[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1602]
[[Page Unknown]]
[Federal Register: January 27, 1994]
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DEPARTMENT OF AGRICULTURE
Farmers Home Administration
7 CFR Parts 1902 and 1930
RIN 0575-AB31
Supervised Bank Accounts and Multi-Housing Reserve Funds
AGENCY: Farmers Home Administration, USDA.
ACTION: Final rule.
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SUMMARY: The Farmers Home Administration (FmHA) amends its regulations
to require Multi-Family Housing (MFH) reserve accounts be subject to
countersignature by an Agency official before funds can be withdrawn.
Internal Agency reviews and audits conducted by the Office of the
Inspector General (OIG) indicate reserve funds are being improperly
used. The intended effect of this action is to curtail reserve fund
abuses.
EFFECTIVE DATE: February 28, 1994.
FOR FURTHER INFORMATION CONTACT: James E. Vollmer, Senior Loan
Specialist, Multi-Housing Servicing and Property Management Division,
Farmers Home Administration, USDA, Washington, DC, 20250, telephone
(202) 720-1060.
SUPPLEMENTARY INFORMATION:
Classification
We are issuing this final rule in conformance with Executive Order
12866, and we have determined that it is not a ``significant regulatory
action.'' Based on information compiled by the Department, we have
determined that this final rule: (1) Would have an effect on the
economy of less than $100 million; (2) would not adversely affect in a
material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local, or tribal governments or communities; (3) would not create a
serious inconsistency or otherwise interfere with an action taken or
planned by another agency; (4) would not alter the budgetary impact of
entitlements, grants, user fees, or loan programs or rights and
obligations of recipients thereof; and (5) would not raise novel legal
or policy issues arising out of legal mandates, the President's
priorities, or principles set forth in Executive Order 12866.
Intergovernmental Consultation
The programs affected are listed in the Catalog of Federal Domestic
Assistance under Numbers 10.405--Farm Labor Housing Loans and Grants,
10.415--Rural Rental Housing Loans, and 10.427--Rural Rental Assistance
Payments, and are subject to the provisions of Executive Order 12372
which requires intergovernmental consultation with State and local
officials. (7 CFR part 3105, subpart V; 48 FR 29112, June 24, 1983; 49
FR 2267, May 31, 1984; 59 FR 14088, April 10, 1985)
Environmental Impact Statement
This document has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' It is the determination of FmHA
that this action does not constitute a major Federal action
significantly affecting the quality of the human environment, and in
accordance with the National Environmental Policy Act of 1969, Public
Law 91-190, an Environmental Impact Statement is not required.
Civil Justice Reform
This regulation has been reviewed in light of Executive Order 12778
and meets the applicable standards provided in sections 2(a) and
2(b)(2) of that Order. Provisions within this part which are
inconsistent with state law are controlling. All administrative
remedies pursuant to 7 CFR part 1900, subpart B must be exhausted prior
to filing suit.
Discussion
The Agency is improving FmHA oversight of MFH reserve accounts by
requiring them to be subject to countersignature in a supervised
account. Reserve accounts were previously required to be funded and
used in accordance with Agency regulations, which already required the
prior consent of the Agency prior to withdrawing reserve funds.
However, internal Agency reviews and audits conducted by the Office of
the Inspector General (OIG), highlighted various violations of Agency
regulations and prompted the need for this final rulemaking action.
Among the most common concerns uncovered to date include the
withdrawal of reserve funds without Agency consent, funds being pledged
as security for other loans without Agency knowledge, withdrawal of
interest earned on reserve funds for non-project purposes, lenders
withdrawing funds for application on other defaulted loans, reserve
funds withdrawn at a lending institution for application on other
debts, and reserve accounts held at a lending institution for a short
period of time before transferring to another institution.
