[Federal Register Volume 60, Number 217 (Thursday, November 9, 1995)]
[Rules and Regulations]
[Pages 56892-56918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27488]




[[Page 56891]]

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Part IV





Department of Housing and Urban Development





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24 CFR Parts 91 and 570



Community Development Block Grant Programs; Correction of Identified 
Deficiencies and Updates; Final Rule

  Federal Register / Vol. 60, No. 217 / Thursday, November 9, 1995 / 
Rules and Regulations   

[[Page 56892]]


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Community Planning and 
Development

24 CFR Parts 91 and 570

[Docket No. FR-2905-F-02]
RIN 2506-AB24


Community Development Block Grant Program; Correction of 
Identified Deficiencies and Updates; Final Rule

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

ACTION: Final rule.

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SUMMARY: This final rule corrects identified deficiencies in the 
Community Development Block Grant (CDBG) program, implements relevant 
portions of the Cranston-Gonzalez National Affordable Housing Act, 
amends the CDBG conflict of interest provisions, implements statutory 
changes from the Housing and Community Development Act of 1987 and the 
Appropriations Act of 1989, and provides criteria for performance 
reviews and timely expenditure of funds under the CDBG program.
    This rule also furthers goals of reinventing government by 
incorporating public input in rulemaking, providing performance 
standards, and clarifying regulatory language. Very few of this rule's 
provisions impose any additional burden on grantees, and these are 
designed to increase program accountability, primarily in areas 
identified by the Inspector General as material weaknesses or other 
serious recurrent audit issues.

EFFECTIVE DATE: December 11, 1995.

FOR FURTHER INFORMATION CONTACT: Deirdre Maguire-Zinni, 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 Ms. Maguire-Zinni at (202) 708-
2575. (These telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

    The information collection requirements for the Community 
Development Block Grant (CDBG) program have been approved by the Office 
of Management and Budget under the Paperwork Reduction Act of 1980, and 
have been assigned OMB Control Number 2506-0077. This rule does not 
contain additional information collection requirements.

II. Background

    The CDBG program is a key component of HUD's legislative 
reinvention proposal, the American Community Partnerships Act. By its 
nature, the CDBG program places responsibility for meeting program 
requirements squarely on the recipients entitled to receive and 
administer the grants. Because the CDBG regulations are the primary 
program guidance issued by HUD, program practitioners refer to them 
often (unlike other Federal regulations, the primary readers of which 
are often attorneys). Therefore, this rule, which updates the CDBG 
regulations to reflect significant statutory enhancements since 1987, 
furthers the reinvention of government, and of HUD in particular, by 
providing local CDBG decisionmakers the advantage of regulatory and 
statutory flexibility to design and use their CDBG program resources. 
This rule also contains several provisions that enhance grantee 
accountability to national program and financial performance standards. 
For example: the definition of ``income'' helps ensure that low- and 
moderate-income persons are served; the consolidated plan performance 
criteria will guide assessment of the extent to which grantees are 
carrying out their consolidated plans; and revolving loan fund and 
other related changes ensure that funds are not unduly sheltered from 
United States Treasury requirements.
    Several of the provisions of this final rule were published for 
comment as a proposed rule on August 10, 1994 (59 FR 41196). As further 
discussed below, these provisions were designed to correct program 
deficiencies identified by HUD's Office of Inspector General (OIG), HUD 
staff, and HUD clients. The August 10, 1994 proposed rule included: a 
flexible definition of ``income'' for families and households; a change 
in calculating the planning and administration limitation; new 
revolving fund requirements to remove the special protection from 
drawdown requirements afforded program income in revolving funds; a 
clarification limiting the scope of the definition of ``ineligible 
income payments'' in 24 CFR 570.207(b)(4); a description of ``float-
funded'' activities in the action plan; a specification of three 
situations in which income earned on grant funds must be remitted to 
the U.S. Treasury; a requirement of a determination of benefit when 
CDBG funds are used outside the jurisdiction of the recipient; and 
performance standards to replace the Housing Assistance Plan (HAP) 
standards at Sec. 570.903, for determining whether a grantee has 
carried out its consolidated plan housing strategy (formerly 
Comprehensive Housing Affordability Strategy (CHAS)).
    The preamble to the August 10, 1994 proposed rule stated that any 
differences between the rule and the Consolidated Plan final rule, 
published on January 5, 1995 (60 FR 1878), would be resolved at the 
final rule stage. In making the resolution, HUD included some of the 
provisions of the August 10, 1994 proposed rule in the Consolidated 
Plan final rule. These pieces include incorporation of some of the 
final statement requirements into the consolidated plan and language at 
Sec. 91.220 describing CDBG program-specific requirements for the 
action plan, including some language on float-funded activities. HUD 
also incorporated the provision in the August 10, 1994 proposed rule 
regarding delay of the grant when performance reports are delinquent 
into the Consolidated Plan final rule at Sec. 91.520(f). In addition, 
HUD has adjusted terms and approaches in both rules to conform to the 
consolidated plan process.
    Two provisions of this final rule were published for comment as a 
proposed rule on November 12, 1993 (58 FR 60088) regarding performance 
reviews, timely expenditure of CDBG funds, sanctions, and due process 
hearings. As further discussed below, this final rule only includes the 
provisions from the November 12, 1993 rule on performance standards and 
timely expenditure of CDBG funds.
    Four of the provisions of this final rule were published for 
comment as an interim rule on June 17, 1992 (57 FR 27116). The June 17, 
1992 interim rule implemented relevant portions of the Cranston-
Gonzalez National Affordable Housing Act (Pub. L. 101-625, approved 
November 28, 1990) (the NAHA). The June 17, 1992 interim rule included: 
enhancing the calculation of the public services limitation by 
permitting CDBG entitlement recipients to include certain program 
income in the base amount of CDBG funds from which the funds available 
for public services are calculated; limiting the reach of the conflict 
of interest provisions; and responding to grantee requests by 
broadening the forms in which funds may be provided to subrecipients 
for their use. 

[[Page 56893]]

    Several other provisions of this final rule were published for 
comment as a proposed rule on March 28, 1990 (55 FR 11556). The March 
28, 1990 proposed rule implemented: section 511 of the Housing and 
Community Development Act of 1987 (Pub. L. 100-242, approved February 
5, 1988) (the 1987 Act) regarding the availability of CDBG funds for 
Uniform Emergency Telephone Number Systems; and relevant portions of 
the Department of Housing and Urban Development--Independent Agencies 
Appropriations Act of 1989 (Pub. L. 100-404, approved August 19, 1988) 
(the Appropriations Act).
    As further discussed below, this final rule also implements 
statutory provisions that require little or no regulatory elaboration. 
This rule implements three provisions of the Multifamily Housing 
Property Disposition Reform Act of 1994 (Pub. L. 103-233, approved 
April 11, 1994): (1) section 207, regarding the use of CDBG funds to 
pay for administration of the HOME program and (2) authorization of a 
housing services eligibility category; and (3) section 234, permitting 
statutory waivers for activities designed to address a Federally 
declared disaster.
    In addition, this rule implements the following provisions of the 
NAHA that require little or no regulatory elaboration: (1) section 
902(a), regarding the overall benefit of 70 percent; (2) section 903, 
regarding city and county classification; and (3) section 912, 
regarding discrimination on the basis of religion. HUD included certain 
other self-implementing changes from the NAHA in the Consolidated Plan 
final rule, published in the Federal Register on January 5, 1995 (60 FR 
1878).
    This rule also implements changes from the Housing and Community 
Development Act of 1992 (Pub. L. 102-550, approved October 28, 1992) 
that require little or no regulatory elaboration: (1) section 807(a), 
regarding separate eligibility categories for provision of technical 
assistance to public or private entities and assistance to institutions 
of higher education for carrying out eligible activities; (2) section 
807(b), regarding the extension of the authority to use CDBG funds for 
direct homeownership assistance for a specified additional period; (3) 
section 807(c)(1), regarding recipient and subrecipient capacity 
building to carry out microenterprise activities; (4) section 807(e), 
regarding amendments to the current restrictions on areas in which CDBG 
funds may be used for code enforcement to take into account privately 
funded development in addition to publicly funded development; and (5) 
section 809, permitting as eligible administrative expenses the costs 
of establishing and administering Federally approved Empowerment Zones 
and Enterprise Communities.
    Finally, as further described below, the rule contains 
miscellaneous technical updates and corrections to the CDBG 
Entitlement, State, Small Cities, and Insular Areas provisions.

