[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countersignature by an Agency official before funds can be withdrawn.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