[Federal Register Volume 59, Number 153 (Wednesday, August 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19228]


[[Page Unknown]]

[Federal Register: August 10, 1994]


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Part IX





Department of Housing and Urban Development





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Office of the Assistant Secretary for Community Planning and 
Development



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24 CFR Part 570




Community Development Block Grant Program; Miscellaneous Amendments to 
Correct Identified Deficiencies; Proposed Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Community Planning and 
Development

24 CFR Part 570

[Docket No. R-94-1701; FR-2772-P-01]
RIN 2506-AB01

 
Community Development Block Grant Program; Miscellaneous 
Amendments to Correct Identified Deficiencies

AGENCY: Office of the Assistant Secretary for Community Planning and 
Development, HUD.

ACTION: Proposed rule.

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SUMMARY: This rule contains: a proposed definition of ``income'' for 
families and households, a proposed change in the calculation of the 
planning and administration limitation; a proposed change removing the 
special protection afforded program income in revolving funds; a 
proposed change to the Sec. 570.207(b)(4) definition of ineligible 
income payments; a proposed change to reorganize the section of the 
rule describing the statement of community development objectives, to 
prescribe the manner of its submission, to permit consolidation of 
amendment submissions, and to add a provision for describing ``float-
funded'' activities in the statement; a proposed change specifying 
three situations in which income earned on grant funds must be remitted 
to the U.S. Treasury; a proposed change restricting use of CDBG funds 
outside the jurisdiction of the recipient; a proposed change to require 
transfer of excess program income to the line of credit; a proposed 
change to authorize the Department to delay making a CDBG grant to any 
community whose Grantee Performance Report (GPR), at the time the grant 
is to be awarded, has not been submitted in a manner consistent with 
the GPR Form Instructions; and proposed performance standards to 
replace the Housing Assistance Plan (HAP) standards at Sec. 570.903, 
for determining whether a grantee has carried out its certification 
concerning following its Comprehensive Housing Affordability Strategy 
(CHAS).
    Most of the described changes are proposed in response to problems 
HUD has identified in its administration of the program. Many of these 
proposals are the direct recommendations or suggestions of the 
Department's Inspector General.

DATES: Comments due date: October 11, 1994.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street SW, Washington, DC 20410. Communications should refer to 
the above docket number and title. A copy of each communication 
submitted will be available for public inspection during regular 
business hours at the above address.

FOR FURTHER INFORMATION CONTACT: Deirdre Maguire-Zinni, Acting 
Director, Entitlement Communities Division, Room 7282, Department of 
Housing and Urban Development, 451 Seventh Street, S.W., Washington, DC 
20410, telephone number (202) 708-1577. A telecommunications device for 
deaf persons (TDD) is available at (202) 708-2565. FAX inquiries (but 
not comments on the rule) may be sent to Mr. Broughman at (202) 708-
2575. (These telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

Background

    This proposed rule would revise the Community Development Block 
Grant Program (24 CFR Part 570) to respond to perceived problems and 
abuses HUD has identified in the program. This rule contains: 1) a 
proposed definition of ``income'' for families and households that will 
continue to allow some grantee discretion in the selection of a 
definition while setting the parameters of the choices; 2) a proposed 
change in the calculation of the planning and administration limitation 
to establish the specific, exclusive method for calculation; 3) a 
proposed change removing the special protection afforded program income 
in revolving funds; 4) a proposed change to Sec. 570.207(b)(4) 
clarifying the definition of ineligible income payments and lessening 
its coverage; 5) a proposed change to reorganize the section of the 
rule describing the statement of community development objectives, to 
prescribe its content and the manner of its submission, to permit 
consolidation of amendment submissions, and to add a provision for 
describing how ``float-funded'' activities must be shown in the 
statement; 6) a proposed change to specify when income earned on grant 
funds must be remitted to the U.S. Treasury; 7) a proposed change 
restricting use of CDBG funds outside the jurisdiction of the recipient 
to instances in which such use will principally benefit residents of 
the recipient; 8) a proposed change that will remove an incentive for 
grantees to make loans to earn income by requiring transfer of excess 
program income to the line of credit; 9) a proposed change to authorize 
the Department to delay making a CDBG grant to any community whose 
Grantee Performance Report (GPR), at the time the grant is to be 
awarded, has not been submitted in a manner consistent with the GPR 
Form Instructions; and 10) proposed performance standards to replace 
the Housing Assistance Plan (HAP) standards at Sec. 570.903, for 
determining whether a grantee has carried out its certification 
concerning following its Comprehensive Housing Affordability Strategy 
(CHAS). Many of these proposals are the direct recommendations or 
suggestions of the Department's Inspector General.
    The Department recently published consolidated submission and 
reporting requirements, in another proposed rule. Differences between 
this program-specific rule and that more broad-based rule be resolved 
before final regulations are issued.

Definition of Income

    Changes are proposed at 24 CFR 570.3. This proposed rule would for 
the first time define what constitutes income for purposes of 
determining whether persons or households qualify as low or moderate 
income under the CDBG program. To preserve the flexibility of the 
program while ensuring greater uniformity in the critical program issue 
of determining the extent to which low- and moderate-income persons 
benefit from CDBG-funded activities, the Department is proposing that 
the grantee be required to select either of the Section 8, Census Long 
Form, or IRS Adjusted Gross definitions of what is income for each type 
of activity benefiting low- and moderate-income persons. (The rule 
makes slight modifications to the Section 8 definition to bring it into 
accord with the CDBG program purposes.) The option to choose a 
definition does not apply to activities that qualify for the low- and 
moderate-income area benefit criteria in Sec. 570.208(a)(1) except when 
the recipient carries out a survey. Activities qualifying under 
Sec. 570.208(a)(1) generally must use the area income data, which is 
taken from the decennial census and supplied to recipients by HUD.
    HUD believes a definition of income is desirable to ensure that 
when CDBG funds are used to address the national objective of 
benefiting persons of low and moderate income, those deemed to benefit 
are actually low- and moderate-income persons. The Department 
repeatedly has received questions about the definition of income, and 
is aware of the potential for abuse in this area.
    In 1984, HUD proposed definitions of low- and moderate-income 
household, low- and moderate-income person, low-income household, low-
income person, moderate-income household, and moderate-income person 
that included a reference to the definition of income under the Section 
8 Housing Assistance Payments program at 24 CFR Part 813. As the 
September 6, 1988, preamble to the Final Rule stemming from that 
proposal noted:

    The majority of commenters objected to the reference * * * 
because they concluded that grantees would be required to calculate 
income eligibility for the CDBG program in exactly the same manner 
as for the Section 8 program. Several commenters pointed out that 
the use of the Section 8 methodology would make many low- and 
moderate-income homeowners ineligible for rehabilitation activities 
and for jobs created by economic development projects. This was the 
case, commenters said, because under Section 8 procedures real 
property assets are considered in determining income levels.