III. Provisions From the August 10, 1994 Proposed Rule

    HUD received 45 comments on the August 10, 1994 proposed rule. The 
following discussion summarizes those comments.

A. Definition of ``Income''

    The CDBG program is unique among HUD's major programs in needing a 
definition of income that will be familiar and useful to private 
businesses and others outside the industry of housing service 
providers, and that will be useful when measuring benefit for an 
activity that will serve an area generally. This rule furthers the 
reinvention of HUD by providing a great deal of administrative 
flexibility while improving accountability in an area of identified 
weakness. This flexibility is provided in the design of the definition 
as well as in the documentation requirements (which are unaffected by 
this rule). Grantees may choose to assess participant income in one of 
three ways based on the cash or asset elements included in either the 
Section 8, Internal Revenue Service, or Census definitions of income. 
The existing documentation requirements permit participants to self-
certify their family incomes or to substitute documentation of their 
qualification in a Federal or State program that has income 
qualifications at least as rigorous as the selected definition. 
Standardizing the definitions ensures that citizens are treated fairly, 
and retaining the current documentation requirements continues to 
provide significant administrative flexibility to grantees. Further, 
grantees still retain the responsibility for determining how much 
assistance to provide.
    HUD received eighteen comments on the proposed definition of 
income, including comments from five urban counties, four metropolitan 
cities, three national public interest groups, two low-income citizens 
advocacy groups, two single city nonprofit housing rehabilitation 
groups, one State, and one regional community development group. Twelve 
of the commenters were generally in favor of the new, flexible 
definition. Almost without exception, the commenters requested that if 
HUD implemented the proposed definition, HUD should permit a fourth 
option. The commenters suggested that this fourth option be either: (1) 
to qualify automatically an individual already qualified under a means-
tested program, or (2) to allow each grantee to develop its own 
definition, to be approved by HUD. Some confusion about the difference 
between the documentation and definition provisions was apparent in the 
comments on these points.
    The two low-income advocates generally endorsed the definition of 
income as proposed, although one requested additional clarification of 
two points. The first point involves clarification of the language 
proposed in paragraph (2) of the definition. By ``integrally related 
activities of the same type,'' HUD intended to denote, for example, a 
program of single family rehabilitation lending activities (which are 
generally grouped for reporting purposes), a ``bundle'' of public 
services provided through a single program to the same clientele (such 
as services provided during transitional housing to the homeless), or a 
portfolio of commercial loans made by a particular subrecipient. If the 
grantee administers a community-wide single family rehabilitation loan 
program, it should use the same definition of household income or 
family income (as applicable) in evaluating each loan in that program.
    HUD does not intend the phrase ``integrally related activities of 
the same type'' to denote activities that are part of the same 
``project,'' because many community development projects are for mixed 
uses and mixed purposes. For example, a three-story building may have 
public parking in the basement, commercial space and a community center 
on the ground floor, and affordable housing in the upper stories. This 
is all one construction project, but with distinct activities serving 
different populations and meeting distinct national objectives within 
the CDBG program. Further, while the term ``project'' is used 
throughout the HOME program, it is only used for limited purposes in 
the CDBG program (for example, under Secs. 570.203 and 570.204 and for 
environmental and Davis-Bacon purposes).
    Ideally, HUD would like each grantee to select one definition for 
all its CDBG activities, or at least for purposes of meeting each 
income-based national objective category. However, as described in the 
preamble to the August 10, 1994 proposed rule, HUD recognizes that this 
would be administratively difficult and not useful for many grantees. 

[[Page 56894]]

    Some commenters appeared to confuse definition and documentation 
issues. Both advocacy groups suggested that the rule require, in 
Sec. 570.3, that none of the three definitions be used if the 
assistance was to be provided to a person who provides documentation of 
income-eligibility for another program ``recognized as more rigorous 
than CDBG.'' This suggestion mixes the definition of income at 
Sec. 570.3 and the documentation of income at Sec. 570.506(b). The 
definition of income merely describes the assets (if any), salaries, 
and other income flows that must be considered in determining income. 
The documentation requirements describe how to verify income at the 
time assistance is provided. Therefore, if a person provides 
documentation from another means-tested program to show that the 
necessary elements (and possibly more than those elements) were 
considered, and affirms that his/her financial status remains the same 
at the time the CDBG assistance is provided, then HUD would find this 
acceptable.
    The groups also requested that Aid to Families with Dependent 
Children (AFDC) and Supplemental Security Income (SSI) be added to the 
definitions of ``programs at least as restrictive'' at Sec. 570.506. 
HUD has decided to add neither, however, because the programs listed at 
that point are illustrative. Documentation from any means-tested 
program may be used if the grantee determines that the program's 
elements and thresholds are at least as restrictive as the CDBG 
definition being used for the activity.
    Five grantees, one public interest group, and two nonprofits 
requested that a fourth option be added to permit grantees to develop 
their own definitions, or to continue using the definitions they had 
been using. Because HUD intends to limit the variation in definitions 
of income, HUD did not adopt these suggestions. However, as noted 
above, if a person is participating in a means-tested State or Federal 
program at least as restrictive as CDBG with regard to income elements 
and thresholds, documentation of qualification for that program may be 
used to determine CDBG income eligibility.
    One grantee and two of its nonprofit subrecipients apparently 
misconceived how the IRS and Census definitions are to be used. These 
commenters apparently thought HUD meant that the Census or tax form, as 
completed at the time required for Census or tax purposes, should be 
used to determine CDBG income eligibility--even when the CDBG 
assistance was provided months or years after an individual completed 
the form. In almost all cases, neither of these documents alone would 
accurately represent the level of income of the family or household at 
the time CDBG assistance is provided. Instead, the familiar terms used 
on these forms will help each person receiving assistance to understand 
which cash and asset values to consider before making the certification 
required by Sec. 570.506 as to their current family or household (not 
individual) income, as appropriate. Although the IRS 1040 form is often 
used to report individual income, not family or household income, that 
form provides a familiar way to show people which kinds of income are 
to be considered. One commenter asked whether the IRS short form could 
be used. Any form can be used, provided the grantee ensures that the 
information is current and that all sources of income covered by the 
selected definition are considered in making income eligibility 
determinations.
    Finally, several commenters to the August 10, 1994 proposed rule 
and to the Consolidated Plan proposed rule requested that the terms 
used for the various income groups be conformed among the regulations 
for the CDBG program, the consolidated plan, and other programs. After 
discussion, HUD decided to use the existing CDBG terms in the 
regulations for both the CDBG program and the consolidated plan. In the 
consolidated plan HUD added two additional terms--''middle-income,'' to 
denote families whose income is 80 to 95 percent of median income, and 
``very low-income'' to denote families whose income is below 30 percent 
of median income. HUD did not need to make changes in this rule to 
accommodate this decision.