The Agency expects to curtail reserve fund abuses by shifting
emphasis to compliance through procedures aimed at preventing abuses
(e.g., requiring the countersignature of Agency officials for
withdrawal of reserve funds which are to be placed in a supervised
account). The Agency's earlier procedures relied on oversight through
monitoring routines, with the threat of potential punitive measures
being imposed should violations be discovered.
The Agency solicited comments concerning the impact of the proposed
rules on those holding reserve funds in money market accounts, bonds,
or financial holdings other than in checking or savings accounts in
federally insured institutions. The prior rulemaking action also
mentioned that the Agency is aware that the proposed rule may result in
some borrowers having to pay financial fees or penalties, which will
erode reserve funds, and is concerned that such adverse impacts be
minimized to the extent practical. The Agency also solicited other
alternative approaches to curtail reserve account abuses. The Agency
desires to ensure that the rules to reduce reserve account abuses are
met in a practical manner without inadvertently imposing severe
financial hardship on existing borrowers.
Discussion of Comments
The proposed rule was published in the Federal Register (57 FR
39631-39635) on September 1, 1992, providing for a 60-day comment
period ending November 2, 1992. The Agency received 25 comments in
response to its proposed rulemaking action. A high number of commentors
indicated the rulemaking was not needed because existing regulations
were adequate if properly enforced. Some commentors were supportive of
the rulemaking action. Comments were received about the potential abuse
of the authority granted to FmHA field representatives, that the
rulemaking action would cause undue delays for approval, impose more
work on existing staff, and possibly warrant requiring fidelity bonds
by Agency personnel. Some commentors suggested alternatives to the
proposed rulemaking action, such as requiring all reserve funds be
remitted to the Government for holding under its accounting system
until such time as a request is approved for a withdrawal, requiring
cosignatories only for problem accounts, requiring only some reserve
funds to be subject to withdrawal, relying on account statements from
financial institutions only, and withholding any authorized return on
owners' investment for any year in which reserve accounts abuses occur.
The Agency considered the various alternatives and determined the
proposed rulemaking action was needed and would not impose an undue
hardship on borrowers. The alternatives suggested did not warrant
adoption by the Agency. The Agency does not deem it wise to require
reserves to be remitted to the Government, and also finds such an
alternative to be administratively undesirable, in part because the
considerable accounting software modifications needed would make it
cumbersome to implement. Requiring co-signatures only for problem
accounts is not attractive because it does not fully accomplish an
Agency objective of ensuring abuses are prevented, rather than relying
on punitive measures. The Agency considers its existing policies to be
adequate to impose appropriate punitive measures for those who are
trying to meet program objectives; however, abuses are still occurring
and preventive steps are deemed necessary. Relying on added review of
statements from financial institutions does not fully accomplish an
Agency objective of ensuring abuses are prevented, rather than
increasingly relying on Agency monitoring to discover and punish
abuses.
A high number of commentors indicated that it was important that
the Agency be required to act timely on requests for reserve fund
withdrawals, especially where emergency repairs are needed. The Agency
expects its employees to take timely action on reserve account
withdrawal requests, especially where emergency cases arise. The Agency
normally expects such requests to be acted on within 5 working days of
the request (See 7 CFR part 1930, subpart C). However, the Agency does
not agree that this is a valid reason to drop the proposed
countersignature provisions.
Agency regulations have long required prior consent before reserve
account funds are used. When circumstances arose where emergency
repairs were needed during non-federal working hours for which no cash
was on hand to pay for the repairs, operators ensured such repairs were
made using commonly available business practices. Operators can
normally request the work be billed for payment within 30 days, or that
the work be paid via the extension of credit arrangements. Such work is
then able to be repaid at a later date, either through the authorized
release of reserve funds for authorized purposes, or through an
alternative revenue source such as project rents. However, the Agency
recognized the need to permit the post approval of commitments made
(e.g., work committed under credit arrangements, etc.) in emergency
cases. The Agency modified 7 CFR part 1930, subpart C at paragraph XIII
B 2 c (5) as a result of similar comments in a separate but related
rulemaking action to accommodate such treatment.