    At the time the referenced definitions were proposed, HUD only 
intended to reflect the requirements at section 102(a)(20) of the 
Housing and Community Development Act of 1974 (the Act) that the income 
limits established for CDBG purposes must be equivalent to those used 
in the Section 8 program. Therefore, the proposed reference to the 
definition of annual income at part 813 was removed in the Final Rule, 
and the following was added: ``The method for determining income under 
the Section 8 Housing Assistance Payments program need not be used for 
this purpose.'' This rule proposes to remove the quoted sentence 
wherever it appears. The definitions proposed in this rule would be 
used in calculating incomes of individual families and households to be 
applied against the established income limits in determining whether 
such families and households are low or moderate income under the CDBG 
program.
    The Inspector General has repeatedly expressed its preference that 
the CDBG program have an easily verifiable definition of income to 
standardize income qualification across the country and to help limit 
the risk of abuse in this area.
    In developing a proposed definition, the Department decided to 
review a number of Federal definitions already in use by grantees and 
beneficiaries before beginning completely anew. Use of an established 
definition should pose fewer training problems and lower changeover 
costs for grantees, as well as offering the potential of ``doubling 
up'' on verifications. Before proposing the definition in this rule, 
the Department reviewed the definitions used under Section 8, Aid for 
Families with Dependent Children (AFDC), Food Stamps, National Student 
Lunch, and Food Distribution Programs, and the Census and IRS 
definitions of income. In selecting the approach proposed in this rule, 
HUD used the following criteria in judging the various definitions 
reviewed: comprehensiveness (covered most sources/fewest exclusions); 
verifiability; familiarity of the definition to HUD staff, grantees and 
beneficiaries; fit with the objectives and practices of the CDBG 
program; and ease of administration. The three definitions that HUD 
believes most closely meet the above criteria are the Section 8 
definition, the Census definition, and the IRS Adjusted Gross Income 
definition.
    One option considered was a modified Section 8 definition of annual 
income. The Section 8 definition is second to the IRS definition in 
comprehensiveness of income sources considered and its exclusions are 
close to the other aid program definitions. (Census has no exclusions, 
and IRS has a very limited number.) Agencies verifying income under the 
Section 8 definition could validate beneficiaries' income by direct 
contact with employers or assistance agencies. This definition is 
familiar to many HUD staff and the housing staff of many CDBG grantees. 
While it may be familiar to persons administering housing-related 
assistance under the CDBG program, it is less likely to be familiar to 
grantee and subrecipient staff administering economic development and 
public service activities. Because the CDBG program considers income of 
the family or household at the time assistance is provided, ease of 
administration primarily means ease in explaining the definition to the 
beneficiary and calculating income. (Considering income at the time 
assistance is provided means that the annual income of the family or 
household, as applicable, should be projected based on the prevailing 
rate of income of each person at the time assistance is provided.) The 
Section 8 definition, with a fairly large number of exclusions from 
income, can take some time to explain and calculate. In particular, 
estimating the value of Net Family Assets and calculating the income 
attributable to the assets in excess of $5000 can sometimes be 
difficult. For example, if a grantee wants to provide an economic 
development loan to a business for working capital, and intends to meet 
the national objective of low- and moderate-income job creation and 
retention, each of the benefiting employees would have to undergo an 
assets review if the use of the section 8 definition were to be 
mandatory. Note that the need to apply the Net Family Asset calculation 
is probably perfunctory in the Section 8 (rental assistance) program 
since persons receiving a rental subsidy are not likely to own a house 
and few would have many other includable assets. On the other hand, it 
is arguable that, from the standpoint of the objectives of the CDBG 
program, inclusion of some part of the value of major non-income 
producing assets would be desirable to help focus assistance on the 
more needy, particularly with respect to the elderly who may not have 
much annual income but have high value assets.
    The Census definition reviewed was that used for the decennial 
census so called ``long form.'' It has both the fewest inclusions and 
the fewest exclusions of the definitions reviewed. All of the 
inclusions except ``net income from operation of a business'' could be 
easily verified by contacting employers and assistance agencies. There 
are no exclusions. Grantee and HUD staff and beneficiaries are not 
likely to be familiar with the definition, unless they have recently 
completed a census long-form questionnaire. It is noteworthy that 
income based on the Census definition is used by HUD for CDBG formula 
allocation and low- and moderate-income summary data by Census tract 
and block group. The definition would probably be easy to explain to 
beneficiaries and to calculate, and would likely be the simplest 
definition to use for an income survey for determining the percent of 
low- and moderate-income persons in an area. The definition does not 
attribute income to ownership of non-income-producing assets.
    The IRS definition of ``adjusted gross income'' on IRS Form 1040 
has the largest number of inclusions and a very small number of 
adjustments. Adjusted gross income can be verified by calling employers 
and assistance agencies, as well as by reviewing actual tax returns 
(that, although they may not be submitted to the IRS at the same time 
as the assistance was provided, can provide a validity check for the 
income reported by the beneficiary then). The IRS definition is very 
likely to be familiar to grantee and HUD staff, and to most 
beneficiaries. While it is not designed to calculate family or 
household income (including dependents), it can easily be adapted. For 
some beneficiaries, calculating all the inclusions (such as business 
income or loss) may be difficult. With few exclusions to consider, the 
definition should be moderately easy to explain and administer. A 
further advantage of the IRS definition is that agencies can easily 
take advantage of inexpensive off-the-shelf software to automate and 
document its use. This definition also does not attribute income to 
ownership of non-income-producing assets. This definition is likely to 
be the easiest to administer for special economic development 
activities in cases in which the assisted business is collecting income 
information. Most of these businesses will not be familiar with any 
federal income definition other than that of the IRS.
    In this rule, the Department is proposing that a recipient be 
allowed to select and use the Section 8, Census, or IRS Adjusted Gross 
Income definition for each of its CDBG activity types. (A grantee could 
also elect to use one definition for all its activity types.) When the 
CDBG activity is homeowner rehabilitation, the net value of the primary 
residence of the beneficiary may be excluded from Net Family Assets 
where the recipient is using the Section 8 definition. As noted, all 
CDBG entitlement recipients would be required to use one of the three 
definitions for each activity. For administrative reasons, the 
Department recommends, but does not propose to require, use of the 
modified Section 8 definition for housing and housing-related 
activities, especially those that are also assisted by other HUD 
programs (such as HOME or HOPE or Section 8). Also, the Department is 
aware that grantees may follow somewhat different standards when 
computing relocation payments.
    This rule would not change the requirements at Sec. 570.506(b) 
regarding records to be maintained when information on income by family 
size is required. That is, the grantee could still elect to keep 
records to show either that 1) the person assisted qualified under 
another assistance program with income qualification standards at least 
as restrictive as the CDBG definitions, 2) a copy of a verifiable 
certification (based on one of the three proposed definitions) from the 
assisted person was obtained, or 3) the person was referred from an 
agency that determined the individual's income status and maintains 
appropriate documentation.
    One further note: this rule does not propose to require recipients 
to use a particular standard procedure for determining the amount of 
benefit to be provided, such as that used in HUD's housing programs for 
determining a family's contribution toward rent. This rule only 
specifies what components must be included in the calculation of 
income. Each recipient remains free to determine the level of benefit, 
such as the amount of rehabilitation subsidy, it considers to be 
necessary and reasonable for each CDBG-assisted activity.