B. Calculation of the Planning and Administration Limitation

    HUD's original proposal was to rule out source-year based 
calculation of the spending limit and to require program-year based 
calculation based on expenditures. In response to the comments and in 
adherence with the principles of reinventing government, HUD changed 
the rule at this final stage to make the calculation more accommodating 
of costs (notably planning costs) which may unexpectedly cross program 
year boundaries. HUD retained the regulatory provision specifying the 
calculation method in the regulations instead of using less binding 
guidance materials, because abuse in this area would decrease funds 
available directly to improve the lives of low- and moderate-income 
persons and to rebuild their communities.
    HUD received thirteen comments on the proposed change to the 
language describing the calculation of the limitation on planning and 
administration expenditures. Two commenters, both low-income citizens 
advocacy groups, supported the change. One group commented that the 
change would ``inhibit grantees from playing shell games'' with 
administrative funds. Both commenters felt that this change would make 
it harder for grantees to hide from citizens the exact amount of funds 
used for administering the program each year. One major metropolitan 
city commented that the change would not affect it.
    Three metropolitan cities, three counties, one State, and three 
public interest groups submitted opposing comments. As one public 
interest group commented: ``Although the source year method of 
calculation is infrequently used by CDBG grantees, those who do use it 
find the proposed change extremely detrimental.'' Almost every one of 
these commenters cited the disruption that could be caused to the 
calculation by a large contract (such as a planning contract) 
unexpectedly extending into another program year. Several commenters 
disagreed with the reasons HUD proposed the language change, stating 
that if the performance report did not support source-year funding, it 
should be modified. One commenter pointed out that program income can 
simply be sourced to the year in which it is received. The State 
commenter agreed with HUD's decision to rule out the source-year method 
as inherently arbitrary. It argued, however, that it may be necessary 
when apportioning expenditures among agencies with ``varied non-CDBG 
funding sources,'' and the source-year method might also be the most 
efficient way to govern and track expenditures by other entities. An 
urban county and the interest groups made similar arguments.
    The opposing commenters suggested a variety of solutions. One 
suggestion was to drop the proposed change entirely. However, this 
suggestion does not address the issues that led HUD to propose the 
change in the first place or the issues raised by the advocacy 
organizations in their comments. Another suggestion was to permit 
grantees that use this method of accounting to submit to an audit to 
determine whether they are using the method correctly, and to submit 
the results of any audit in their favor to HUD for approval to use this 
method. Another suggestion was to base the cap calculation on the 
amount ``committed'' 

[[Page 56895]]
for administration during the program year, rather than the amount 
expended. A variation of this suggestion was that the grantee count 
expenditures when the activity was to be carried out by its own staff 
and count commitments when the activities were to be carried out by a 
subrecipient, a contractor, or, in the case of the State, another 
agency.
    In the past, HUD has based the planning and administrative 
limitation on expenditures because many, if not most, of the 
expenditures for these activities are for the grantee's own staff on 
payroll. Prediction and management of annual payroll expenses is a 
normal part of the budgeting process. Therefore, the expenditure basis 
of the cap is not a burden for most grantees, but rather is the 
simplest method of calculating and governing the cap. According to HUD 
data, some grantees also have an unused margin each year.
    In drafting the final rule, HUD rejected suggestions allowing 
grantees to calculate 20 percent of each annual grant, and to use this 
amount in the current year or to carry it over into future grant years 
until the entire amount was expended. This could have the effect of 
making expenditure of the maximum possible for program administration 
costs the norm. Any funds spent on program administration are not being 
spent on activities that more directly implement the purposes of the 
Housing and Community Development Act of 1974 (the Act). However, HUD 
agrees with commenters who argued that even with proper management, 
planning and administrative contracts can occasionally involve 
expenditures occurring in a year other than the one in which the costs 
were budgeted. HUD also agrees that an expenditures-only test ignores 
the difficulties in managing the precise period when a contractor or 
subrecipient will actually expend funds. Therefore, this rule changes 
the cap calculation by basing it on annual obligations (rather than 
expenditures) for purposes of calculating the 20 percent cap. At the 
end of the program year, grantees will reconcile these amounts using 
the same method now used for reconciling the public services 
limitation, which is currently calculated based on obligations. (While 
the base for the public services cap includes the amount of program 
income received during the previous program year, the base for the 
planning and administration cap uses the current year's program 
income.) Using this approach, a grantee that does not obligate any 
planning and administrative funds before expending them is still 
treated as though the requirement is based on expenditures rather than 
obligations, while a grantee that requires some additional flexibility 
will have it.

C. Revolving Funds and Returning Excess Program Income

    HUD proposed the revolving loan fund (RLF) and return of program 
income provisions in response to Inspector General findings. HUD is 
making these changes to ensure that recipients of Federal resources 
meet certain responsibilities (in this case demonstrating fiscal 
responsibility and not unnecessarily increasing the Federal deficit) in 
return for the Federal assistance, which is one of the principles of 
reinventing government. The proposed rule language would have 
eliminated the provision that sheltered money in RLFs from the 
requirement that no additional funds be drawn down from the line of 
credit when CDBG funds are already on hand.
    HUD received 31 comments from groups and individuals regarding the 
revolving loan fund proposed changes. Fourteen metropolitan cities, 
four urban counties, three national interest groups, three community-
based nonprofit organizations, two regional community development 
groups, two States, two local HUD program officers, and one low-income 
citizens advocacy group were included among the commenters. All 
commenters opposed the changes. Many of the comments linked the 
proposed revolving loan fund changes to the proposed rule to require 
grantee- or subrecipient-held program funds in excess of one-twelfth of 
the grant amount to be returned to the line of credit.
    HUD has considered all the comments and finds some of them 
persuasive. However, several commenters apparently misunderstood how 
the proposed changes would work and were concerned that HUD was 
striking at the activities typically funded by RLFs, instead of just 
adjusting the RLF mechanism. This in turn led to confusion of the 
issues associated with permitting revolving funds to shelter program 
income. However, HUD did not propose to eliminate revolving loan funds, 
and HUD agrees that the activities typically carried out through 
revolving funds (e.g., housing rehabilitation) serve vital program 
purposes.
    Any activity carried out under a revolving fund can be carried out 
through the normal CDBG delivery mechanism. The basic question, 
therefore, is whether the revolving fund structure, per se, serves a 
vital program purpose. Under the proposed rule, principal and interest 
payments for loans in a revolving fund would have been held in the 
grantee's general program account, while RLF accounts would have been 
kept separately. In effect, the proposed changes would have made the 
grantee the ``bank'' in which the RLF was held. HUD did not contemplate 
changes to the budgeting of RLF amounts in the final statement (now 
called the action plan), so comments claiming that the changes would 
increase the difficulty of securing funding during the local budgeting 
process seem misplaced. Even under existing rules, program income to 
RLFs must be projected for citizens who are then able to comment on 
whether to propose another use for the funds.
    Other comments include those described in the following paragraphs. 
All of the following comments were expressed to some degree by more 
than one commenter. Several commenters asserted that the proposed rule 
changes would cause enough additional delay and expense that 
administration of RLFs would become time prohibitive. For instance, 
commenters remarked that RLFs held in local financial institutions can 
provide access time as short as one day; such short access times are 
often critical to small and minority contractors carrying out CDBG 
activities. One commenter remarked that management of its own RLF by a 
neighborhood- or community-based nonprofit organization empowers the 
organization. Allowing it to manage and keep its own funds teaches the 
skills that foster successful, sustainable organizations. Other 
commenters added that if a financial institution is used as a 
depository, it often can be persuaded to provide other benefits. 
Commenters also argued that the proposed changes will increase 
administrative costs to the RLF administrator caused by constant 
passing back and forth of small amounts of money, resulting in fewer 
CDBG dollars being used to assist activities.
    In response, HUD agrees that it would be more advantageous for a 
number of reasons to keep loan repayments in a separate account and not 
``mix'' it with other program income, the use of which has not been 
predetermined. This convenience does justify some expense to taxpayers.
    Many commenters suggested as an alternative to the proposed rule 
that HUD require a minimum expenditure from a revolving fund in a year, 
or a maximum carryover percentage from year to year. One commenter, a 
local HUD program officer, suggested a single system that at least 
partly addresses the issues behind both the RLF proposal and the return 
of grant funds proposal. 

