[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] ----------------------------------------------------------------------- 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. ----------------------------------------------------------------------- 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Multi-Family Housing (MFH) reserve accounts be subject to countersignature by an Agency official before funds can be withdrawn.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