Calculating the Planning and Administration Limitation

    This proposed rule includes changes at Sec. 570.200(g). The 
language at Sec. 570.200(g) on the 20 percent limitation on 
expenditures for planning and administration for entitlement recipients 
would be revised to establish the specific, exclusive method for 
calculation of this limitation. While the vast majority of entitlement 
recipients have followed the guidelines in the current rules for 
calculating expenditures without regard to the source year of funds 
used to pay for such costs, some recipients have continued to claim 
compliance based on individual source years. Recipients would no longer 
be allowed to demonstrate compliance by apportioning planning and 
administrative expenses to each source year of CDBG funds.
    The Department has determined that it is no longer advisable to 
allow entitlement recipients to meet this requirement on a ``source 
year'' basis for the following reasons:
    a) The Grantee Performance Report (GPR), HUD's principal tool for 
determining compliance with the 20 percent limitation, does not track 
expenditures on a source year basis; and,
    b) the Department has concluded that the allocation of expenditures 
for program administration against individual activities is inherently 
arbitrary, and thus is likely to result in an inaccurate measure of how 
much of the total expenditures for administration in a given year 
applies to any individual activity. For example, a recipient may have 
spent $100,000 administering an ongoing rehabilitation loan program in 
FY 1992. The money used to fund the loans in FY 1992 included grant 
funds received in FY 1992 and previous years, and program income from 
repayments of loans received over multiple years. To make the 
calculations necessary to allocate the $100,000 expenditure for program 
administration on a source year basis, the recipient must assign each 
dollar spent for making loans that year to a source year. Such 
assignment is a cumbersome, difficult task fraught with the potential 
for error. With this proposed regulation, HUD would assure the 
uniformity of the procedures used by all entitlements, and further 
ensure that the administrative and planning limitation will be 
calculated in the most efficient way.

Prohibition of Income Payments

    The prohibition against income payments at Sec. 570.207(b)(4) in 
the current rule was principally intended to keep CDBG funds from 
providing ongoing cash payments directly to individuals to provide for 
their subsistence. For example, this would include making monthly 
payments to an individual to allow that individual to pay for housing, 
food, clothes, day care, or utilities. However, the Department has 
determined that the current provision goes too far beyond that 
objective. The proposed redefinition at Sec. 570.207(b)(4) reflects 
this determination. The Department has further determined that, 
although downpayment assistance is listed as an example of an income 
payment in the current rule, a one-time payment for downpayment 
assistance should not be classified as an income payment for these 
purposes. Therefore, under this proposed rule downpayment assistance to 
individual homebuyers would be provided with CDBG in one of three ways: 
(1) under the Direct Homeownership provision of the National Affordable 
Housing Act (NAHA) (currently due to terminate in October, 1994); (2) 
under Sec. 570.202(b)(1) to assist acquisition for the purpose of 
rehabilitation; or (3) under Sec. 570.201(e) as an eligible public 
service activity. The Department has also determined that loans to 
individuals to provide for their subsistence are not ongoing cash 
payments and therefore proposes that they be considered eligible public 
services rather than income payments. A conforming change is also being 
proposed in Sec. 570.201(e).

Reorganization, Standard Submission, and Float-Funded Activities in the 
Statement of Community Development Objectives (Final Statement)

    This portion of the rule proposes several changes at Sec. 570.301 
to the requirements for the statement of community development 
objectives, generally known as the final statement, that grantees are 
required to submit to HUD in order to receive their grants. On March 
28, 1990, HUD published a proposed regulation to implement certain 
statutory changes to the CDBG program made in the Housing and Community 
Development Act of 1987 (Pub. L. 100-242, approved February 5, 1988) 
and the Department of Housing and Urban Development--Independent 
Agencies Appropriations Act of 1989 (Pub. L. 100-404, approved August 
19, 1988). A final rule implementing these 1987 changes has not yet 
been issued. Section 570.301 is among the sections of the CDBG rule 
that will be altered from the rule presently in effect in the 
forthcoming final rule. This proposed rule deals with and clarifies 
matters that were not addressed by the previous proposed rule. Readers 
should note that the text proposed here for Sec. 570.301(c) was 
developed on the premise that the basic requirements of Sec. 570.301 
(a) and (b), as published in the previous proposed rule, will be 
similar to those expected to be published in the final rule. The 
Department recently published consolidated submission requirements, in 
another proposed rule. Differences between this program-specific rule 
and that more broad-based rule will be resolved before final 
regulations are issued.
    In this rule, first, for clarity, the rule would be reorganized 
into sections on sources and uses of funds, content of the statement, 
citizen participation, and float-funded activities. Second, the final 
statement would be required to be submitted in a manner prescribed by 
HUD. Third, the details concerning required content and citizen 
participation would be more clearly specified. Fourth, the rule would 
permit final statement amendments to be submitted to HUD in 
consolidated form at the end of the program year. Finally, float-funded 
activities and the circumstances under which they would be authorized 
would be defined and a procedure described for identifying such 
activities in the statement.
    The second and third changes, which would require the final 
statement to contain certain specific details and to be submitted in a 
manner prescribed by HUD, are intended to serve four purposes. First, 
citizens would be better able to follow CDBG activities through the 
entire program cycle because the prescribed submission would share many 
common elements with the grantee performance report (GPR). Second, a 
standard submission would ensure that all citizens receive a comparable 
basic level of information on all proposed activities. Third, standard 
submissions would improve the efficiency of HUD's processing of the 
final statement, and its ability to train grantee and HUD staff on 
final statement requirements. Finally, making the final statement 
submission standard for all grantees would facilitate automation of the 
statement, linking that automation to an automated GPR. Ultimately, 
this automation could save grantees and HUD much time and effort, while 
preserving grantee flexibility in deciding how funds will be used.
    The fourth change, allowing consolidation of amendment submissions, 
is being proposed for the sake of increased efficiency for grantees.
    The final change is being proposed because of difficulties 
experienced by HUD with management of ``float'' activities, including 
those identified in the Inspector General's audit of CDBG interim 
financing. For purposes of this section, an activity that uses 
undisbursed funds in the line of credit or program account that have 
been previously budgeted in a final statement for one or more 
activities that do not need the funds immediately would be called a 
``float-funded activity.'' HUD has long held that a float-funded 
activity must meet all of the same requirements that apply to CDBG-
assisted activities generally. However, the regulations have been 
silent on managing these activities. After review, the Department has 
determined that the primary risks to the CDBG program inherent in the 
float funding process are, first, that the float-funded activity will 
not generate sufficient program income in a timely manner to allow for 
timely undertaking of previously budgeted activities. Second, if 
proposed float-funded activities and the possible consequences of their 
default are not disclosed to citizens in sufficient detail, they will 
not be afforded sufficient information to fully understand how they may 
be affected by each activity, and thus not have the opportunity to 
object to such a use of the funds. Third, in undertaking a float-funded 
activity that exceeds a certain size or duration, grantees apparently 
assume that they will receive sufficient additional CDBG funds in 
future years to continue funding previously budgeted activities until 
the float-funded activity generates program income. However, grantees 
are only authorized to use such a funding technique (e.g. banking on 
future CDBG funds as assurance to backstop a large loan for a 
particular activity in the present) under the section 108 Loan 
Guarantee program.
    The proposed rule would either eliminate the first risk by 
requiring one of two forms of guarantee for the float funds, or limit 
it by requiring a commitment for timely identification of specific 
previously budgeted activities that would be deleted. The second risk 
would be limited by requiring more detailed information to be provided 
to citizens on each float-funded activity. The third factor would be 
minimized by limiting CDBG float-funded activities to those that are 
expected to generate program income within a period of time defined in 
the regulation. The proposed time limit was selected keeping the 
standards at Sec. 570.902(a) in mind. Sixty days prior to the end of 
any program year, the amount of CDBG funds in the line of credit should 
be no more than 1.5 times the amount of the current grant amount. Then, 
at the beginning of any program year, with the new grant in the line of 
credit, the maximum amount in the line of credit could be as much as 
2.5 times the annual grant amount. Therefore, 2.5 years was selected as 
the maximum duration of any float-funded activity, since this is the 
maximum time period that a grantee could be reasonably certain of 
having CDBG funds available absent additional appropriations. The 
Department requests comment on these provisions and also whether the 
rule should additionally specify a limit on the proportion of a 
grantee's funds that it could use for float-funded activities at any 
one period in time.

