must be held only in financial
institution accounts insured by an agency of the Federal Government or
held in securities meeting the conditions in this subpart.
(ii) Funds maintained in an institution may not exceed the limit
established for Federal deposit insurance. Funds exceeding the
Federally insured limit under a Tax ID Number must be moved to a
different qualified banking institution that will ensure the funds
unless the current financial institution provides additional surety
such as a collateral pledge that may already be in place.
* * * * *
(iv) All funds received and held in any account, except the tenant
security deposit, membership fee, and patron capital accounts, are
considered assets of the property and must be held in trust by the
borrower for the loan obligations until used and serve as security,
through transfers or assumptions for the Agency loan or grant until all
outstanding balances are satisfied.
* * * * *
0
21. Revise Sec. 3560.303 to read as follows:
Sec. 3560.303 Housing project budgets.
(a) General requirements. (1) Using an Agency-approved format,
borrowers must submit to the Agency for approval a proposed annual
housing project budget prior to the start of the housing project's
fiscal year. The capital budget section of the annual project budget
must include anticipated expenditures on the project's long-term
capital needs as specified in Sec. 3560.103(c) and will assist the
Agency on utilization of the reserve account for current or future rent
increase requests.
(2) Budget projections regarding income, expenses, vacancies, and
contingencies must be realistic given the housing project's history,
current circumstances, and market conditions.
(3) Borrowers must document that the operating expenses included in
the budget accurately reflect reasonable and necessary costs to operate
the housing project in a manner consistent with the objectives of the
loan and in accordance with the applicable Agency requirements in this
part.
(4) Borrower must submit supporting documentation to justify
housing project utility allowances.
(5) Upon Agency request, borrowers must submit any additional
documentation necessary to establish that applicable Agency
requirements in this part have been met.
(b) Allowable and unallowable project expenses. Expenses charged to
project operations, whether for management agent services or other
expenses, must be reasonable, typical, necessary and show a clear
benefit to the residents of the property. Services and expenses charged
to the property must show value added and be for authorized purposes.
(1) Allowable expenses. Allowable expenses include those expenses
that are directly attributable to housing project operations and are
necessary to carry out successful operations.
(i) Housing project expenses must not duplicate expenses included
in the management fee as defined in Sec. 3560.102(i).
(ii) Actual costs for direct personnel costs of permanent and part-
time staff assigned directly to the project site. This includes
managers, maintenance staff, and temporary help including their:
(A) Gross salary;
(B) Employer Federal Insurance Contributions Act (FICA)
contribution;
[[Page 11284]]
(C) Federal unemployment tax;
(D) State unemployment tax;
(E) Workers compensation insurance;
(F) Health insurance premiums;
(G) Cost of fidelity or comparable insurance;
(H) Leasing, performance incentive, or annual bonuses that are
clearly provided for by the site manager salary contract;
(I) Direct costs of travel to off-site locations by on-site staff
for property business or training; and/or
(J) Retirement benefits.
(iii) Legal fees directly related to the operation and management
of the property including tenant lease enforcement actions, property
tax appeals and suits, and the preparation of all legal documents.
(iv) All outside account and auditing fees, if required by the
Agency, directly related to the preparation of the annual audit,
partnership tax returns, and 401-K's, as well as other outside reports
and year-end reports to the Agency, or other governmental agency.
(v) All repair and maintenance costs for the project including:
(A) Maintenance staffing costs and related expenses.
(B) Maintenance supplies.
(C) Contract repairs to the projects (e.g., heating and air
conditioning, painting, roofing).
(D) Make ready expenses including painting and repairs, flooring
replacement, and appliance replacement as well as drapery or mini-blind
replacement. (Turnover maintenance.)
(E) Preventive maintenance expenses including occupied unit repairs
and maintenance as well as common area systems repairs and maintenance.
(F) Snow removal.
(G) Elevator repairs and maintenance contracts.
(H) Section 504 and other Fair Housing compliance modifications and
maintenance.
(I) Landscaping maintenance, replacements, and seasonal plantings.
