[Federal Register Volume 60, Number 38 (Monday, February 27, 1995)]
[Rules and Regulations]
[Pages 10758-10759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4745]




[[Page 10757]]

_______________________________________________________________________

Part VIII





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Community Planning and 
Development



_______________________________________________________________________



24 CFR Part 570



Section 111(a) of Housing and Community Development Act of 1974; 
Interpretive Rule

  Federal Register / Vol. 60, No. 38 / Monday, February 27, 1995 / 
Rules and Regulations   
[[Page 10758]] 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Community Planning and 
Development

24 CFR Part 570

[Docket No. R-95-1773; FR-3787-I-01]
RIN 2506-AB70


Section 111(a) of Housing and Community Development Act of 1974; 
Interpretive Rule

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

ACTION: Interpretive rule.

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

SUMMARY: This interpretive rule sets forth HUD's interpretation of 
section 111(a) of the Housing and Community Development Act of 1974 
(the HCDA of 1974), as to whether this section's procedural protections 
apply when HUD terminates a city's Urban Development Action Grant 
(UDAG) agreement prior to final approval and funds disbursement. The 
United States Court of Appeals for the District of Columbia Circuit 
instructed HUD to provide a reasonable construction of this statute. 
HUD determines that section 111(a) does not mandate procedural 
protections when a UDAG grant is terminated prior to final approval and 
funds disbursement.

EFFECTIVE DATE: February 27, 1995.

FOR FURTHER INFORMATION CONTACT: Roy O. Priest, Director of the Office 
of Economic Development, Department of Housing and Urban Development, 
Room 7136, 451 Seventh Street, SW., Washington, DC 20410. Telephone 
number (202) 708-2290. The TDD number is (202) 708-2565. (These are not 
toll-free telephone numbers).

SUPPLEMENTARY INFORMATION:

Background

    The Urban Development Action Grant (UDAG) program, which was 
enacted in 1977 under a Congressional amendment to the Housing and 
Community Development Act of 1974 (HCDA of 1974), was designed to 
encourage new or increased private investment in cities and urban 
counties experiencing severe economic distress. The availability of 
UDAG funds permitted local officials to capitalize on opportunities to 
stimulate economic development activity to aid in economic recovery. 
UDAG funds, awarded on a competitive basis, were available to carry out 
projects in support of a wide variety of economic development 
activities that involved the private sector. UDAG grants could be used 
in the form of equity funding, loans, interest subsidy, or other forms 
of necessary financing. Although Congress has not appropriated any new 
funds for the UDAG program since Fiscal Year 1988, many grants 
preliminarily approved by HUD pursuant to--or even prior to--the last 
funding competition still have not reached the final close-out stage. 
The termination of the grant agreements of recipients who fail to 
submit acceptable evidentiary materials or amendments to their grant 
agreements will be subject to the determination set forth herein 
regarding the opportunity for a formal hearing under section 111(a) of 
the HCDA of 1974.
    Section 111 of the HCDA of 1974 is entitled ``Remedies for 
Noncompliance,'' and applies both to the Community Development Block 
Grant program created in 1974 and the subsequently created UDAG 
program. Section 111(a) provides as follows:

    If the Secretary finds after reasonable notice and opportunity 
for hearing that a recipient of assistance under this title has 
failed to comply substantially with any provision of this title, the 
Secretary, until he is satisfied that there is no longer any such 
failure to comply, shall--
    (1) terminate payments to the recipient under this title, or
    (2) reduce payments to the recipient under this title by an 
amount equal to the amount of such payments which were not expended 
in accordance with this title, or
    (3) limit the availability of payments under this title to 
programs, projects, or activities not affected by such failure to 
comply.

(This provision is codified at 42 U.S.C. 5311(a), and applicable 
regulations are contained in 24 CFR 570.913, which also describe the 
notice and hearing proceedings.)
    The United States Court of Appeals for the District of Columbia 
Circuit found that section 111(a) of the HCDA of 1974 is unclear and 
ambiguous as to whether HUD, before such time as any grant funds have 
been disbursed, must provide an opportunity for a formal hearing to a 
city or urban county that has a grant agreement with HUD under the UDAG 
program, when HUD has decided to terminate the grant agreement due to 
failure to comply substantially with the HCDA of 1974, applicable 
regulations, or the grant agreement itself. City of Kansas City, 
Missouri v. HUD, 923 F.2d 188, 191 (D.C. Cir. 1991). The court also 
found that the HCDA of 1974 contains an implicit delegation of 
authority to HUD to interpret the applicability of section 111 under 
these circumstances. Id. at 191-92.

