Rental Assistance and Asset Management for the Multi-Family Housing Direct Loan Programs, 59682-59692 [2020-18192]

Agencies

• DEPARTMENT OF AGRICULTURE
• Rural Housing Service

[Federal Register Volume 85, Number 185 (Wednesday, September 23, 2020)]
[Proposed Rules]
[Pages 59682-59692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18192]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 85, No. 185 / Wednesday, September 23, 2020 / 
Proposed Rules

[[Page 59682]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3560

[Docket No. RHS-20-MFH-0017]
RIN 0575-AD17


Rental Assistance and Asset Management for the Multi-Family 
Housing Direct Loan Programs

AGENCY: Rural Housing Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: The Rural Housing Service (RHS or the Agency) is proposing to 
amend its regulation to implement changes related to the development of 
a sustainable plan for the Rental Assistance (RA) program, including 
new Agency flexibilities in the managing of the RA distribution and 
integrate new asset management policies. The regulation changes are 
designed to provide flexibility, more economically utilize the RA, and 
to improve the efficiency in managing the assets in the Direct Loan 
portfolio.

DATES: Comments on the proposed rule must be received on or before 
November 23, 2020.

ADDRESSES: You may submit comments to this rule by utilizing the 
Federal eRulemaking Portal. Go to https://www.regulations.gov and, in 
the lower ``Search Regulations and Federal Actions'' box, select 
``Rural Housing Service'' from the agency drop-down menu, then click on 
``Submit.'' In the Docket ID column, select RHS-20-MFH-0017 to submit 
or view public comments and to view supporting and related materials 
available electronically. Information on using Regulations.gov, 
including instructions for accessing documents, submitting comments, 
and viewing the docket after the close of the comment period, is 
available through the site's ``User Tips'' link.

FOR FURTHER INFORMATION CONTACT: Jennifer Larson, Multi-Family Housing 
Portfolio Management Division, Rural Housing Service, Stop 0782, 1400 
Independence Avenue SW, Washington, DC 20250-0782.

SUPPLEMENTARY INFORMATION: 

Background and Summary of Changes

    The existing statutory authority for the Multi-Family Housing (MFH) 
programs was established in title V of the Housing Act of 1949, which 
gave authority to the RHS (then the Farmers Home Administration) to 
make housing loans to farmers. As a result of this Act, the Agency 
established single-family and multi-family housing programs. The MFH 
program is administered, subject to appropriations, by the U.S. 
Department of Agriculture (USDA) as authorized under Sections 514, 515 
and, 516 and 521 of the Housing Act of 1949, as amended (42 U.S.C. 
1484, 1485, and 1486, and 1490). Over time, the sections of the Housing 
Act of 1949 addressing MFH have been amended a number of times. 
Amendments have involved issues such as the provision of interest 
credit, broadening definitions of eligible areas and populations to be 
served, participation of limited-profit entities, establishment of a 
rental assistance program, and imposition of a number of restrictive-
use provisions and prepayment restrictions.
    The Agency operates a multifamily rural rental housing direct loan 
program under section 515 and section 514 for farm labor housing. The 
Agency also provides grants under the section 516 farm labor housing 
program. The direct loan program employs a public--private partnership 
by providing subsidized loans at an interest rate of 1 percent to 
developers to construct or renovate affordable rental complexes in 
rural areas. This 1 percent loan keeps the debt service on the property 
sufficiently low to support below-market rents affordable to low-income 
tenants. Many of these projects also utilize low-income housing tax 
credit (LIHTC) proceeds. This program is typically used in conjunction 
with the RHS section 521 Rental Assistance (RA) program, which provides 
project-based rental assistance payments to property owners to 
subsidize tenants' rents to an affordable level. With rental 
assistance, tenants pay 30 percent of income toward their rent 
(including utilities). Some section 515 projects also utilize the U.S. 
Department of Housing and Urban Development's (HUD's) section 8 
project-based assistance, which enables additional very low-income 
families to be served.
    The direct loan and grant programs under sections 514 and 516 
provide low interest loans and grants to provide housing for 
farmworkers. These workers may work either at the borrower's farm 
(``on-farm'') or at the borrower's or any other farm (``off-farm'') so 
long as the tenants meet program eligibility requirements. Section 521 
rental assistance is available for off-farm labor housing, but not on-
farm labor housing. The Agency has decided to not provide RA to on-farm 
labor housing units because of its limited availability.
    The Rural Housing Service (RHS) published a proposed rule on June 
2, 2003 (68 FR 32872) to streamline and consolidate 14 regulations into 
7 CFR part 3560. Part 3560 sets forth requirements, policies, and 
procedures for originating, processing, and servicing Rural 
Development's MFH direct loans and grants. An interim rule was 
published November 26, 2004 (69 FR 69032-69176) to implement those 
changes, with an effective date of February 24, 2005. The Agency 
received more than 2,800 comments on the Proposed Rule published in the 
Federal Register on June 2, 2003, (68 FR 32872). While the issues of 
concern tended to vary, the Agency noted that some issues were raised 
by more than one commenter. Topics discussed by five or more commenters 
were presented and organized by subpart within the interim rule 
published and addressed.
    This proposed rule will amend the current interim rule in order 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.