Spending Funds Outside the Jurisdiction of the Recipient

    This portion of the proposed rule would add a new Sec. 570.309. In 
the early years of the CDBG program, HUD would likely find an 
application that proposed spending CDBG funds outside of the 
jurisdiction of the grantee to be plainly inappropriate to address the 
identified needs of the jurisdiction. Under the statute then, such a 
finding was the basis for HUD to disapprove the application. Since 
1981, the regulations have been silent on this matter, but the 
Department has ruled in several cases that a grantee's decision to 
spend CDBG funds outside the jurisdiction was allowable. The Department 
now believes that it would be helpful to state clearly the 
circumstances under which this practice is allowed in order to remove 
any uncertainty on the part of grantees and auditors. The limitation 
proposed (i.e. that the principal benefit of such an activity must be 
for residents of the jurisdiction of the recipient) is important to 
ensure that the community's share of the national appropriation of 
entitlement funds, which is based on the community's relative share of 
needs, is expended in a manner that addresses the needs for which the 
funds were provided. What would be precluded by this change is the 
lending of CDBG funds to entities outside the grantee's jurisdiction 
when the principal benefit to the jurisdiction would be interest earned 
on the loan. Thus an urban county would not be authorized to loan funds 
to non-participating units of general local government within the 
boundaries of the county unless the urban county could make the 
required determination that the activity (without regard to the use of 
the interest expected to be earned on a loan made for the activity) 
would principally benefit citizens within the urban county.

Revolving Funds

    This portion of the proposed rule includes changes at 
Secs. 570.500(a)(1)(viii), 570.502(a)(5), 570.500(b), and 
570.504(b)(2)(i). A revolving fund is defined at Sec. 570.500(b) to 
mean ``* * * a separate fund (with a set of accounts that are 
independent of other program accounts) established for the purpose of 
carrying out specific activities which, in turn, generate payments to 
the fund in carrying out the same activities.'' Revolving funds are 
used most frequently in connection with rehabilitation and economic 
development projects that involve loans.
    Revolving funds are established and administered typically in the 
following manner. A loan is made with CDBG funds (e.g., to a private 
property owner to rehabilitate her home). Payments on that loan (i.e., 
principal or interest, or both) constitute program income that is 
credited as CDBG program income on the grantee's books and held in an 
account independent of other program accounts. The program income in 
that account, including interest earned on the funds while on deposit 
pending their re-use, becomes the source of financing for additional 
loans of the same type (e.g., housing rehabilitation). Hence, the term 
``revolving fund'' has been used to describe such a fund.
    Of course, much of the same objective could be achieved without the 
need to establish an independent account. Loan payments could simply be 
placed in the grantee's general CDBG account. (The entity used for 
other CDBG funds would vary from community to community; however, CDBG 
funds are often budgeted and accounted for in a special revenue fund.) 
Program income generated by a particular activity could be earmarked in 
advance for use in carrying out additional transactions (e.g., loans) 
involving the same kind of activity (e.g., housing rehabilitation).
    However, the use of a revolving fund has another advantage over the 
fund used to budget and account for other CDBG funds, besides the fact 
that the community does not have to reconsider the use of program 
income generated by a particular activity following its receipt. The 
second advantage is the special treatment given program income in 
revolving funds under the current CDBG regulations. A recipient that 
establishes a revolving fund to carry out a particular activity must 
substantially disburse any program income in that fund before making 
additional cash withdrawals from the Treasury for the same kind of 
activity; however, the recipient may make additional withdrawals from 
the Treasury for other activities before substantially disbursing the 
program income from the revolving fund. This authority appears to have 
created an incentive for some grantees to create revolving funds to 
shelter the program income on hand from cash withdrawal requirements 
and to earn interest income from the investment of the program income 
pending its use for the revolving fund activity. There is also some 
indication that it has created the incentive for some grantees to delay 
the reuse of the funds, since the longer the funds stay in the account 
the more interest they earn while on deposit.
    The HUD Inspector General has identified a number of cases where 
funds in a revolving account were clearly not being used in a timely 
manner. Because of the fact that the grantees involved were allowed to 
leave the funds in a revolving account and to draw funds from their 
lines of credit to meet their cash needs for other CDBG assisted 
activities, this has resulted in additional, and seemingly unwarranted, 
cost to the U.S. Treasury. HUD is generally in favor of the use of 
revolving funds, since it is a sensible way to program funds to meet 
ongoing needs, such as housing rehabilitation and business assistance. 
However, it must also be concerned about avoiding unnecessary costs to 
the Treasury. Under this proposed rule, recipients would no longer be 
authorized to shelter program income in revolving funds. The proposed 
rule would require that all program income, including program income in 
a revolving fund, be disbursed before further cash withdrawals are made 
from the U.S. Treasury.
    The changes made by this rule would not preclude the use of funds 
in a revolving manner. However, the Department recognizes that 
compliance with the proposed rule's requirement that all program income 
be disbursed before additional cash withdrawals are permitted would 
make administration of revolving funds more complicated. This 
additional complexity may, as a practical matter, make revolving funds 
infeasible for some grantees.
    Other options that HUD believes might be used to address the 
problem include:
    (1) limiting the amount of program income in any revolving fund to 
the amount that could be expected to be needed for funding the activity 
within a certain time period (such as 30 days); and
    (2) limiting the number of revolving funds per recipient.
    However, each of these has a drawback. A limitation on the amount 
allowed in a revolving account would mean additional administrative 
burden for both the grantee and HUD to ensure compliance with such a 
limitation. A limit on the number of revolving funds might pose an 
undesirable restriction on a grantee's capacity to address its needs in 
the most sensible way. Because of these problems and since these 
options would still permit funds to be withdrawn from the Treasury for 
other purposes while program income is available to the recipient, they 
were not selected to be proposed for this rule.
    The Department requests comments on this proposed provision that 
explain how the benefits of using revolving funds as they are under 
current rules might be considered to outweigh the costs to the U.S. 
Treasury. Comments are particularly solicited that would identify the 
advantages of the current system that go beyond the obvious ones of 
administrative convenience and the additional interest income earned by 
a grantee as a result of the investment of program income while 
sheltered in a revolving account. Specifically, the Department would be 
interested in determining the amount of any additional program costs 
that might result from administering revolving fund activities under 
this proposed rule so that cost could be compared with the likely 
savings to the Treasury.
    Therefore, the changes proposed in this rule would remove the 
language at Secs. 570.504(b)(2)(i) and (ii) that permits recipients to 
shelter program income in revolving funds. The proposed rule would 
require all program income to be substantially disbursed before 
additional cash withdrawals were made. The reference at 
Sec. 570.500(a)(1)(viii) to interest earned in revolving funds would be 
removed, and the subparagraph would be reserved. The definition of 
revolving fund at Sec. 570.500(b) would be removed and the paragraph 
reserved.