A large number of respondents also recommended requiring at least
two Agency employees to be authorized to countersign for reserve
account withdrawals to ensure that prompt action can be taken should
employees be on travel or leave. Although the Agency understands it may
be desirable to ensure that at least two officials are authorized to
countersign for reserve account withdrawals, it may be impractical to
require multiple counter-signatures by authorized Agency officials in
some circumstances. The Agency does not object to accommodating
multiple counter-signatures. However, it does not desire to require
multiple signatures, in part, because normal business practices should
not demand extremely prompt action on reserve withdrawal requests even
when emergency situations occur. There are ample means of handling
emergencies in a prompt manner other than by relying solely on the
immediate access to reserve account funds. Also, some FmHA offices do
not have two qualified employees to authorize reserve fund withdrawals.
The Agency received a number of comments regarding the use of
reserve accounts. The information published in the reserve section was
basically the same as published in a separate, but related, prior
rulemaking action on 7 CFR part 1930, subpart C. Changes resulting from
that rulemaking action were separately addressed.
The wording proposed at paragraph XIII B 2 c (2) of Exhibit B of
part 1930, subpart C, is being adopted with a modification of the
implementation date. The Agency is modifying the effective date to be
180 days after publication of the final rule instead of 60 days. This
was deemed necessary because of the significant number of commentors
who indicated that establishing accounts requiring countersignature by
Agency officials would be cumbersome to implement, especially if
implemented over a short timeframe. The Agency agrees and is providing
for a longer implementation period. The paragraph also provides that
reserve funds held just prior to the effective date, in instruments
which are subject to monetary penalties for early withdrawal, may be
temporarily held for the time needed to avoid such penalties.
A comment was received concerning whether borrowers whose accounts
were established on or before October 27, 1980, would be subject to a
supervised account for reserve account funds, since these accounts were
not subject to the required account standards set out in FmHA
regulations for loans approved after October 27, 1980. The Agency
intends all RRH, RCH, and all LH borrowers operating projects (e.g.,
all LH borrowers except on-farm type borrowers) to establish a
supervised account for reserve funds.
Comments received in conjunction with the prior rulemaking changes
for 7 CFR part 1930, subpart C, suggested reserve accounts be permitted
to be invested in other than federally insured institutions and readily
marketable obligations of the United States Treasury. The Agency agreed
to make some expansion for MFH reserve accounts as prescribed in 7 CFR
part 1930, subpart C. Consequently, it is necessary to make a number of
technical changes to 7 CFR part 1902, subpart A to be compatible with
these principles. Those changes would have necessitated extensive
changes to numerous paragraphs in the existing regulation. Therefore,
the Agency determined the public would be better served to have a
separate section covering all regulations governing the MFH reserve
accounts, instead of providing extensive exceptions in numerous
sections of the existing regulation. Section 1902.4 was added to the
regulation, taking into consideration the comments for improvements
recommended by the public.
In addition, a number of recommendations were offered to improve
the technical implementation of any regulations resulting from the
prior rulemaking action. Comments indicated that using the term ``bank
statements'' when discussing MFH reserve accounts was not appropriate.
The Agency agrees and avoided this wording when used in conjunction
with MFH reserve accounts.
A commentor also desired clarification as to whether originals or
copies of account activity statements are expected. The Agency will
accept either for MFH reserve accounts. A commentor also desired
clarification as to when the MFH supervised account activity statements
will be provided to the Agency. The Agency normally will not need
account activity statements. Accordingly, the Agency made changes to
clarify this intent. Commentors also were concerned about the need and
frequency of providing MFH reserve account deposit information to the
Agency. The Agency normally will not need deposit documentation.
Accordingly, the Agency made changes to clarify this intent.