[[Page 56896]]
Because many of the commenters indicated linkages between the RLF and 
return of excess program income proposals, the comments and issues 
related to the return of excess program income proposal are discussed 
immediately below, followed by the description of the final regulatory 
provisions adopted in response to comments on both proposals.
    The proposal to require return of excess program income drew 17 
comments opposing it in whole or in part. The commenters included six 
metropolitan cities, four urban counties, three public interest groups, 
one low-income citizens advocacy group, one local HUD program officer, 
one community-based nonprofit organization, and one State. The 
strongest opposition came from those who interpreted the language to 
mean that, on an ongoing basis, as a grantee accumulated in its program 
account an amount greater than one-twelfth of its annual grant amount, 
that amount must be remitted to the grantee's CDBG line of credit. This 
is what HUD originally intended. Several commenters expressed intense 
objection to this proposal, based on the costs of administering such a 
complex system and passing small amounts of funds back and forth. Three 
commenters stated that such a system would be a significant 
disincentive to carrying out the revenue-producing activities that 
currently generate approximately $450 million in additional funds for 
community development activities annually.
    Several commenters suggested that the funds should be required to 
be remitted only at specific intervals, such as quarterly or annually. 
This process would establish CDBG balances and allow HUD to be certain 
that large sums were not being held unused, in violation of Treasury 
guidelines. One commenter, the HUD program officer, linked the concept 
of an annual remittance of funds on hand to his suggestion for how to 
better manage RLFs. This commenter suggested that all unexpended funds, 
except those needed immediately, those in RLFs, or those resulting from 
legal lump-sum drawdowns, be remitted to the line of credit annually 
near the beginning of the program year to establish a beginning 
balance. Under this proposal, with this one exception, program income 
received during the program year would be treated as it is now. At the 
time of the remittance, the recipient would describe to HUD the exact 
amount of funds in each RLF. The HUD program officer further proposed 
annual RLF expenditure and carryover standards, which, if violated, 
would result in HUD requiring the grantee to dissolve the RLF.
    HUD is yielding to the unanimous view of the commenters that RLFs 
are an important CDBG tool by retaining a specific provision for RLFs 
in this final rule. The RLF provision in this final rule accommodates 
the suggestions of the commenters while substantially addressing the 
original problem, the loss of revenue to the U.S. Treasury. The final 
rule provides that cash balances of each RLF must be held in an 
interest-bearing account, and that any interest earned by funds 
accumulating in this account must be remitted annually, at the end of 
each program year, to the Treasury. This remittance will partially 
offset the cost to the Treasury of removing RLF funds from the general 
requirement that funds on hand must be used before any draws to the 
Treasury. Interest paid by borrowers on loans made from the RLF will 
remain program income and may be used as part of the RLF for further 
lending.
    Furthermore, in response to comments on the return of grant funds 
proposal, HUD modified the rule to require all program income cash 
balances or investments thereof in excess of one-twelfth of the grant 
or subgrant amount--except for those needed immediately, those in RLFs, 
those resulting from lump-sum drawdowns authorized under Sec. 570.513, 
and those invested or held as additional security for a Section 108 
loan guarantee--be remitted to the CDBG line of credit annually. This 
remittance will take place as soon as practicable following the end of 
the grantee's program year. HUD expects that all such remittances will 
be complete within 60 days following the end of a grantee's program 
year. The amount to be remitted will be calculated based on the total 
program income balances (with the exceptions above) held by the grantee 
and all of its subrecipients as of the last day of the grantee's 
program year. While the rule requires at Sec. 570.503(b)(3) that 
subrecipient agreements include a provision allowing the grantee to 
require subrecipient remittance of program income cash balances or 
investments at the end of the program year, the grantee is responsible 
for determining whether amounts held by any subrecipient or 
subrecipients are sufficiently large that such remittance will be 
necessary to enable it to meet the requirement at 
Sec. 570.504(b)(2)(iii). HUD anticipates that information describing 
the exact amount of any program income cash balances and investments 
thereof that the rule permits grantees to retain will be provided to 
HUD by the grantee as part of the annual performance report.

D. Income Payments

    The income payments provision of this final rule follows the 
principles of reinventing government by clarifying and limiting 
burdensome regulations; the rule allows grantees more options for 
empowering program participants. On the effective date of this rule, 
downpayment assistance (other than that authorized by Sec. 570.201(n)), 
and loans for subsistence will be eligible public services, rather than 
ineligible income payments. Only subsistence grants will remain CDBG-
ineligible.
    HUD received 17 comments on the new definition of prohibited income 
payments. The commenters included five urban counties, four 
metropolitan cities, three public interest groups, two HUD program 
officers, two low-income citizens advocacy groups, and one State. Only 
the two HUD program officers opposed the change entirely.
    First, one of the HUD program officers was concerned that loans for 
income payments would often be made to those who could not or would not 
make payments. Since grants are ineligible, this program officer asked 
what HUD's position would be on the eligibility of a subsistence loan 
activity that appeared from its results to be a grant activity. HUD 
recognizes that loans for small amounts for subsistence activities are 
risky. However, some grantees have had success in offering people the 
responsibility of loan repayments along with subsistence assistance. 
Grantees are responsible for meeting program requirements. If a loan 
program default rate is unusually high, HUD would examine the system 
the grantee has in place to ensure payment, and in this case, to ensure 
eligibility. If such a system was absent or faulty, HUD would recommend 
and, if necessary, enforce corrective actions.
    The other program officer's objection was that other programs exist 
to provide for subsistence and downpayment assistance, and that it is 
inappropriate for the CDBG program to allow such activities. HUD 
acknowledges that the regulatory prohibition against direct-to-the-
individual subsistence-type income payments exists, in part, because 
other large programs, such as food stamps, Aid to Families with 
Dependent Children (AFDC), Section 8, and Social Security are designed 
to provide such assistance. None of these programs, however, provides 
general assistance in the form of loans or is linked to an overall 
community development program. Further, since such loans in the CDBG 
program are subject to the 15 