Income Earned on Grant Funds

    The proposed rule includes a change at Sec. 570.500(a)(2) 
concerning interest earned on ineligible loans and reimbursed funds. 
This change is one of several in this rule resulting from the HUD 
Inspector General's review of the CDBG program. It also reflects a 
recent decision by the Comptroller General of the United States (issued 
May 11, 1992) with respect to interest earned on unauthorized loans of 
Federal grant funds.
    This proposed rule specifies three situations in which income 
earned on grant funds must be remitted to HUD for transmittal to the 
U.S. Treasury. The first is interest earned from the investment of the 
initial proceeds of a grant advance by the U.S. Treasury (e.g., funds 
wire-transferred to a recipient pursuant to a withdrawal from its line 
of credit for a grant). The second situation is income (e.g., interest) 
earned on loans or forms of assistance made with CDBG funds that are 
used for activities determined by HUD either to be ineligible or to 
fail to meet a national objective in accordance with the requirements 
of subpart C of this part, or fail substantially to meet any other 
requirement of this part. The third situation is interest earned on 
amounts that have been reimbursed pursuant to Sec. 570.910(b)(5) prior 
to the funds being used for eligible purposes.

Return of Excess Program Income

    This portion of the proposed rule includes changes at 
Sec. 570.504(b)(2) and Sec. 570.503(b)(3). Under the current rules, 
there is an incentive for a recipient to make quick turnaround loans--
even if the recipient does not earn interest on the loans. By making 
such a loan, the recipient, in effect, quickly changes the nature of 
the funds to program income. It may then place them in its program 
account and earn interest pending the use of the funds to meet cash 
needs of the program. The proposed changes would remove an incentive 
for recipients to make loans to earn income rather than using the funds 
strictly for community development purposes. The rule does this by 
requiring all program income held by an entitlement recipient that is 
in excess of one-twelfth of the most recent grant made pursuant to 
Sec. 570.304 to be remitted to HUD to be restored to the recipient's 
line of credit, and by requiring that each subrecipient agreement 
specify that any program income held by the subrecipient that is in 
excess of one-twelfth of its estimated annual expenditure of CDBG funds 
be remitted to the recipient (thus, if the subrecipient agreement is 
for a twelve-month period, the amount of program income would be one-
twelfth of the agreement amount).

Grant Delays for GPRs that are Inconsistent with Instructions

    This portion of the proposed rule includes changes at 
Secs. 570.304, 570.900 and 570.910. The Department considers the 
Grantee Performance Report (GPR) to be the foundation of HUD's ability 
to fulfill the statutory requirement that it review each grantee's 
performance at least annually. Some time ago, the Department, through 
its Financial Management Task Force, determined that it needed to take 
action against grantees that failed to submit reports in the prescribed 
forms in a timely manner. To accomplish this, the Task Force 
recommended that HUD amend the CDBG regulations to authorize HUD to 
hold back on making grants in cases where previous GPRs have not been 
submitted in a manner consistent with GPR Form Instructions. The 
purpose of the rule is to bring pressure to bear on grantees that are 
seriously delinquent in this matter. The language of the rule would 
only affect the most egregious cases, because a GPR is due nine months 
before the next grant is made. (For example, City X ends its program 
year 15 on June 30, 1993. HUD then makes the grant for program year 16 
on July 1. The city's GPR for program year 15 will be due on September 
30, 1993. If that GPR is not properly submitted by June 30, 1994, this 
rule would allow HUD to delay making the program year 17 CDBG grant, 
otherwise due on July 1, 1994, until the overdue report is properly 
submitted.) The rule would not permit delaying the grant simply because 
the GPR was submitted late, if it is submitted in proper form by the 
time the new grant is to be made, although persistent lateness by a 
grantee could be addressed through the use of the sanctions provisions 
at Secs. 570.910, 570.911, and 570.913.

CHAS Performance Standards for CDBG Entitlements

    This proposed rule describes the review standards HUD proposes to 
use in determining whether a CDBG entitlement recipient is following a 
current HUD-approved Comprehensive Housing Affordability Strategy 
(CHAS), as it is required to certify under Sec. 570.303(l). These 
standards would replace those for the Housing Assistance Plan (HAP) 
that itself has been replaced by the CHAS.
    The proposed standards relate to the CHAS implementation process. 
Thus, a grantee would be held accountable for taking all planned 
actions to meet CHAS goals; and for pursuing all resources it indicated 
it would pursue. To assure that each community's non-profit and other 
housing developers that may apply to HUD for assistance are fairly 
considered for certifications of consistency with the CHAS, where such 
a certification is a prerequisite for application, a grantee would be 
expected to provide certifications of consistency in a fair and 
impartial manner that furthers attainment of the purposes and 
objectives of the grantee's housing strategy. The final specific 
standard is that no grantee may hinder implementation of the CHAS by 
action or willful inaction.
    Failure on the part of a grantee to meet its annual CHAS goals for 
persons and households to be assisted would not, in itself, constitute 
failure to follow the CHAS. While the Department would like to see 
every CHAS goal met, it is more concerned that the process of 
developing and implementing the CHAS be carried out in a manner that 
furthers achievement of the goal of the National Affordable Housing 
Act--that every American family be able to afford a decent home in a 
suitable environment. To this end, the proposed CHAS performance 
standards for entitlement recipients will focus on the CHAS 
implementation process, and, initially, if this process has been 
adequately followed, a lack of results would be viewed as signalling a 
need for further technical assistance or for modifying the CHAS. (See 
the recently published proposed rule for a Consolidated Plan, which 
would replace the CHAS.)

Other Matters

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969. The Finding of No Significant Impact is available for 
public inspection during regular business hours in the Office of the 
Rules Docket Clerk, Office of General Counsel, Department of Housing 
and Urban Development, Room 10276, 451 Seventh Street SW., Washington, 
DC 20410.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this proposed rule before publication and 
by approving it certifies that this proposed rule does not have a 
significant economic impact on a substantial number of small entities. 
The proposed rule is limited to the effecting of relatively minor 
procedural amendments within the structure of the CDBG program 
regulations.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive order 12612, Federalism, has determined that the policies 
contained in this proposed rule will not have substantial direct 
effects on states or their political subdivisions, or the relationship 
between the federal government and the states, or on the distribution 
of power and responsibilities among the various levels of government. 
As a result, the proposed rule is not subject to review under the 
order. The proposed rule is limited to making relatively minor, 
procedural amendments within the structure of the CDBG program 
regulations.

Executive Order 12606, the Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this proposed rule does 
not have potential for significant impact on family formation, 
maintenance, and general well-being, and, thus, is not subject to 
review under the order. No significant change in existing HUD policies 
or programs will result from promulgation of this proposed rule, as 
those policies and programs relate to family concerns.

Regulatory Agenda

    This proposed rule was listed as item number 1633 in the 
Department's Semiannual Agenda of Regulations published on April 25, 
1994 (59 FR 20424, 20457) in accordance with Executive Order 12866 and 
the Regulatory Flexibility Act.