(J) Pest control services.
(K) Other related maintenance expenses.
(vi) All operational costs related to the project including:
(A) The costs of obtaining and receiving credit reports, police
reports, and other checks related to tenant selection criteria for
prospective residents.
(B) Photocopying or printing expense related to actual production
of project brochures, marketing pieces, forms, reports, notices, and
newsletters are allowable project expenses no matter what location or
point of origin the work is performed including outsourcing the work to
a professional printer.
(C) All bank charges related to the property including purchases of
supplies (e.g., checks, deposit slips, returned check fees, service
fees).
(D) Costs of site-based telephone including initial installation,
basic services, directory listings, and long-distances charges.
(E) All advertising costs related specifically to the operations of
that project. This can include advertising for applicants or employees
in newspapers, newsletters, social media, radio, cable TV, and
telephone books.
(F) Postage expense to mail out rental applications, third-party
(asset income and adjustments to income) verifications, application
processing correspondence (acceptance or denial letters), mailing
project invoice payments, required correspondence, report submittals to
various regulatory authorities for the managed property are allowable
project expenses no matter what location or point of origin the mail is
generated.
(G) State taxes and other mandated Tribal, State, or local fees as
well as other relevant expenses required for operation of the property
by a third-party governmental unit. Costs of continuation financing
statements and site license and permit costs.
(H) Expenses related to site utilities.
(I) Site office furniture and equipment including site-based
computer and copiers. Service agreements and warranties for copiers,
telephone systems and computers are also included (if approved by the
Agency).
(J) Real estate taxes (personal tangible property and real property
taxes) and expenses related to controlling or reducing taxes.
(K) All costs of insurance including property liability and
casualty as well as fidelity or crime and dishonesty coverage for on-
site employees and the owners.
(L) All bookkeeping supplies and recordkeeping items related to
costs of collecting rents on-site.
(M) All office supplies and copies related to costs of preparing
and maintaining tenant files and processing tenant certifications to
include electronic storage.
(N) Public relations expense relative to maintaining positive
relationships between the local community and the tenants with the
management staff and the borrowers. Chamber of Commerce dues,
contributions to local charity events, and sponsorship of tenant
activities, are examples.
(O) Tax credit compliance monitoring fees imposed by Housing
Finance Authorities (HFAs).
(P) All insurance deductibles as well as adjuster expenses.
(Q) Professional service contracts (audits, owner-certified
submissions in accordance with Sec. 3560.308(a)(2), tax returns,
energy audits, utility allowances, architectural, construction,
rehabilitation and inspection contracts, capital needs assessments
(CNA), etc.).
(R) Association dues to be paid by the project should be related to
training for site managers or management agents. To the extent that
association dues can document training for site managers or management
agents related to project activities by actual cost or pro-ration, a
reasonable expense may be billed to the project.
(S) Legal fees if found not guilty of civil lawsuits, commercially
reasonable legal expenses and costs for defending or settling lawsuits.
(vii) With prior Agency approval, cooperatives and nonprofit
organizations may use housing project funds to reimburse actual and
typical asset management expenses directly attributable to ownership
responsibilities. Such expenses may include:
(A) Errors and omissions insurance policy for the Board of
Directors. The cost must be prorated if the policy covers multiple
Agency housing properties.
(B) Board of Directors review and approval of proposed Agency's
annual operating budgets, including proposed repair and replacement
outlays and accruals. The cost must be prorated if the policy covers
multiple Agency housing properties.
(C) Board of Directors review and approval of capital expenditures,
financial statements, and consideration of any management comments
noted. The cost must be prorated if the policy covers multiple Agency
housing properties.
(D) The cost must be prorated if the policy covers multiple Agency
housing properties.
(viii) Agency approved third party debt service for the project.