Rental Assistance Changes

    The changes proposed are designed to more economically utilize RA, 
reduce the program cost over time, and provide management flexibilities 
in the use of funds. The Agency has already implemented several 
measures to reduce the cost of RA within its already established 
regulatory authority, but

[[Page 59683]]

amendments to the regulation are needed to ensure effectiveness and 
true cost savings to the RA program. The Agency experienced dramatic 
funding reductions in Fiscal Year 2013, which has highlighted the need 
for adaptability in delivering RA to as many beneficiaries as possible.
    This proposed rule establishes the historical practice of using 
unused Rental Assistance obligation balances from properties that have 
left the portfolio for renewal purposes. The Agency has actively used 
RA balances from properties that have paid off the Rural Development 
mortgage or natural maturity. These funds supplement the annual 
appropriation and make efficient use of inactive funds. Inclusion of 
this process in the regulation will increase transparency on the 
management of RA funds.
     This proposed rule would add language at Sec.  3560.259(d) 
regarding the transfer of obligation balances from RA Agreements from 
properties whose mortgages have naturally matured.
    The Consolidated Appropriations Act, 2019 (Pub. L. 116-6, February 
2, 2019) for the Rental Assistance Program requires ``. . . that rental 
assistance provided under agreements entered into prior to fiscal year 
2019 for a farm labor multi-family housing project financed under 
section 514 or 516 of the Act may not be recaptured for use in another 
project until such assistance has remained unused for a period of 12 
consecutive months.'' Accordingly, the Agency is adding the 12-month 
term for transfer of unused RA in Section 514 Farm Labor Housing.
     Amending 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.
    This proposed rule also proposes to change the following additional 
RA provisions:
     Amending Sec.  3560.11 definitions of Domestic farm 
laborer, Management agreement and Management fee 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.''
     MFH borrowers had previously identified certain 
requirements within Rural Development's regulations governing 
Supervised Bank Accounts that are difficult to obtain in the current 
commercial banking environment. This is mainly due to the current 
modern electronic banking environment. Accordingly, this proposed rule 
would add 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.
     Current regulation allows for management agents to earn a 
management fee for the performance of certain tasks. The Agency intends 
to clarify that the performance of the agent in meeting the Management 
Certification requirements will be assessed in determining the 
allowable fee. This proposed rule would add language at Sec.  3560.102 
that performance assessments of management agents will be used when 
determining the allowable management fee. It will also specify what are 
allowable management fee expenses and require that management plans 
include a listing of the charges covered by the fee.
     Borrowers must comply with the requirements of the Fair 
Housing Amendments Act of 1988, and this section to meet their fair 
housing responsibilities. At Sec.  3560.104, this proposed rule would 
raise the threshold for rental units from four units or more to five or 
more units. This will allow the Agency to align with the Affirmative 
Fair Housing Marketing Plan (AFHMP) as defined in 24 CFR part 200, 
subpart M.
     Current regulation does not contain a provision within RA 
eligibility for tenants that are delinquent on Agency Unauthorized 
Assistance Repayment Agreements and how should not be eligible to 
receive federal assistance. This proposed rule would change Sec.  
3560.254(c) to clarify that tenants are no longer eligible to receive 
RA if they are delinquent on their Unauthorized Assistance Repayment 
Agreement.