List of Subjects in 24 CFR Part 570

    Administrative practice and procedure, American Samoa, Community 
development block grants, Grant programs--education, Grant programs--
housing and community development, Guam, Indians, Lead poisoning, Loan 
programs--housing and community development, Low and moderate income 
housing, New communities, Northern Mariana Islands, Pacific Islands 
Trust Territory, Pockets of poverty, Puerto Rico, Reporting and 
recordkeeping requirements, Small cities, Student aid, Virgin Islands.

    Accordingly, the Department proposes to amend 24 CFR part 570 as 
follows:

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

    1. The authority citation for part 570 would continue to read as 
follows:

    Authority: 42 U.S.C. 3535(d) and 5300-5320.

    2. Section 570.3 would be amended to add a new definition of 
``Income;'' and to revise the definitions of ``Low and moderate income 
household or low- income household,'' ``Low and moderate income person 
or low-income person,'' ``Low-income household,'' ``Low-income 
person,'' ``Moderate income household,'' and ``Moderate income person'' 
to read as follows:


Sec. 570.3   Definitions.

* * * * *
    Income, for the purpose of determining whether a family or 
household is low- or moderate-income under subpart C of this part, is 
defined as follows:
    (1)(i) The definition of annual income under the Section 8 Housing 
Assistance Payments program at 24 CFR part 813 (except that if the CDBG 
assistance being provided is homeowner rehabilitation under 
Sec. 570.202, the value of the homeowner's primary residence may be 
excluded from any calculation of Net Family Assets);
    (ii) Income as reported under the Census long-form for the 1990 
decennial Census. This definition includes:
    (A) Wages, salaries, tips, commissions, etc.;
    (B) Self-employment income from own non-farm business, including 
proprietorships and partnerships;
    (C) Farm self-employment income;
    (D) Interest, dividends, net rental income, or income from estates 
or trusts;
    (E) Social security or railroad retirement;
    (F) Supplemental Security Income, Aid to Families with Dependent 
Children, or other public assistance or public welfare programs;
    (G) Retirement, survivor, or disability pensions; and
    (H) Any other sources of income received regularly, including 
Veterans Administration payments, unemployment compensation, and 
alimony; or
    (iii) Adjusted gross income as defined for purposes of reporting 
under IRS Form 1040 for individual Federal income tax purposes.
    (2) The annual income of the family or household, as applicable, 
should be projected based on the prevailing rate of income of each 
person at the time assistance is provided for the individual, family or 
household, and shall include income from all family or household 
members. Income or asset enhancement derived from the CDBG-assisted 
activity shall not be considered in calculating income. Grantees may 
select any of the three listed definitions for each activity, except 
that integrally related activities of the same type and having the same 
qualifications as those set forth in Sec. 570.208(a), shall use the 
same definition of annual income. The option to choose a definition 
does not apply to activities that qualify under Sec. 570.208(a)(1) 
except when the recipient carries out a survey. Activities qualifying 
under Sec. 570.208(a)(1) generally must use the area income data 
supplied to recipients by HUD.
* * * * *
    Low and moderate income household or low-income household means a 
household having an income equal to or less than the Section 8 low 
income limits established by HUD.
    Low and moderate income person or low-income person means a member 
of a family which has an income equal to or less than the Section 8 low 
income limits established by HUD. Unrelated individuals will be 
considered as one person families for this purpose.
    Low-income household means a household having an income equal to or 
less than the Section 8 very low income limits established by HUD.
    Low-income person means a member of a family which has an income 
equal to or less than the Section 8 very low income limits established 
by HUD. Unrelated individuals shall be considered as one-person 
families for this purpose.
* * * * *
    Moderate income household means a household having an income equal 
to or less than the Section 8 low income limit and greater than the 
Section 8 very low income limit, established by HUD.
    Moderate income person means a member of a family which has an 
income equal to or less than the Section 8 low income limit and greater 
than the Section 8 very low income limit, established by HUD. Unrelated 
individuals shall be considered as one-person families for this 
purpose.
* * * * *
    3. In Sec. 570.200, paragraph (g) would be revised to read as 
follows:


Sec. 570.200   General policies.

* * * * *
    (g) Limitation on planning and administrative costs. No more than 
20 percent of the sum of any grant, plus program income, shall be 
expended for planning and program administrative costs, as defined in 
Secs. 570.205 and 507.206, respectively. Recipients of entitlement 
grants under subpart D shall conform with this requirement by limiting 
expenditures for planning and administration during a program year to 
an amount that does not exceed 20 percent of the sum of its entitlement 
grant made for that program year (if any) plus the program income 
received during that program year.
* * * * *
    4. In Sec. 570.201, paragraph (e) introductory text would be 
revised to read as follows:


Sec. 570.201   Basic eligible activities.

* * * * *
    (e) Public services. Provision of public services (including labor, 
supplies, and materials) that are directed toward improving the 
community's public services and facilities, including but not limited 
to those concerned with employment, crime prevention, child care, 
health, drug abuse, education, fair housing counseling, energy 
conservation, welfare (but excluding the provision of income payments 
identified under Sec. 570.207(b)(4)), homebuyer downpayment assistance, 
or recreational needs. In order to be eligible for CDBG assistance, a 
public service must meet each of the following criteria:
* * * * *
    5. In Sec. 570.207, paragraph (b)(4) would be revised to read as 
follows:


Sec. 570.207   Ineligible activities.

* * * * *
    (b) * * *
    (4) Income payments. The general rule is that CDBG funds may not be 
used for income payments. For purposes of the CDBG program, income 
payments means a series of subsistence-type grant payments made to an 
individual or family for items such as food, clothing, housing (rent or 
mortgage), day care or utilities, but excludes one-time emergency 
payments made to the provider of such items or services on behalf of an 
individual or family.
    6. Section 570.301 would be amended by revising the section heading 
and paragraph (c) to read as follows:


Sec. 570.301   Presubmission and citizen participation requirements.