(2) Unallowable expenses. Housing project funds may not be used for
any of the following:
(i) Equity skimming as defined in 42 U.S.C. 543(a);
(ii) Purposes unrelated to the housing project;
(iii) Reimbursement of inaccurate or false claims;
(iv) Court ordered settlement agreements, court ordered decrees,
legal fees, or other costs that result from the
[[Page 11285]]
filing of civil rights complaints or legal action alleging the
borrower, or a representative of the borrower, has committed a civil
rights violation. It is inappropriate to charge for legal services to
represent any interest other than the borrower's interest (i.e.,
representing a general partner or limited partner to defend their
individual owner interest is not allowable);
(v) Fines, penalties, and legal fees where the borrower or a
borrower's representative has been found guilty of violating laws,
including, but not limited to, civil rights, and building codes.
Charging for payment of penalties including opposition legal fees
resulting from an award finding improper actions on the part of the
owner or management agent is generally an inappropriate project
expense. The party responsible generally pays such expenses for
violating the standards or by their insurance carriers;
(vi) Association dues unless related to training for site managers
or management agents. To the extent that association dues can document
training for site managers or management agents related to project
activities by actual cost or pro-ration, a reasonable expense may be
billed to the project;
(vii) Pay for bonuses or monetary performance awards to site
managers or management agents that are not clearly provided for by the
site manager salary contract;
(viii) Billing for parties or gifts to management agent staff;
(ix) Billing for practices that are inefficient such as routine use
of collect calls from a site manager to a management agent office;
(x) Billing the project for computer hardware, some software, and
internal connections that are beyond the scope and size reasonably
needed for the services supplied (i.e., purchasing equipment or
software for use by a site manager that is clearly beyond that needed
to support project operations). Note that computer learning center
activities benefiting tenants are not covered in this prohibition; or
(xi) Costs of tenant services.
(c) Priorities. The priority order of planned and actual budget
expenditures will be:
(1) Senior position lienholder, if any;
(2) Operating and maintenance expenses, including taxes and
insurance;
(3) Agency debt payments;
(4) Reserve account requirements;
(5) All accounts payable;
(6) Other authorized expenditures; and
(7) Return on owner investment.
(d) Determining if expenses are reasonable. Generally, expenses
charged to project operations, whether for management agent services or
other expenses, must be reasonable, typical, necessary and show a clear
benefit to the residents of the property. Services and expenses charged
to the property must show value added and be for authorized purposes.
If such value is not apparent, the service or expense should be
examined.
(1) Administrative expenses for project operations exceeding 23
percent, or those typical for the area, of gross potential basic rents
and revenues (i.e., referred to as gross potential rents in industry
publications) highlight a need for closer review for unnecessary
expenditures. Budget approval is required, and project resources may
not always permit an otherwise allowable expense to be incurred if it
is not fiscally prudent in the market.
(2) Excessive administrative expenses can result in inadequate
funds to meet other essential project needs, including expenditures for
repair and maintenance needed to keep the project in sound physical
condition. Actions that are improper or not fiscally prudent may
warrant budget denial and/or a demand for recovery action.
(e) Agency review and approval. (1) The Agency will only approve
housing project budgets that meet the requirements of paragraphs (a)
through (d) of this section.
(2) If no rent change is requested, borrowers must submit budget
documents for Agency approval 60 calendar days prior to the start of
the housing project's fiscal year. The Agency will notify borrowers if
the budget submission does not meet the requirements of paragraphs (a)
through (d) of this section. The borrower will have 10 days to submit
the additional material.
(3) If a rent change is requested, the borrower must submit budget
documents to the Agency and notify tenants of the requested rent change
at least 90 calendar days prior to the start of the housing project's
fiscal year.
(i) The Agency will notify borrowers if the budget submission does
not meet the requirements of paragraphs (a) through (d) of this
section, or if the rent and utility allowance request has been denied
in accordance with Sec. 3560.205(f). The borrower will have 10 days to
submit the additional material to address any issues raised by the
Agency.
(ii) The rent change is not approved until the Agency issues a
written approval. If there is no response from the Agency within the
30-day period, the rent change is considered automatic. The following
budgets are not eligible for automatic approval:
(A) Budgets with rent increases above $25 per unit; and
(B) Budgets that are submitted late or that miss other deadlines
set by the Agency.