Asset Management Changes

    The changes proposed in this rule are designed to improve the 
efficiency in managing the assets in the Direct Loan portfolio. These 
consist of properties financed under the Section 515 Rural Rental 
Housing Program and the Section 514 Farm Labor Housing Program. Since 
publication of the interim rule in 2004, management policies have 
changed in important areas and certain statutory provisions were not 
originally included in the interim rule.
    Some of these changes are highlighted in:
     Management fees are 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. This proposed rule would 
change Sec.  3560.102 to specify what are allowable management fee 
expenses and require that management plans include a listing of the 
charges covered by the fee. This will improve the use of the regulation 
by the borrower and Agency by specifying which expenses can be charged 
against property income and which must be paid out of the earned 
management fee.
     This proposed rule would change Sec.  3560.156(c)(6) to 
add the Violence Against Women Reauthorization Act to the list of 
federal laws with which lease requirements must comply. Addition of the 
Violence Against Women Reauthorization Act (VAWA) to federal law 
compliance list. The Agency requires borrowers to provide a tenant 
lease that meets all federal and program regulation requirements. The 
VAWA and its amendments are added to the list of laws.
     MFH borrowers had previously identified certain procedures 
and requirements within Rural Development's regulations governing 
Supervised Bank Accounts that are outdated, obsolete, and no longer 
feasible in the commercial banking environment as a means of 
withdrawing reserve account funds. This is mainly due to the current 
electronic banking operations. Section 3560.302(c)(5)(i) will be 
updated so that Borrowers are no longer required to obtain a collateral 
pledge if the amount of funds exceed the maximum limit covered by 
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 insure the funds unless the current financial 
institution provides additional surety such as a collateral pledge that 
may already be in place. The clarification of 7 CFR 3560.302(c)(5)(iv) 
will reinforce that all account funds will stay with the property until 
all outstanding loan balances are paid in full that are securing the 
property. Language will be added at Sec.  3560.302(c)(5)(vii) to allow 
for 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 of the Agency loan or grant until all 
outstanding loan balances are paid in full.
     Changes in Sec.  3560.303 will also address property 
expenses are

[[Page 59684]]

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. Since the interim 
rule was published, borrowers have sought clarification on how expenses 
should be treated. The Agency has provided periodic guidance to 
Servicing Officials and borrowers to ensure the appropriate use of 
project funds. This is in accordance with a recommendation from the 
Office of the Inspector General (OIG) in their audit ``Review of Rural 
Rental Housing's Tenant and Owner Data using Data Analytics,'' Audit 
No. 04901-001-13. MFH properties rely on project income to maintain 
operations and provide safe, decent and sanitary housing for our 
residents. Rent increases are necessary at times to generate needed 
revenue to pay for ongoing maintenance, capital improvements, and 
immediate repairs, as well as to cover administrative costs associated 
with management of the property. To achieve these objectives, it is 
necessary and proper for Servicing Officials to thoroughly review 
budget submissions, ask questions, and seek documentation that support 
budget requests or actual expenses. Implementing this change will 
improve compliance, reduce unnecessary and unsupportable expenses, and 
result in stronger, more financially stable properties.
    [cir] In Sec.  3560.303(a)(1), the Agency will require that 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 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.
    [cir] 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.
    [cir] 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.
    [cir] 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.
     MFH borrowers had previously identified certain procedures 
and requirements within Rural Development's regulations governing 
Supervised Bank Accounts that are outdated, obsolete, and no longer 
feasible in the commercial banking environment as a means of 
withdrawing reserve account funds. This is mainly due to the current 
electronic banking operations. Language will be amended at Sec.  
3560.306(e)(2) removing the requirement to countersign withdrawals from 
reserve accounts. This will allow for current electronic banking 
practices.
     Currently under use of reserve account Borrowers must only 
inform the Agency of planned uses of reserve accounts in their annual 
capital budget if known at budget planning time without utilization of 
an agency approved capital needs assessment. A change at Sec.  
3560.306(g) requiring that needed capital improvements, based on the 
needs identified in an Agency approved capital needs assessment, are 
completed within a reasonable timeframe. This will improve the 
management and delivery of the MFH program by establishing the 
authority to require borrower utilization of the reserve accounts as 
recommended in the Agency approved capital needs assessment (CNA).