It was recommended that proposed rulemaking wording for
Sec. 1902.1(k) be modified, since it states that the ``Interest-Bearing
Deposit Agreement'' be executed in conjunction with Form FmHA 1940-1.
The Agency agrees that the ``Interest-Bearing Deposit Agreement'' need
not be executed when MFH reserve accounts are involved. The Agency
avoided referencing this form when it consolidated all the MFH reserve
account provisions in Sec. 1902.4.
A commentor indicated that the proposed revision to
Sec. 1902.2(a)(6) is not appropriately located, and suggested adding
another paragraph to cover the treatment of MFH accounts at
Sec. 1902.2(a). The Agency determined that the proposed clarifying
wording is appropriate to ensure it is understood that MFH accounts are
to be kept in supervised accounts as long as the borrower is indebted
to the Agency. However, the Agency also agrees that additional coverage
would help convey that MFH reserve funds must be withdrawn for
disbursement for an authorized purpose. Consequently, the Agency
consolidated these related provisions into Sec. 1902.4.
Also, commentors suggested removing the word ``checking'' where it
occurs throughout Sec. 1902.14, in part because credit unions and
savings accounts may also be used when MFH reserve accounts are being
established. The Agency agrees and is dropping the word ``checking''
from the section governing MFH reserve funds.
List of Subjects
7 CFR Part 1902
Accounting, Banks, Banking, Grant programs--Housing and community
development, Loan programs--Agriculture, Loan programs--Housing and
community development.
7 CFR Part 1930
Accounting, Administrative practice and procedure, Grant programs--
Housing and community development, Loan programs--Housing and community
development, Low- and moderate-income housing--Rental, Reporting and
recordkeeping requirements.
Accordingly, title 7, chapter XVIII of the Code of Federal
Regulations is amended as follows:
PART 1902--SUPERVISED BANK ACCOUNTS
1. The authority citation for part 1902 continues to read as
follows:
Authority: 7 U.S.C. 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR
2.23; 7 CFR 2.70.
Subpart A--Loan and Grant Disbursement
2. The heading of subpart A to part 1902 is revised to read as
follows:
Subpart A--Disbursement of Loan, Grant, and Other Funds
3. Section 1902.1 is amended by adding introductory text to read as
follows:
Sec. 1902.1 General.
This subpart prescribes the policies and procedures of the Farmers
Home Administration (FmHA) for disbursement of funds under the Loan
Disbursement System (LDS), in establishing and using supervised bank
accounts, and in placing Multi-Family Housing (MFH) reserve accounts in
supervised bank accounts. The LDS system provides for disbursement of
funds on an as needed basis to substantially reduce interest costs to
FmHA borrowers, U.S. Treasury, and FmHA.
* * * * *
4. Section 1902.4 is added to read as follows:
Sec. 1902.4 Establishing MFH reserve accounts in a supervised bank
account.
(a) General Requirements. All MFH borrowers required to maintain
reserve accounts must place the reserve accounts in a supervised bank
account(s) which meets the following requirements:
(1) Countersignature requirements. The reserve account must require
that any funds withdrawn be countersigned by an authorized FmHA
official.
(2) Restrictions on collateral. The financial institution holding
the reserve account must ensure that the funds are not pledged or taken
as security without the Agency's prior consent.
(3) Interest bearing. The reserve account funds are encouraged to
be maintained in an interest-bearing account. The ``Interest-Bearing
Deposit Agreement'' set out in Exhibit B of this subpart is not
required to be used for reserve accounts.
(4) Restricted investments. Reserve funds must be placed in
investments authorized in subpart C of part 1930 of this chapter. The
authorized investments are deemed to be of acceptable risk such that
the potential for any loss is minimal.