(4) If the Agency denies the budget approval, the Agency will
notify the borrower in writing.
(5) If budget approval is denied, the borrower shall continue to
operate the housing project based on the most recently approved budget.
0
22. Amend Sec. 3560.306 as follows:
0
a. Revise paragraphs (a), (b), (d), and (e)(2);
0
b. Redesignate paragraphs (g)(2) through (5) as paragraphs (g)(3)
through (6), respectively, and add new paragraph (g)(2); and
0
c. Redesignate paragraph (j)(2) as paragraph (j)(3) and add new
paragraph (j)(2).
The revisions and additions read as follows:
Sec. 3560.306 Reserve account.
(a) Purpose. To meet the major capital expense needs of a housing
project, borrowers must establish and maintain a reserve account,
unless escrowed by the Agency.
(b) Financial management of the reserve account. Unless otherwise
approved by the Agency, borrower management of the reserve account is
subject to the requirements of 7 CFR part 1902, subpart A, regarding
supervised bank accounts.
* * * * *
(d) Transfer of surplus general operating account funds. (1) The
general operating account will be deemed to contain surplus funds when
the balance at the end of the housing project's fiscal year, after all
payables and priorities, exceeds 20 percent of the operating and
maintenance expenses. If the borrower is escrowing taxes and insurance
premiums, include the amount that should be escrowed by year end and
subtract such tax and insurance premiums from operating and maintenance
expenses used to calculate 20 percent of the operating and maintenance
expenses.
(2) If a housing project's general operating account has surplus
funds at the end of the housing project's fiscal year as defined in
paragraph (d)(1) of this section, the Agency will require the borrower
to use the surplus funds to address capital needs, make a deposit in
the housing project's reserve account, reduce the debt service on the
borrower's loan, or reduce rents in the following year. At the end of
the borrower's fiscal year, if the borrower is required to transfer
surplus funds from
[[Page 11286]]
the general operating account to the reserve account, the transfer does
not change the future required contributions to the reserve account.
(e) * * *
(2) Reserve accounts must be supervised accounts that require the
Agency to approve all withdrawals; except, this requirement is not
applicable when loan funds guaranteed by the Section 538 GRRH program
are used for the construction and/or rehabilitation of a direct MFH
loan project. Direct MFH loan borrowers, who are exempted from the
supervised account requirement, as described in this section, must
follow Section 538 GRRH program regulatory requirements pertaining to
reserve accounts. In all cases, Section 538 lenders must get prior
written approval from the Agency before reserve account funds involving
a direct MFH loan project can be disbursed to the borrower.
* * * * *
(g) * * *
(2) Borrowers should include any needed capital improvements based
on the needs identified in an Agency approved Capital Needs Assessment
(if obtained) are completed within a reasonable timeframe.
* * * * *
(j) * * *
(2) The Agency will allow for an annual adjustment to increase
reserve account funding levels by Operating Cost Adjustment Factor
(OCAF) as published by HUD annually. This will require a modification
to the Loan agreement and the increase documented with budget
submission as outlined in Sec. 3560.303.
* * * * *
Subpart I--Servicing
0
23. Amend Sec. 3560.402 by revising paragraph (b) to read as follows:
Sec. 3560.402 Loan payment processing.
* * * * *
(b) Required conversion to PASS. Borrowers with Daily Interest
Accrual System (DIAS) accounts must convert to PASS with any loan
servicing action.
* * * * *
Subpart L--Off Farm Labor Housing
Sec. 3560.576 [Amended]
0
24. Amend Sec. 3560.576 by removing the words ``State Director's'' and
adding in their place ``MFH Leadership Designee's'' in paragraph (e).
Subpart N--Housing Preservation
Sec. 3560.656 [Amended]
0
25. Amend Sec. 3560.656 by removing the word ``will'' and replacing it
with ``may'' in paragraph (a) introductory text.
Joaquin Altoro,
Administrator, Rural Housing Service.
[FR Doc. 2022-03837 Filed 2-28-22; 8:45 am]
BILLING CODE 3410-XV-P