The Interpretive Rule

    Under its implied interpretive authority as delegated by the HCDA 
of 1974, HUD interprets section 111(a) of the HCDA of 1974 as not 
requiring HUD to provide an opportunity for a hearing to a recipient 
under the UDAG program pertaining to the recipient's failure to comply 
substantially with any provisions of the HCDA of 1974, the regulations, 
or the grant agreement, which results in the termination of a grant 
agreement by HUD before final grant approval and payment of the grant 
funds to a recipient under its line of credit.
    HUD has consistently maintained this interpretation of this section 
since the inception of the UDAG program in 1977. Accordingly, HUD has 
not voluntarily offered an opportunity for a formal section 111(a) 
hearing under the HCDA of 1974 to any recipient before acting to 
terminate a grant agreement. By judicial direction, HUD has now 
reconsidered the reasonableness of its construction of the HCDA of 
1974, and has concluded that its long-standing interpretation remains 
correct and reasonable.
    It is HUD's position that the reference in the HCDA of 1974 to 
HUD's ``terminat[ion of] payments'' to the recipient due to the 
recipient's failure to comply substantially with the provisions of 
Title I of the HCDA of 1974 means that the opportunity for a hearing 
before HUD acts to terminate a UDAG grant agreement shall be given to a 
recipient only after such time as funding has been finally approved and 
released (i.e., after payments have been made) to a recipient under its 
line of credit. In other words, the actual language of the statute has 
been interpreted by HUD not to require a formal hearing in order to 
effectuate HUD's termination of a grant agreement prior to such time as 
the recipient obtains from HUD an increase in the amount of money 
available under its line of credit. The primary basis for this position 
is the simple logic that HUD cannot possibly ``terminate payments'' 
that HUD has not yet made. Since entitlement to the use of grant funds 
is dependent upon satisfactory performance by the recipient in 
providing HUD with legally binding commitments that comply with the 
requirements of the grant agreement, there is no need to impose the 
procedural burden of a formal hearing upon HUD in order to terminate a 
grant agreement when the recipient, due to its failure to submit 
acceptable and timely legally binding commitments, has not become 
entitled to the funds by having its line of credit increased. 
[[Page 10759]] 
    The use of the word ``recipient'' in the HCDA of 1974 and the UDAG 
regulations, beginning at 24 CFR 570.460(c), does not endow a grant 
applicant who receives preliminary grant approval with an unconditional 
entitlement to payment of the grant funds. Rather, the term 
``recipient'' is intended merely to describe cities and urban counties 
that have entered into a grant agreement with HUD under the UDAG 
program. The term does not signify any absolute right to, let alone 
actual receipt of, the grant funds; it merely evidences conditional 
authority for the funds. Indeed, the regulations specifically provide 
at Sec. 570.460(c)(5) that:

    Preliminary approval does not become final until legally binding 
commitments between the recipient and the private and public 
participating parties have been submitted and approved by HUD. 
Release of grant funds is contingent upon the recipient's meeting 
each and every condition set forth in the grant agreement.

Approved legally binding commitments, as required by the regulations 
and the grant agreement, are the touchstone that the project is fully 
financed and has met all conditions necessary for it to move forward to 
completion with the assistance of the grant funds. In other words, the 
recipient has no authority or right to receive any grant money until 
and unless it submits on a timely basis acceptable legally binding 
commitments that HUD approves.
    Also supporting HUD's position is the fact that recipients 
knowingly invest in a UDAG project at their peril with regard to 
receiving federal grant funds until legally binding commitments are 
approved and their line of credit is funded. Each recipient is afforded 
every opportunity to know that its investment in the project in 
connection with an activity to be paid for, in whole or in part, with 
grant funds may not be recoverable if the recipient incurs costs before 
HUD's approval of the legally binding commitments and the funding of 
the recipient's line of credit. The regulations at 24 CFR 570.462(b) 
specifically state that:

    The recipient and participating parties may voluntarily, at 
their own risk, and upon their own credit and expense, incur costs 
as authorized in paragraph (a) of this section, but their authority 
to reimburse or to be reimbursed out of grant funds shall be 
governed by the provisions of the grant agreement applicable to the 
payment of costs and the release of funds by the Secretary.