[[Page 56897]]
percent cap on public services obligations, their use will be limited. 
In response to similar comments on downpayment assistance activities, 
HUD believes it is clear that the amount required to meet the need for 
downpayment assistance for low- and moderate-income persons exceeds the 
amount of funds available under all HUD's programs within its Office of 
Community Planning and Development (CPD). HUD strongly supports 
expanding the resources available for homeownership, and many grantees 
have already found CDBG useful for this purpose.
    Five commenters opposed the placement of downpayment assistance in 
the public services category upon its removal from the income payment 
category, although all agreed that it is not an income payment. Some 
suggested other placements for it, such as the economic development, 
rehabilitation, or acquisition categories. HUD understands the 
commenters' desire to keep downpayment assistance unencumbered by the 
public service cap, and agrees that the category is not a perfect fit. 
However, downpayment assistance also clearly does not belong under 
economic development, as it is defined in the CDBG regulations. 
Assisting acquisition by an individual homebuyer for the purpose of 
rehabilitation is already eligible, but activities not associated with 
rehabilitation do not fit in Sec. 570.202. Furthermore, the law limits 
the eligibility of acquisition for purposes other than economic 
development or rehabilitation to grantees and other public or private 
nonprofit entities. Downpayment assistance may also be carried out by 
qualified Community-Based Development Organizations (CBDOs) as part of 
a Sec. 570.204 eligible activity (such activities will generally be 
subject to the annual limitation on public services obligations).
    Some of the commenters may have objected to changing the 
eligibility of downpayment assistance because they believed that HUD 
was indicating that such activities could meet the national objective 
of benefit to low- and moderate income persons under the criteria at 
Sec. 570.208(a)(2)--Limited clientele activities. However, application 
of the limited clientele criteria would allow downpayment assistance 
qualifying under Sec. 570.201(e) to be provided to a substantial 
percentage (up to 49 percent) of above-income persons even if it is not 
part of a neighborhood revitalization effort. The more appropriate low- 
and moderate-income category to apply is Sec. 570.208(a)(3)--Housing 
activities. For clarification, HUD modified the second sentence of that 
section to include acquisition or rehabilitation by an individual 
homebuyer on the exemplary list of activities covered by that 
provision.
    In terms of eligibility, downpayment assistance fits best as part 
of the temporary category at Sec. 570.201(n)--Direct homeownership 
assistance. The eligibility for this activity expired on its ``sunset'' 
date of October 1, 1995. However, HUD has requested that Congress amend 
the statute to reinstate the activity's eligibility. One commenter, a 
public interest group, objected to HUD allowing downpayment assistance 
as a public service because this would remove pressure from Congress to 
delete the sunset provision on direct homeownership assistance (a broad 
category that includes downpayment assistance) as a separate activity. 
However, HUD believes that downpayment assistance is useful to grantees 
in meeting the needs of their residents and therefore has decided to 
make this activity eligible under CDBG (although it is constrained by 
the public services cap).
    Four commenters requested that child care be removed from the list 
of prohibited income payments. One wanted ongoing ``scholarship'' 
payments made to a family, organization, or institution for medical and 
child care made eligible. HUD agrees that scholarships for child care 
should be eligible and is removing child care from the list of 
ineligible subsistence payments. However, the grantee must design a 
system that ensures that any cash payment made to a family for child 
care (or any purpose) is actually used as the grantee intended. To this 
end, HUD recommends that, whenever possible, payments for such purposes 
are made in the form of vouchers or payments directly to the provider.
    One commenter wanted clarification that loans for housing 
rehabilitation are not public services. Loans for housing 
rehabilitation are eligible under Sec. 570.202 as rehabilitation 
activities. Such loans are not eligible as public services. This 
includes loans and downpayments to assist acquisition for the purpose 
of rehabilitation.
    The two advocacy groups wanted emergency one-time payments to be 
changed to emergency payments made over no longer than a three-month 
period. HUD agrees and has made the suggested change. Further, HUD 
wants to clarify that, under the language of this rule, payments to 
help a family or individual meet one emergency do not preclude such 
assistance being provided to the same family or individual at some 
later, not immediately sequential, point in time to meet a different 
emergency. The commenters also wanted the preamble language stating 
that loans for subsistence would not be considered income payments to 
be stated in the regulation, along with language in Sec. 570.207 
stating that downpayment assistance was no longer prohibited by that 
paragraph. HUD has adopted the first half of the suggestion at 
Sec. 570.201 by adjusting the specific activity list. However, adding 
language in Sec. 570.207 would be redundant.

E. Float-Funded Activities

    Float-funded activities use undisbursed funds in the line of credit 
and the CDBG program account that are budgeted in action plans for one 
or more other activities that do not need the funds immediately. HUD 
included the provision governing float-funded activities in the 
proposed rule at the urging of the Office of Inspector General, which 
had identified serious repeated findings of program mismanagement in 
two audits of interim financing carried out during the 1980s.
    In the proposed rule, HUD added criteria for float-funded 
activities in the final statement section of the regulations. These 
criteria included citizen participation and security requirements 
necessary to offset the risks of float-funding. In this final rule, 
because HUD incorporated basic final statement requirements into the 
regulations for the consolidated plan (24 CFR part 91), the float-
funded activities language is the bulk of the language remaining in 
Sec. 570.301.
    HUD received 11 comments with respect to these proposed 
requirements. Three public interest groups representing community 
development practitioners, three urban counties, two low-income 
advocacy organizations, two large metropolitan cities, and a local HUD 
Community Planning and Development program officer responded. Seven of 
the commenters, including the HUD program officer, wanted the 2.5-year 
time limit for the duration of a float-funded activity either removed, 
lengthened, or modified by adding a provision permitting exceptions to 
the limit in certain cases. One advocacy organization suggested the 
2.5-year limit might be too long, but admitted a lack of experience 
with the issue area. The other two commenters, a city and a county, 
generally supported HUD's proposed changes. The county characterized 
the rule as ``logical and sufficient.'' 

[[Page 56898]]

    In the preamble to the proposed rule, HUD noted that among 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 to allow for timely undertaking of previously budgeted 
activities. HUD also noted that in undertaking a float-funded activity 
from which funds will not return for use for previously budgeted 
activities for a particularly long time period, grantees apparently 
assume that they will receive sufficient additional CDBG funds in 
future years to continue funding those previously budgeted activities 
until the float-funded activity generates program income. HUD further 
noted that grantees are only authorized to use such a funding technique 
(e.g., relying on future CDBG funds to backstop a large loan for a 
particular activity in the present) under the Section 108 Loan 
Guarantee program. Although one commenter, a city, stated that an 
irrevocable letter of credit removes the first risk, HUD's experience 
is that this is not always the case. Most of the commenters did accept 
the 2.5-year limit as the general rule or as a guideline. However, in 
response to comments, HUD is clarifying that, while it expects most 
float-funded activities will conform to the 2.5-year requirement, a 
float-funded loan may be extended, reissued, or ``rolled over'' by 
treating it as though it were a new float-funded activity and showing 
that it meets all the same requirements that apply to float funding. 
(In the past, HUD equated float extensions and rollovers with 
refinancing existing indebtedness, which is not generally allowed under 
the CDBG program.)
    The advocacy organizations suggested a variety of special action 
plan amendment procedures for float-funded activities, including the 
following requirements: relating changes to consolidated plan 
priorities, focusing citizen participation on the area or neighborhood 
that would have benefited from a defaulted or canceled float-funded 
project, and reprogramming action within 30 days of learning of the 
delay or default. HUD has long held that float-funded activities must 
meet all the same requirements that apply to CDBG-assisted activities 
generally, and the proposed rule added additional requirements only in 
response to the identified primary risks to the program stemming from 
the float-funding process. The suggested additional citizen 
participation requirements far exceed the existing requirements 
covering all CDBG activities. Therefore HUD is not adopting these 
suggested changes.
    One of the public interest groups asked HUD to clarify that the 
rule did not mean that each float-funded activity be identified 
separately in the action plan, but rather that such activities be 
identified by eligibility category, as many other activities may be 
designated (e.g., community-wide single family rehabilitation loan 
programs). However, to ensure that citizens are properly informed, HUD 
does intend that each float-funded activity be identified separately in 
the action plan.
    Another of the public interest groups stated that the income stream 
from an activity can be difficult to predict, and it requested 
information on how HUD would treat a grantee who carried out a float 
activity that exceeded the 2.5-year limit. In response, HUD suggests 
that activities appropriate for float funding be evaluated for the 
predictability of their income streams, with only more predictable 
activities being so funded. HUD further notes that the corrective 
actions permitted to HUD under the CDBG program vary from issuing a 
letter of warning to enforcing a grant reduction. The local HUD offices 
(in the case of float-funded activities, usually in conjunction with 
Headquarters) will assess each deficiency and design a corrective 
action to prevent a continuation of the performance deficiency, 
mitigate the adverse consequences of the deficiency, and prevent a 
recurrence of the deficiency. As noted above, the rule does provide for 
float-funded activities to be extended, reissued, or rolled-over, 
provided certain requirements are met.
    Two grantees responded to the request for comment on whether a 
limit should also be set on the proportion of a grantee's funds that 
could be used for float funding. Both grantees responded that there 
should be no limit, stating that the other proposed requirements were 
sufficient to address the identified risks. Therefore, HUD will impose 
no such limit at this time.
    One commenter, a grantee, suggested that the rule permit the action 
plan covering the float-funded activity to describe the characteristics 
of the lender that will provide an irrevocable letter of credit, rather 
that providing the actual lender's name. The commenter also suggested 
describing the maximum and minimum terms for the letter of credit in 
the action plan, because the terms may change somewhat when the deal is 
negotiated after the action plan is amended. HUD finds no problem with 
this approach if the language used is as specific as possible. 
Therefore, any grantee choosing this approach should contact its local 
HUD office for guidance in developing a suitable description.
    Another commenter, the local HUD program officer, suggested that 
the action plan break out the identified float payment amount into 
principal and interest, so that citizens can tell whether the activity 
will ``make money.'' This rule requires at Sec. 570.301(b) that each 
float-funded activity be individually listed in the action plan, and 
that the ``full amount'' of income expected to be generated by that 
activity must be shown (the latter requirement is also included in the 
consolidated plan regulations at 24 CFR 91.225(g)(1)(ii)(D)). These 
requirements will permit citizens to determine easily whether the 
activity is expected to ``make money.'' The rule language is also 
easily adaptable to float-funded activities that do not involve loans.
    The program officer also suggested that HUD allow in the rule for 
HUD approval of grantee-proposed methods, other than those described in 
the rule, of securing the repayment of the float funding. HUD accepted 
this proposal, so long as the method ensures fund availability within 
30 days of default or shortfall. This approval can be made in writing 
by the appropriate local HUD office, in advance of carrying out the 
float-funded activity.