* * * * *
    (c) Develop a statement of community development objectives and 
projected use of funds annually. The principal purpose of the statement 
is for the grantee to describe to HUD and its citizens how it plans to 
use CDBG funds. When completed and submitted to HUD, it is known as the 
final statement. The grantee must amend its final statement whenever it 
decides not to carry out an activity described in the final statement, 
to carry out an activity not already included in the final statement, 
or to change substantially the purpose, scope, location, or 
beneficiaries of an activity described in the statement. The statement 
and any amendments must be prepared in accordance with the following:
    (1) Sources and uses. All available CDBG funds must be identified 
and accounted for in the statement by clearly identifying the source 
and planned use of all CDBG funds that the grantee expects to receive 
during the upcoming program year, plus any CDBG funds received in the 
current program year that are not included in the current year's final 
statement.
    (i) The sources of CDBG funds to be included in the statement are:
    (A) The annual grant to be received for that grant year;
    (B) Program income expected to be received during that program 
year;
    (C) Program income received during the preceding program year that 
has not been included in a final statement;
    (D) Program income expected to be received during the program year 
and in future program years from float-funded activities described in 
the final statement (the amount of such income and the year(s) in which 
it is expected to be received must be identified and the grantee must 
also explain how it will respond to any delays in the receipt of such 
future year income (as required in paragraph (c)(4) of this section);
    (E) Program income expected to be received during that program year 
from a float-funded activity that was described in an identified 
preceding final statement;
    (F) Surplus funds from any urban renewal settlement for community 
development and housing activities; and
    (G) Any grant funds returned to the line of credit, the planned use 
of which has not been included in a final statement.
    (ii) The use of all such CDBG funds must be identified for specific 
activities and allowable contingencies, as described in paragraph 
(c)(2).
    (2) Content. The statement must be submitted in the manner 
prescribed by HUD and must, at minimum, describe:
    (i) The community development objectives the grantee proposes to 
pursue;
    (ii) The community development activities the grantee proposes to 
carry out with anticipated CDBG funds to address its community 
development objectives.
    (A) The statement must show how all of the funds expected to be 
available during the program year are expected to be used. This means 
that all of the funds identified under the sources section must be 
programmed for use in specific activities, except for any program 
income identified in the statement as stemming from a float-funded 
activity identified in a final statement from a preceding program year, 
and except that an amount not to exceed ten percent of such total 
available funds may be identified for the contingency of cost overruns 
in any of the activities contained in the statement.
    (B) An activity may not be included in a final statement, whether 
originally or by amendment, unless the activity was previously 
described in the proposed statement, or a proposed amendment to the 
final statement, and has been properly subject to citizen participation 
under paragraph (c)(3) of this section. Neither may an activity be 
included in a form that has been substantially modified from the form 
in which it was made known to citizens pursuant to paragraph (c)(3). 
This means that, although the grantee has the final say as to which 
activities are selected for funding, it cannot elect to include a new 
or substantially modified activity that has not been subject to or 
derived from the process of citizen review.
    (iii) Each activity must be described in sufficient detail, 
including the specific regulatory provisions under which it is eligible 
and is expected to meet a national objective, the amount of funds 
expected to be used, the location of the activity, the amount of 
program income expected to be generated, and when such income is 
expected to be available for use. The description must be in sufficient 
detail to permit a clear understanding of the nature of the activity 
and to allow citizens to determine the degree to which they may be 
affected. For activities for which the grantee has not yet decided on a 
specific location, such as when the grantee is allocating an amount of 
funds to be used for making loans or grants to businesses or for 
residential rehabilitation, the description shall identify who may 
apply for the assistance, the process by which the grantee expects to 
select who will receive the assistance (including selection criteria) 
and how much and under what terms the assistance will be provided. The 
statement may include an ``urgent needs'' activity (one that is not 
expected to qualify under Sec. 570.208 (a) or (b)) only if the grantee 
identifies the activity in the statement and certifies that the 
activity is designed to meet other community development needs having a 
particular urgency because existing conditions pose a serious and 
immediate threat to the health or welfare of the community and other 
financial resources are not available.
    (iv) The statement must also describe where citizens may obtain 
additional information about activities described in the statement.
    (v) Float-funded activities, described in paragraph (c)(4) of this 
section, must be specifically identified as such in the statement.
    (3) Citizen participation. (i) Statement. The grantee must prepare 
a statement identifying in the detail prescribed in paragraph (c)(2) 
the activities it proposes to carry out, and must publish the statement 
community-wide to afford affected citizens an opportunity to examine 
the statement and to provide comments on it. Publishing the proposed 
statement in a newspaper of general circulation will be considered to 
constitute community-wide publication. Simply publishing a notice that 
the statement is available in public libraries is not adequate for this 
purpose, unless such publication is accompanied by a broad distribution 
of the statement among neighborhood or similar citizen groups 
representing virtually all areas of the community whose residents are 
predominantly low and moderate income or that are blighted. After 
comment on the proposed statement has been received, the grantee must 
consider the comments and make such modifications to the proposed 
statement as the grantee considers appropriate. Upon completion, the 
grantee must make the final statement available to the public.
    (ii) Amendment. Before amending a final statement, the grantee must 
provide for citizen participation concerning proposed amendments. The 
grantee must provide citizens a reasonable amount of time to consider a 
proposed amendment and shall consider any citizens' comments and may 
make such modifications to the proposed amendment as the grantee 
considers appropriate. Upon completion, the grantee must make the 
amendment available to the public and must submit to HUD a description 
of changes adopted. The grantee may submit a copy of each statement 
amendment to HUD as it occurs, or the grantee may simply notify HUD in 
writing that the amendment has been made and, at the end of the program 
year, submit copies of all amendments made during the year. Letters 
notifying HUD of amendments and those transmitting copies of amendments 
must be signed by the official representative of the grantee authorized 
to take such action.
    (4) Float-funded activities and guarantees. A recipient may use 
undisbursed funds in the line of credit and its CDBG program account 
that are budgeted in statements for one or more other activities that 
do not need the funds immediately, subject to the limitations described 
in paragraph (c)(4). Such funds shall be referred to as the ``float'' 
for purposes of this section. Each activity carried out using the float 
must meet all of the same requirements that apply to CDBG-assisted 
activities generally, and must be expected to produce program income in 
an amount at least equal to the amount of the float so used. Whenever 
the recipient proposes to fund an activity with the float, it must 
include the activity in its statement or amend the final statement for 
the current program year. For purposes of this section, an activity 
that uses such funds will be called a ``float-funded activity.'' Each 
float-funded activity must be individually listed and described as such 
in the statement.
    (i) The expected duration between obligation of assistance for a 
float-funded activity and receipt of program income in an amount at 
least equal to the full amount drawn from the float to fund the 
activity may not exceed 2.5 years. A loan for a longer term may not be 
funded from the float, but may be included in a statement if it is 
funded from CDBG funds other than the float (e.g., grant funds, or 
proceeds from an approved Section 108 Loan guarantee).
    (ii) Unlike other projected program income, the full amount of 
income expected to be generated by a float-funded activity must be 
shown in the sources section of the statement containing the activity 
whether or not some or all of the income is expected to be received in 
a future program year. To justify the inclusion of activities that 
exceed the sources of funds shown in the statement as expected to be 
received in the program year covered by the statement, and to assure 
that citizens can clearly understand the risks inherent in undertaking 
such a float-funded activity, the recipient must specify in the sources 
section of the statement the total amount of program income expected to 
be received and the month(s) and year(s) that it expects the float-
funded activity to generate each portion of such program income.
    (iii) To help citizens assess the degree of risk to activities they 
support in case the float-funded activity fails to generate program 
income as scheduled, the recipient must also clearly declare its 
commitment to undertake one of the following options in the statement 
that identifies the float-funded activity. The recipient may commit 
either to:
    (A) Amend or delete activities in an amount equal to any default or 
failure to produce sufficient income in a timely manner. If the grantee 
makes this choice, it must include a description of the process it will 
use to select the activities to be amended or deleted, how it will 
involve citizens in that process, and it must amend the applicable 
statement(s) showing those amendments or deletions promptly upon 
determining that the float-funded activity will not generate sufficient 
or timely program income; or
    (B) Obtain an irrevocable line of credit from a commercial lender 
for the full amount of the float-funded activity and describe the 
lender and terms of such line of credit in the statement that 
identifies the float-funded activity. To qualify for this purpose, such 
line of credit must be unconditionally available to the recipient in 
the amount of any shortfall within 30 days of the date that the float-
funded activity fails to generate the projected amount of program 
income on schedule; or
    (C) Transfer general local government funds in the full amount of 
any default or shortfall to the CDBG line of credit within 30 days of 
the float-funded activity's failure to generate the projected amount of 
the program income on schedule.
    (iv) When preparing a statement for a year in which program income 
is expected to be received from a float-funded activity and such 
program income has been shown in a prior statement, the sources section 
of the current statement shall identify the expected income and explain 
that the planned use of the income has already been described in prior 
statements, and shall identify the statements in which such description 
may be found.
* * * * *
    7. Section 570.304 would be amended by adding a new paragraph 
(a)(4) to read as follows:


Sec. 570.304   Making of grants.

