Multi-Family Housing (MFH) Direct Loan Programs

CourtRural Housing Service
Citation87 FR 11275
Record Number2022-03837
Published date01 March 2022
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.
                ========================================================================
                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.
                -----------------------------------------------------------------------
                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
                

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