The regulations, as well as the grant agreement, thus make it clear 
that any authorized costs incurred by a recipient or by a participating 
party to the project that is the subject of the grant shall be incurred 
at the risk of the recipient or other party, without any assurance of 
reimbursement out of grant funds. Accordingly, every reasonable effort 
should be made by a recipient to submit acceptable evidentiary 
materials in order that the grant funds contingently set aside at the 
time of preliminary approval of the grant may expeditiously be provided 
to the project and not remain dormant and unavailable for use by HUD. 
HUD's experience clearly indicates that the primary cause of 
recipients' failure to comply with the provisions of the HCDA of 1974, 
the regulations, and the grant agreement has been their failure to 
submit satisfactory legally binding commitments to HUD within the time 
agreed under their grant agreements.
    The fact that termination of grants is more likely to occur before 
disbursement of the funds, rather than after, does not serve to alter 
HUD's determination in this interpretive rule. A potential practical 
effect cannot undo HUD's reasonable interpretation of Congress' chosen 
statutory language, made in light of the overall program operation 
discussed above. Moreover, even as to practical considerations, there 
have been, to date, more than 263 terminations of grants for cause 
before the legally binding commitments have been approved and the 
recipient's line of credit funded. Requiring a formal hearing prior to 
termination would thus be extremely burdensome upon HUD's limited 
resources.
    While HUD determines that recipients lack a formal hearing right 
under section 111(a) prior to final approval of the grant, it is 
significant that HUD nevertheless provides extensive notice and 
opportunities to resolve the problems. HUD consistently makes every 
effort to resolve problems that a recipient is experiencing in its 
attempt to comply with requirements of the HCDA of 1974, the 
regulations, or the grant agreement before giving final notice of 
termination to the recipient. Efforts include an invitation to the 
recipient's representatives to meet with HUD officials to discuss the 
issues and attempt to correct the problems that may be causing 
noncompliance. It has been HUD's practice to afford a recipient every 
reasonable opportunity to comply substantially with the requirements of 
the HCDA of 1974, the regulations, and the grant agreement. Only after 
HUD has exhausted all available means to resolve the issues has it been 
compelled to advise the recipient that its failure to correct the 
default may result in termination of a grant agreement by HUD. Often a 
recipient has responded favorably to HUD's efforts to assist in 
clearing the noncompliance and the project has been timely funded.
    If HUD's attempts to work with the recipient to resolve the issues 
ultimately do not succeed, HUD will provide the recipient a written 
notice of its intention to terminate the grant agreement at least 35 
days before taking action to terminate the grant agreement. Often this 
period of time is extended by HUD to provide additional opportunities 
to the recipient to remedy the noncompliance. Thus, recipients are not, 
in fact, deprived of procedural protection at the stage when, according 
to the U.S. Court of Appeals for the District of Columbia Circuit, it 
is arguably most needed. City of Kansas City, Missouri v. HUD, 923 F.2d 
188, 193 (D.C. Cir. 1991). To the contrary, HUD provides extensive 
notice and opportunities to resolve the dispute, albeit not through a 
formal hearing.
    Accordingly, this interpretive rule sets forth HUD's determination 
that, before such time as the UDAG grant has received final approval by 
HUD and the grant funds have been paid to the recipient under its line 
of credit, the HCDA of 1974 does not require that a UDAG recipient be 
entitled to an opportunity for a hearing concerning the recipient's 
failure to comply substantially with any provision of the HCDA of 1974, 
the regulations, or the grant agreement that HUD has decided to 
terminate. In addition, it has been determined that an opportunity for 
a hearing will be available to a recipient with regard to the 
termination of a grant that has been partially funded, but only with 
regard to the grant funds covered by legally binding commitments that 
HUD approved before the termination of a grant (or part of a grant) due 
to the failure of a recipient to comply substantially with any 
provision of the HCDA of 1974, the regulations, or the grant agreement.
    This interpretive rule shall not apply to recipients who have 
received grants in states under the jurisdiction of the U.S. Court of 
Appeals for the First Circuit. In City of Boston v. HUD, 898 F.2d 828 
(1st Cir. 1990), the court held that the recipient City of Boston was 
entitled to notice and opportunity for a hearing prior to termination 
of its UDAG grant, even though the City of Boston had not received 
final approval by HUD for its grant, let alone received any 
disbursement of funds.

    Authority: 42 U.S.C. 3535(d).

    Dated: February 17, 1995.
Andrew Cuomo,
Assistant Secretary for Community Planning and Development.
[FR Doc. 95-4745 Filed 2-24-95; 8:45 am]
BILLING CODE 4210-29-P