Technical Corrections

    Other technical changes (moving and consolidating sections, 
removing duplicative language, language clarifications) will make the 
regulation easier to use, and promote better compliance with program 
requirements by borrowers and management agents. The changes include:
     In Sec.  3560.105(f)(10), a change to clarify that if an 
insurance deductible is met, there is no need to track with a 
replacement reserve account.
     Section Sec.  3560.152 incorporates changes related to 
``age'' ineligibility.
     The Agency has updated the wording of ``State Director'' 
to ``Leadership Designee'' to allow for future staff flexibility.
     Update Sec.  3560.152 by removing term ``elderly units in 
mixed housing''.
     Language will be changed in Sec.  3560.154 to correct 
``sex'' to ``gender'' and update policy on criminal activity for 
admissions.
     Update Sec.  3560.205 to include the notification of all 
household members of rent change effective 30 days from date of 
notification.
     Section Sec.  3560.252 will now include the Agency's 
housing voucher program to allow for the proper allowance of rental 
subsidies.
     In Sec.  3560.402 the Agency will amend language that any 
loan servicing action will require DIAS accounts to be converted to the 
current Predetermined Amortization Schedule System (PASS) system of 
accounting.

Executive Order 12866--Classification

    This proposed rule has been determined to be non-significant and; 
therefore, was not reviewed by the Office of Management and Budget 
(OMB) under Executive Order 12866.

Authority

    The Rental Assistance Program (RA) is administered subject to 
appropriations by the U.S. Department of Agriculture (USDA) as 
authorized under Section 521 of Title V of the Housing Act of 1949 as 
amended.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1970, 
subpart A, ``Environmental Policies.'' RHS determined that this action 
does not constitute a major Federal action significantly affecting the 
quality of the environment. In accordance with the National 
Environmental Policy Act of 1969, Public Law 91-190, an Environmental 
Impact Statement is not required.

Regulatory Flexibility Act

    The 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.

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.

[[Page 59685]]

Executive Order 12988--Civil Justice Reform

    This 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 Mandate Reform Act (UMRA)

    Title II of the 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 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.

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 proposed 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.

Civil Rights Impact Analysis

    Rural Development has reviewed this rule in accordance with USDA 
Regulation 4300-4, Civil Rights Impact Analysis,'' to identify any 
major civil rights impacts the rule might have on program participants 
on the basis of age, race, color, national origin, sex or disability. 
After review and analysis of the rule and available data, it has been 
determined that implementation of the rule will not adversely or 
disproportionately impact very low, low- and moderate-income 
populations, minority populations, women, Indian tribes or persons with 
disability by virtue of their race, color, national origin, sex, age, 
disability, or marital or familiar status. No major civil rights impact 
is likely to result from this rule.

Programs Affected

    The program affected by this regulation is listed in the Catalog of 
Federal Domestic Assistance under numbers 10.427--Rural Rental 
Assistance Payments.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order 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.

Executive Order 12372--Intergovernmental Consultation

    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.