(5) Financial institutions. The reserve account must be maintained
in authorized financial institutions set out in subpart C of part 1930
of this chapter (e.g., banks, savings and loan institutions, credit
unions, brokerage firms, mutual funds, etc.). Generally, any financial
institution may be used provided invested or deposited funds are
insured to protect against theft and dishonesty. The reserve account
funds need not be Federally insured. However, if Federally insured, any
amount held above the Federal insurance ceilings established must be
backed by a pledge of collateral from the financial institution, or
otherwise covered by non-federal insurance against theft and
dishonesty.
(6) Rules where multiple projects are involved. A reserve
account(s) must be maintained for each borrower. When a borrower owns
multiple projects, reserve accounts may be established for each
project. A single reserve account may also be established by a borrower
owning multiple projects, provided the conditions set out in subpart C
of part 1930 of this chapter are met.
(7) Term. Reserve accounts are expected to be kept for the full
term of the loan.
(b) Deposits and account activity statements.
(1) Deposits. Generally, the FmHA will not require the review or
approval of deposits or the use of Forms FmHA 402-1 or FmHA 402-2.
(2) Account activity statements. Generally, the FmHA will not
monitor or reconcile the reserve account activity statements issued
periodically by the financial institutions holding the funds. FmHA will
monitor reserve account levels through budget reports, audits, and
Agency reserve tracking systems. If disputes arise or the borrower is
in violation of Agency regulations, the Agency may require account
activity statements. When account activity statements are sought, it
will normally be sufficient to obtain the statement which reflects
balances as of the last activity statement ending period. Form FmHA
402-2 is not required to be used.
Secs. 1902.17-1902.49 [Added and reserved]
5. Sections 1902.17 thru 1902.49 are added and reserved.
6. Section 1902.50 is added to read as follows:
Sec. 1902.50 OMB control number.
The reporting and recordkeeping requirements contained in this
regulation have been approved by the Office of Management and Budget
and have been assigned OMB control number 0575-0158. Public reporting
burden for this collection of information is estimated to vary from 5
minutes to 1\1/2\ hours per response, with an average of 0.42 hours per
response, including time for reviewing instructions, searching existing
data sources, gathering and maintaining the data needed, and completing
and reviewing the collection of information. Send comments regarding
this burden estimate or any other aspect of this collection, including
suggestions for reducing this burden, to Department of Agriculture,
Clearance Officer, OIRM, room 404-W, Washington, DC 20250; and to the
Office of Management and Budget, Paperwork Reduction Project (OMB
#0575-0158), Washington, DC 20503.
PART 1930--GENERAL
7. The authority citation for part 1930 continues to read as
follows:
Authority: 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23; 2.70.
Subpart C--Management and Supervision of Multiple Family Housing
Borrowers and Grant Recipients
8. The introductory text of paragraph XIII B 2 c of Exhibit B of
subpart C is revised to read as follows:
Exhibit B of Subpart C--Multiple Housing Management Handbook
* * * * *
XIII Accounting and Reporting and Financial Management Analysis:
* * * * *
B. * * *
2. * * *
c. Reserve account. The reserve account is a required account
subject to the requirements set out in this paragraph. The borrower
will initiate monthly deposits in this project account, preferably
an interest bearing account, starting the same month the first loan
payment is due FmHA. As projects age, the required reserve account
level may be adjusted to meet anticipated ``life-cycle'' needs,
including equipment and facility replacement costs, by amending the
loan agreement/resolution. All RRH, RCH, and LH borrowers operating
projects (i.e., all LH borrowers exclusive of those on-farm type LH
borrowers) are required to establish a reserve account. Effective as
of July 26, 1994, reserve funds will be required to be placed in a
supervised account. The provisions of subpart A of part 1902 of this
chapter apply. Reserve funds on deposit just prior to this date in
instruments which are subject to monetary penalties for early
withdrawal may be temporarily held for the time needed to avoid such
penalties.
* * * * *
Dated: October 12, 1993.
Bob Nash,
Under Secretary for Small Community and Rural Development.
[FR Doc. 94-1602 Filed 1-26-94; 8:45 am]
BILLING CODE 3410-07-U