    (a) * * *
    (4) GPR submissions. All previously due GPRs that have not been 
submitted to HUD in the prescribed manner are properly submitted.
* * * * *
    8. A new Sec. 570.309 would be added to read as follows:


Sec. 570.309   Restriction on location of activities.

    CDBG funds may assist an activity outside the jurisdiction of the 
grantee only if the grantee determines that the principal benefit of 
such an activity will be for residents within the jurisdiction of the 
grantee. The grantee shall document the basis for any such 
determination.
    9. Section 570.500 would be amended by removing and reserving 
paragraphs (a)(1)(viii) and (b), and by revising paragraphs (a)(2) and 
(a)(3), to read as follows:


Sec. 570.500   Definitions.

* * * * *
    (a) * * *
    (2) Program income does not include income earned (except for 
interest described in Sec. 570.513) on grant advances from the U.S. 
Treasury. The following items of income earned on grant advances must 
be remitted to HUD for transmittal to the U.S. Treasury and will not be 
reallocated under section 106(c) or (d) of the Act:
    (i) Interest earned from the investment of the initial proceeds of 
a grant advance by the U.S. Treasury;
    (ii) Income (e.g., interest) earned on loans or other forms of 
assistance provided with CDBG funds that are used for activities 
determined by HUD either to be ineligible or to fail to meet a national 
objective in accordance with the requirements of subpart C of this 
part, or that fail substantially to meet any other requirement of this 
part; and
    (iii) Interest earned on the investment of amounts reimbursed to 
the CDBG program account pursuant to Sec. 570.910(b)(5) prior to the 
use of the reimbursed funds for eligible purposes.
    (3) Examples of other receipts that are not considered program 
income are proceeds from fund raising activities carried out by 
subrecipients receiving CDBG assistance; funds collected through 
special assessments used to recover the non-CDBG portion of a public 
improvement; and proceeds from the disposition of real property 
acquired or improved with CDBG funds when the disposition occurs after 
the applicable time period specified in Sec. 570.503(b)(8) of this part 
for subrecipient-controlled property, or in Sec. 570.505 of this part 
for recipient-controlled property.
* * * * *
    10. In Sec. 570.502, paragraph (a)(5) would be revised to read as 
follows:


Sec. 570.502   Applicability of uniform administrative requirements.

    (a) * * *
    (5) Section 85.21 of this title, ``Payment,'' except for 
Sec. 85.21(f)(1) of this title and as modified by Sec. 570.513;
* * * * *
    11. In Sec. 570.503, paragraph (b)(3) would be revised to read as 
follows:


Sec. 570.503   Agreements with subrecipients.

* * * * *
    (b) * * *
    (3) Program income. The agreement shall include the program income 
requirements set forth in Sec. 570.504(c). The agreement shall also 
specify the subrecipient's estimated annual expenditure of CDBG funds 
and that any program income held by the subrecipient that is in excess 
of one-twelfth of that estimate be remitted to the recipient.
* * * * *
    12. In Sec. 570.504, paragraph (b)(2) would be revised to read as 
follows:


Sec. 570.504   Program income.

* * * * *
    (b) * * *
    (2) If the recipient chooses to retain program income, that program 
income shall be disposed of as follows:
    (i) Program income in excess of one-twelfth of the most recent 
grant made pursuant to Sec. 570.304 shall be remitted to HUD to be 
restored to the recipient's line of credit;
    (ii) Substantially all other program income shall be disbursed for 
eligible activities before additional cash withdrawals are made from 
the U.S. Treasury.
* * * * *
    13. In Sec. 570.900, paragraph (b)(3) would be revised to read as 
follows:


Sec. 570.900   General.

* * * * *
    (b) * * *
    (3) In conducting performance reviews, HUD will rely primarily on 
information obtained from the recipient's performance report, records 
maintained, findings from on-site monitoring, audit reports, and the 
status of the line of credit. Where applicable, the Department may also 
consider relevant information pertaining to a recipient's performance 
gained from other sources, including litigation, citizen comments and 
other information provided by the recipient. A recipient's failure to 
maintain records in the prescribed manner may result in a finding that 
the recipient has failed to meet the applicable requirement to which 
the record pertains. A recipient's failure to submit a performance 
report in the prescribed manner may result in a finding that the 
recipient has substantially failed to meet the requirements of the 
program.
* * * * *
    14. Section 570.903 would be revised to read as follows:


Sec. 570.903   Review to determine if the recipient is meeting its CHAS 
responsibilities.

    (a) Review timing and purpose. HUD will review an entitlement grant 
recipient's CHAS performance prior to acceptance of a grant recipient's 
annual certification under Sec. 570.303(l) to determine whether the 
recipient followed its HUD-approved CHAS for the most recently 
completed fiscal year, and that any housing activities assisted with 
CDBG funds during that period were consistent with that CHAS.
    (b) Following a CHAS. The recipient has taken all of the planned 
actions, and has met the goals described in its annual plan. This 
includes, but is not limited to:
    (1) Pursuing all resources identified in its investment plan which 
the grantee indicated it would pursue;
    (2) Providing certifications of consistency, when requested to do 
so by applicants for HUD programs for which the grantee indicated in 
its investment plan that it would support application by other 
entities, in a fair and impartial manner; and
    (3) Not hindering implementation of the CHAS by action or wilful 
inaction.
    (c) Disapproval. If HUD determines that an entitlement grant 
recipient has not met the criteria outlined in paragraph (b) of this 
section, the recipient will be notified and provided up to 45 days to 
demonstrate to the satisfaction of the Secretary that it has followed 
its CHAS, considering all relevant circumstances and the recipient's 
actions and lack of actions affecting the provision of housing covered 
by the CHAS within its jurisdiction. Failure to so demonstrate in a 
timely manner will be cause for HUD to find that the recipient has 
failed to meet its certification. A complete and specific response by 
the recipient should describe:
    (1) Any factors beyond the control of the recipient that prevented 
it from following its CHAS and any actions the recipient plans to take 
to alleviate such factors; and
    (2) Actions taken by the recipient, if any, beyond those described 
in the CHAS performance report to facilitate following the CHAS, 
including the effects of such actions.
    15. Section 570.910 would be amended by adding a new paragraph 
(b)(9) to read as follows:


Sec. 570.910   Corrective and remedial actions.

* * * * *
    (b) * * *
    (9) In the case of an entitlement recipient which has failed to 
submit a previously due performance report in the prescribed manner, 
delay making the grant until any outstanding performance report has 
been properly submitted to HUD.

    Dated: July 29, 1994.
Andrew Cuomo,
Assistant Secretary for Community Planning and Development.
[FR Doc. 94-19228 Filed 8-9-94; 8:45 am]
BILLING CODE 4210-29-P