Non-Discrimination Statement

    In accordance with Federal civil rights law and U.S. Department of 
Agriculture (USDA) civil rights regulations and policies, the USDA, its 
Agencies, 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, familial/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.
    Persons with disabilities who require alternative means of 
communication for program information (e.g., Braille, large print, 
audiotape, American Sign Language, etc.) should contact the responsible 
Agency or USDA's TARGET Center at (202) 720-2600 (voice and TTY) or 
contact USDA through the Federal Relay Service at (800) 877-8339. 
Additionally, program information may be made available in languages 
other than English.
    To file a program discrimination complaint, complete the USDA 
Program Discrimination Complaint Form, AD-3027, found online at: https://www.usda.gov/oascr/how-to-file-a-program-discrimination-complaint and 
at any USDA office or write a letter addressed to USDA and provide in 
the letter all of the information requested in the form. To request a 
copy of the complaint form, call (866) 632-9992, submit your completed 
form or letter to USDA by:
    (1) Mail: U.S. Department of Agriculture, Director, Office of 
Adjudication, 1400 Independence Avenue SW, Washington, DC 20250-9410;
    (2) Fax: (202) 690-7442; or
    (3) Email: [email protected].
    USDA is an equal opportunity provider, employer, and lender.

List of Subjects in 7 CFR 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, 7 CFR part 3560 is 
proposed to be amended as follows:

[[Page 59686]]

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 of 
the paragraph.
0
3. Amend Sec.  3560.11 by:
0
a. Removing the acronym ``MFHMFH'' wherever it appears in the section 
and adding ``MFH'' in its place; and
0
b. Revising the definitions of ``Domestic farm laborer'', ``Management 
agreement'', and ``Management fee'' to 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 
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.''
* * * * *

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 ``MFH Leadership Designee'' in the second 
sentence of paragraph (b).

Subpart C--Borrower Management and Operations Responsibilities

0
6. Amend Sec.  3560.102 by:
0
a. Revising paragraph (b);
0
b. Adding paragraph (g)(1)(iv); and
0
c. Revising 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. 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 Sec.  3560.102(i)(3)(i)(A). The management plan must 
meet the standards set out in this rule.
* * * * *
    (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 this 
determination.
* * * * *
    (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, E&O, 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.)

[[Page 59687]]

    (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 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) Identifying the Type of Administrative Expense. 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 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

[[Page 59688]]

indicated in 3560.105(f)(9)(i). 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 paragraph (c) heading and 
introductory text, and paragraphs (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:


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 by:
0
a. Revising paragraph (c)(1);
0
b. Adding paragraph (c)(6)(v); and
0
c. Revising 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, 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, or Federal law) in any local, state, 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.

* * * * *

[[Page 59689]]

    (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 3560.205(d)(2) shall be notified of the rent or 
utility allowance change to be effective 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.

* * * * *
    (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 by:
0
a. Redesignating paragraphs (b)(2) through (4) as paragraphs (b)(3) 
through (5) respectively, and adding new paragraph (b)(2); and
0
b. Revising paragraph (c)(2) introductory text.
    The addition and revision 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 of the following 
conditions are met.
* * * * *
0
17. Amend Sec.  3560.254 by revising paragraph (c) to read as follows:


Sec.  3560.254  Eligibility for rental assistance.

* * * * *
    (c) Eligible households. Households eligible for rental assistance 
are those:
    (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;
    (3) Whose head of the household is a U.S. citizen or a legal alien 
as defined in Sec.  3560.11;
    (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 Federal debt, including 
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 3560.259(a)(2) and (3) for 
renewal purposes.

Subpart G--Financial Management

0
20. Amend Sec.  3560.302 by revising paragraphs (c)(3)(ii) and (iii) 
and paragraphs (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 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 insure 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 7 CFR 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.

[[Page 59690]]

    (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.
    (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 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;
    (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 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 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) Training for on-site staff provided by outside training 
vendors. 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 asset 
management expenses directly

[[Page 59691]]

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 Director 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 Director 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) Long-term asset management reviews. 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 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 on the basis of the most recently approved 
budget.
0
22. Amend Sec.  3560.306 by:
0
a. Revising paragraphs (a), (b), (d), and (e)(2);
0
b. Redesignating paragraphs (g)(2) through (5) as paragraphs (g)(3) 
through (6) respectively, and adding new paragraph (g)(2); and
0
c. Redesignating paragraph (j)(2) as paragraph (j)(3) and adding 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,

[[Page 59692]]

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), 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 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.

Elizabeth Green,
Acting Administrator, Rural Housing Service.
[FR Doc. 2020-18192 Filed 9-22-20; 8:45 am]
BILLING CODE 3410-XV-P