F. Using CDBG Funds Outside the Grantee's Jurisdiction

    HUD included this provision in this rule as a result of the 
Inspector General's audit findings regarding grantees loaning funds to 
other jurisdictions rather than using the funds in their own. The 
proposed language would have added a new Sec. 570.309 to require that, 
prior to using CDBG funds to assist projects outside jurisdiction 
boundaries, grantees make a determination that the principal benefit of 
the activities will accrue to persons residing within jurisdiction 
boundaries.
    HUD received 13 comments on this portion of the proposed rule, nine 
of which expressed some opposition. Those opposed included four urban 
counties, one State, one national public interest group, one regional 
nonprofit organization, and one large metropolitan city. An advocacy 
group and a national public interest group supported the proposal with 
little additional comment. A metropolitan city and an urban county 
neither supported nor opposed the proposed change, but requested 
clarification on its effects. In addition, HUD received one comment 
from a local HUD program officer opposing the rule as proposed and 
raising some related issues. 

[[Page 56899]]

    The opposition to this proposal was primarily based on the chilling 
effect the commenters felt this proposal would have on projects that 
were jointly funded by cities and counties. The large metropolitan city 
argued that this change would increase the isolation of central cities. 
One urban county argued that all economies are linked--there are 
indirect effects of development and long-term benefits to an area from 
an activity, even one outside the county's jurisdiction. HUD's concern 
should be assuring that a national objective is met. Several grantees 
requested that different activities, such as water and sewer 
developments, that are expected to result in jobs be excluded from the 
requirement.
    One public interest group cited a February 7, 1986 HUD memorandum 
signed by former Assistant Secretary for Community Planning and 
Development Moran. The Moran memorandum discussed an issue raised by an 
urban county using CDBG funds in cities within the county, but outside 
the jurisdiction of the urban county. As stated in that memorandum, HUD 
believes that the determination of to whom and how an activity will 
provide benefit is best left to the county. At that time, HUD had not 
yet come across any grantee that appeared to be regularly spending CDBG 
funds outside its jurisdiction. Since that time, several grantees have 
loaned their CDBG funds to nonparticipating or nonentitled 
jurisdictions, or have used CDBG funds outside their jurisdictions, 
despite pressing need for facilities and services within their own 
jurisdictions.
    The CDBG formula results in grant awards to communities to benefit 
the residents whose poverty and housing needs determined (via the 
formula) the amount of funding. HUD has noticed that, particularly in 
large urban counties, citizens can easily be unaware of the boundaries 
of the urban county for purposes of the CDBG program when it differs 
from the boundaries of the county as a whole, and may not be aware that 
funds that were supposed to benefit one community are being spent to 
benefit another. Since HUD is aware that activities located outside a 
grantee's jurisdiction may indeed provide substantial benefits to the 
citizens within the jurisdiction, the rule does not prohibit such 
activities. The rule simply requires that the grantee consider whom the 
funds will benefit and make a determination. HUD will not question the 
determination unless it is clearly unreasonable. The rule does not 
limit the amount or percentage of funds that may assist such an 
activity, and should not affect joint efforts by cities and counties to 
benefit their residents.
    Several commenters noted that ``principal'' benefit would be 
difficult to determine in certain cases. For example, the amount of 
benefit to ascribe to each jurisdiction participating in joint 
affirmative fair housing activities might not be easily assigned. In 
response, HUD has adjusted the final rule to require a determination 
that the activity was necessary to meet the purposes of the Act and 
community development objectives of the recipient, and that 
``reasonable'' benefits will accrue to the residents of the recipient. 
The recipient is free to determine the reasonableness of the benefits 
in such case.
    HUD received an inquiry from a large metropolitan city about 
whether this rule change would block affirmative fair housing efforts 
to develop minority housing outside of areas of minority concentration. 
In response, HUD definitely does not believe that this provision will 
cause any such problem, especially as HUD has adjusted the provision in 
this final rule.
    One commenter, the HUD program officer, raised issues about the 
difficulty of monitoring this provision. The purpose of this provision 
is to ensure that, in funding an activity outside its boundaries, the 
recipient has properly considered the purposes for which it was awarded 
the funds. In most cases, HUD monitoring will simply involve making 
certain that the determination has been made. Only when the HUD monitor 
believes that the likely extent of the benefits to residents within the 
jurisdiction is clearly not commensurate with the amount of funds spent 
on the activity should it be raised as an issue with the recipient. For 
example, a loan of CDBG funds to another jurisdiction for an activity 
that would provide little or no benefit to the recipient's residents 
would be very likely to provoke a challenge from HUD.

G. Remission of Grant Funds

    This provision responds to Inspector General findings and 
implements a General Accounting Office (GAO) opinion that income 
generated by an ineligible CDBG-assisted activity must be returned to 
the U.S. Treasury. Since, in the context of the GAO opinion, 
eligibility includes meeting a national objective, this provision 
should invoke a sharpened grantee focus on successful outcomes--
interest generated from CDBG-funded loans may only be kept by the 
grantee when the national objective requirements are achieved.
    HUD received four comments on this portion of the proposed rule. A 
low-income advocacy group commented simply that it supported the 
change. Another commenter, a State, had no objection, but suggested the 
language ``or fail substantially to meet any other requirement of this 
part'' was overly broad. However, HUD is retaining this language, as it 
is standard language throughout the CDBG regulations in similar 
situations.
    A large metropolitan city requested a clarification on whether 
return of interest is possible with CDBG funds. It gave an example of 
an economic development loan that was supposed to meet the national 
objective of low- and moderate-income jobs, but does not. The commenter 
stated: ``Auditors declare the loan ineligible because no national 
objective was met. Can the City identify CDBG funds and pay HUD the 
interest earned, or is the grantee expected to use non-federal funds 
for repayment?'' If a grantee received interest that is required to be 
remitted to HUD pursuant to Sec. 570.500(a)(2) and used the interest 
for payment of the costs of carrying out activities in its CDBG 
program, it may remit CDBG funds (grants or program income) to HUD. 
Grants should not be used for this purpose, however, if program income 
is available. The commenter also wanted to know whether it is correct 
in presuming that only interest, not principal, need be repaid in such 
a case. The rule requires the interest to be remitted to the Treasury; 
there is no recovery of principal amounts required for this purpose. If 
HUD advises reimbursement of the principal amount using local funds, 
any such payments would be available for use by the grantee under CDBG 
rules and would not go to the Treasury.
    One commenter, a public interest group, wants HUD to pay more 
attention to the initial use for an eligible activity. HUD understands 
the commenter to be objecting to consideration of the national 
objective outcome in determining whether funds should be remitted. 
However, this rule provides that if a grantee makes a loan that is 
found not to meet a national objective, the interest may not be 
retained by the grantee, whether the loan was eligible in a more narrow 
sense or not. HUD intends to continue emphasizing loan programs that 
are outcome-oriented.

H. Consolidated Plan Performance Standard

    This rule provides performance criteria for implementing the 
consolidated plan. This is important because every CDBG grantee must 
certify, before receiving its annual grant, that it is carrying out its 
consolidated plan--not just for its CDBG activities, 

[[Page 56900]]
but for all programs and actions covered by the plan. Without a 
published, regulatory performance standard, grantees are unlikely to 
understand the significance of this certification.
    HUD received six comments on this portion of the proposed rule. 
Also, several entities commenting on the Consolidated Plan final rule, 
published on January 5, 1995 (60 FR 1878), asked what standard HUD 
would use to judge whether a grantee had ``carried out'' its 
consolidated plan. HUD placed the standard in this rule because the 
standard is driven by a CDBG-specific certification (see 
Sec. 91.225(b)(3)) required by statute to be made before CDBG funds can 
be awarded. A grantee making the certification affirms that it is 
following its consolidated plan--in its entirety, not just the CDBG 
portions--and that each CDBG-assisted activity will be consistent with 
the plan. Failure to follow the consolidated plan can result in loss of 
future CDBG funds. Parts of the Stewart B. McKinney Homeless Assistance 
Act, including the Emergency Shelter Grants program, are governed by a 
similar certification (Sec. 91.225(c)(9)), so forfeit of these funds 
may also be possible if the consolidated plan is not followed.
    One national public interest group commented that the proposed 
standard is vague. The commenter requested clarification of the 
standard and conformance of the standard with the consolidated plan. 
HUD agrees that the proposed standard is general; it designed the 
criteria to cover broad categories of actions (to pursue and use 
resources, to make certifications of consistency, to take promised 
actions, and to refrain from obstructionism) that HUD considers most 
important in ensuring each plan is implemented. Within these 
categories, the standard will be as general or as vague as the 
descriptions of actions contained in each community plan. The same 
grounds that led HUD to adopt custom-tailoring of each plan to the 
needs and priorities of each community also led HUD to decide that the 
suitable policy for administering the certification was to hold each 
community to the standard of action the community set for itself in its 
consolidated plan. The HUD review will be carried out by the same local 
HUD office that is responsible for approving the plan. HUD made no 
change to the rule as a result of this comment.
    Two low-income advocacy organizations asked HUD to make grantees 
``follow'' the consolidated plan by allocating fair share based on 
needs. As HUD noted in the preamble to the Consolidated Plan final 
rule, HUD declines this suggestion. HUD's goal for the consolidated 
plan is to provide the framework for communities to have meaningful 
plans. HUD does not wish to substitute its judgment for locally 
developed plans and priorities framed through the strengthened citizen 
participation process.
    A national public interest organization and an urban county 
commented that the proposed standard of taking all promised actions is 
too high and inappropriate. Instead, they suggest a ``due diligence'' 
clause. HUD believes a standard that all promised actions should be 
carried out will strengthen the consolidated plan process by 
strengthening the confidence of citizens that the grantee really 
intends to implement the actions described in the plan. The regulation 
allows for consideration of events beyond the control of the grantee 
and for grantee rebuttal of HUD reviews. Therefore, HUD made no change 
in response to these comments.
    One metropolitan city suggested this section be eliminated as 
unnecessary. HUD agrees that this section would be unnecessary if the 
certification was not to be reviewed. However, section 104(e) of the 
Act requires HUD to review a grantee's performance to determine, among 
other things, whether a grantee has ``carried out * * * its 
certifications.'' Without some standard for performance review, the 
consolidated plan would be an empty exercise. HUD has the 
responsibility to ensure that each grantee meets all program 
requirements, including the certification. Grantees have the right to 
know against what standard their performance will be judged.

IV. Provisions From the November 12, 1993 Proposed Rule on 
Sanctions

    HUD published for comment two provisions of this final rule as a 
proposed rule on November 12, 1993 (58 FR 60088). This proposed rule 
covered performance reviews, timely expenditure of CDBG funds, 
sanctions, and due process hearings. HUD has included the first two 
topics in this final rule, but has withdrawn the other two topics. 
After thoroughly considering the comments on the November 12, 1993 
proposed rule, HUD decided to adjust its approach to these issues, and 
HUD will be publishing another proposed rule in these areas shortly.
    Therefore, this rule reflects the following changes to subpart O of 
part 570--Performance Reviews. HUD has withdrawn its changes to 
Secs. 570.907-913 and plans to repropose changes to these sections.

A. Performance Review Procedures

    In order to clarify the relationship between HUD's review 
procedures and HUD's process for resolving findings of deficiencies, 
this final rule amends several of the elements of the performance 
review procedures under Sec. 570.900 to: clarify what the primary 
information sources will be for such reviews; provide the recipient 
that has failed to comply with a program requirement an opportunity to 
provide additional information; and indicate what initial actions HUD 
may take.

B. Timely Performance

    With respect to entitlement recipients, this final rule revises and 
clarifies how HUD will review to determine if CDBG-funded activities 
are being carried out in a timely manner.
    HUD received two comments, both from grantees. One commenter 
suggested that the measurement of timely performance be taken at a date 
coincident with consolidated planning or reporting. Another commenter 
recommended that program income not be coupled with the balance in the 
line of credit because of the effect of balloon repayments on 
timeliness calculations. This final rule at Sec. 570.902 indicates that 
HUD will not only consider a recipient's line of credit balance but 
also its program income on hand 60 days prior to the end of the program 
year, as well as any evidence that lack of timeliness resulted from 
factors beyond the grantee's reasonable control, believing that 
generally a grantee should be able to plan and budget for the use of 
scheduled loan repayments, including balloon repayments. HUD has 
decided to continue measuring timeliness 60 days prior to the end of 
the program year so that program progress can be considered prior to 
the next grant award.

V. Provisions From the June 17, 1992 Interim Rule

A. Public Services Cap

    This provision expands the public services limitation and rewards 
entrepreneurial grantees by allowing a portion of program income to be 
included in the amount available for public services. This increases 
the amount of funds available for public services for grantees that 
earn program income, and furthers government reinvention by maximizing 
the grantees' options for fund use.
    HUD received three comments on this portion of the rule. One 
grantee suggested that the program income used in the calculation 
should come from the time period that ends one year before 

[[Page 56901]]
the beginning of the program year for which the cap is being 
determined. HUD had considered this option prior to publication of the 
interim rule, but rejected the time period as being overly remote from 
the time period for which the action plan was being prepared. The other 
two comments supported counting program income from the program year 
immediately preceding the year for which the cap is being determined. 
HUD selected this method for the final rule.

B. Conflict of Interest

    This rule also incorporates a change to the prohibition against 
conflicts of interest in the use of CDBG funds. This change furthers 
government reinvention by clarifying regulatory requirements and by 
limiting regulatory burdens. The conflict of interest provisions of 
this rule include coverage of the subrecipient relationships that are 
central to CDBG, but that are not as common in programs outside HUD's 
Office of Community Planning and Development. (The regulation does not 
apply to conflicts in regard to procurement contracts, which are 
covered by 24 CFR part 85.) As described in the preamble to the June 
17, 1992 interim rule (57 FR 27117-18), HUD believes that the conflict 
rules should be limited to the prohibition of situations that provide a 
financial interest or benefit.
    HUD received three outside comments on the new provision, two from 
national community development organizations and one from a city 
official. All the commenters supported the change, believing that the 
new regulation is sufficient without requiring further definition or 
restriction. One commenter, employed as a community development 
director in a CDBG entitlement community, offered personal experience 
that his ability to serve on the boards of nonprofit corporations was 
an effective use of his time. The commenter cited his belief that it 
ensures better use of CDBG funds and compliance with Federal mandates 
as the CDBG-funded activities are carried out. Both national 
organizations expressed hope that amending the conflict of interest 
regulation is a sign that HUD is moving away from ``overregulation of 
public officials'' who are involved with nonprofit subrecipients. These 
two commenters believe that serving on such organizations' boards has a 
positive public benefit to the grantee, the subrecipient, and HUD.
    In addition, HUD received comments from two local HUD offices, one 
from an office manager and another from a community planning and 
development director. Although both agreed that the use of the word 
``personal'' has created difficulty, one was concerned that its removal 
may undermine HUD's efforts to eliminate improper lobbying and 
influence peddling. The other supported the proposed change.
    Both HUD commenters offered additional points for consideration. 
First, both expressed concern about the introductory phrase at 
Sec. 570.611(b): ``Except for the use of CDBG funds to pay salaries and 
other related administrative or personnel costs. * * *'' One commenter 
felt that persons outside HUD read the phrase literally, and that the 
phrase could appear, by itself, to allow current board members of a 
CDBG subrecipient routinely to request CDBG-paid employment with that 
subrecipient and to be considered routinely for open positions, without 
prior approval from HUD.
    The other HUD commenter believed the application of this exception 
to the grantee and its subrecipients is not clear. This commenter 
expressed concern that the exception implies that subrecipient board 
members or city directors would be allowed to hire family members as 
staff, and that other forms of nepotism or preferential treatment could 
occur (absent any local civil service rules to the contrary). The 
commenter described a situation in which the paid director of a 
nonprofit subrecipient leased space in a building he owned to the 
nonprofit for its offices. Both his salary and the rent were paid with 
CDBG funds. While the field office interpreted this as a conflict, this 
could have been considered ``related administrative costs'' excepted 
under the rule's introductory phrase, instead of a situation that 
requires a request for an exception under the provisions of 
Sec. 570.611(d) and (e). Both commenters recommended that HUD add 
clarifying language expressly to indicate that receipt of a salary by 
an existing CDBG-funded staff person for performing eligible activities 
is not to be considered, in itself, a prohibited interest or benefit 
under Sec. 570.611.
    Since the existing introductory language at Sec. 570.611(b) appears 
to cause confusion, HUD has deleted it. Although the commenters 
suggested changing or adding clarifying language, HUD decided that the 
existing restrictions at Sec. 570.206 (Program administration costs) 
along with Sec. 570.611 are sufficient to prevent inappropriate 
situations. Exceptions can be handled through the mechanism in 
Sec. 570.611(d).
    HUD received a second comment about Sec. 570.611(b), specifically 
the phrase ``may obtain a financial interest or benefit from a CDBG-
assisted activity.'' The commenter expressed concern that a strict 
interpretation could prohibit a covered person in a subrecipient entity 
from obtaining an interest or benefit from any CDBG funded activity, 
not just the one(s) administered by the subrecipient. Although such an 
extreme interpretation is possible, generally a subrecipient employee 
is restricted to just the activity run by the subrecipient (although a 
city employee would be restricted from any CDBG activity). Thus, HUD 
made no change in the current language.
    A third commenter raised the suggestion that HUD should replace the 
words ``contract, subcontract'' in Sec. 570.611(b) with words such as 
``subrecipient agreements.'' This commenter remarked that the current 
terminology confuses the application of these rules, since procurement 
activities are covered in other regulations (in 24 CFR parts 84 and 
85). Since the word ``agreement'' is already in Sec. 570.611 (in the 
same phrase), it is not appropriate to follow this suggestion. 
``Contract'' and ``subcontract,'' as defined words, are appropriate to 
use in part 570 as well as parts 84 and 85, and in OMB Circular A-110.
    A fourth commenter suggested that the phrase ``family or business 
ties'' in Sec. 570.611(b) needs an expanded definition. This commenter 
expressed concern that, without more definition, it is unclear whether 
``immediate family,'' as defined in 24 CFR 85.36, is intended. The 
commenter argued that, in some communities with histories of extended 
family ties, it could be difficult to avoid a conflict. Similarly, the 
commenter expressed concern that, without definition, the business ties 
between, for example, an individual and the family doctor would be 
construed to pose the same conflict of interest concern as those 
between members of a partnership in a business. In response to this 
concern, HUD has amended Sec. 570.611(b) to include the word 
``immediate'' to clarify the extent of family to be covered. HUD has 
left the term ``business'' unchanged, however, on the basis that the 
exception provisions will allow for the necessary distinction.
    A fifth comment concerned the existing language at Sec. 570.611(c) 
(Persons covered). By not including the word ``of'' at the beginning of 
the final phrase, ``subrecipients that are receiving funds under this 
part,'' the commenter argued that a subrecipient would not include in 
the regulation's coverage the same persons as those ``of the recipient, 
or of any designated public agencies.'' It 

[[Page 56902]]
could instead be construed only to mean the subrecipient as an entity 
and not its employees as individuals. HUD has therefore amended the 
rule at the beginning of that final phrase, ``subrecipients that,'' to 
commence with the word ``of,'' to be consistent with the other two 
types of entities covered.
    Another commenter expressed concern that handling exceptions on a 
``case-by-case basis'' has created a time-consuming exercise for both 
HUD and grantees in responding to the current regulation, which the 
commenter found to be too broad and vague. This commenter offered a 
number of suggestions, including allowing grantees to establish 
procedures ``in a manner acceptable to HUD,'' exempting specific 
members and officials of subrecipients from persons covered, and 
separating the regulations applicable to the grantees from those 
applicable to subrecipients. HUD has clarified the conflict of interest 
provision in this rule, which should eliminate many of the exception 
cases that would now come to HUD for a determination. The exception 
thresholds in this rule continue to include a determination by the 
recipient's attorney that the conflict in question does not violate 
local or State standards. HUD does not believe, however, that 
permitting grant recipients to exempt some of their employees or 
subrecipient employees from CDBG conflict of interest provisions is in 
the best interests of the CDBG program.
    In reviewing the comments, HUD determined that, although no further 
substantive changes to the regulation at Sec. 570.611 are necessary, 
some editorial reorganization of Sec. 570.611(d) would further clarify 
the exception requirements. Therefore, this final rule adjusts the 
language at Sec. 570.611(b) as specified above, and makes additional 
adjustments to Sec. 570.611 (d) and (e).

C. Loans to Subrecipients

    This provision expands the ways CDBG assistance may be provided to 
subrecipients. It follows the principles of government reinvention by 
increasing grantee flexibility.
    HUD received four comments on this provision. Two of the four 
commenters, an urban county and a public interest group, requested HUD 
to permit the urban county to make loans to units of general local 
government participating under an urban county consortium. The 
commenters gave the following reasons for this proposal: (1) the change 
would enhance program options and creativity; (2) the change would 
allow the grantee greater leverage in monitoring an activity and 
provide more opportunity for reusing funds; and (3) grants could be 
continued to communities experiencing widespread distress, but loans 
could be provided to better-off communities capable of repayment as an 
incentive to serve low-income areas.
    HUD understands that the commenters would like the units of 
government participating in an urban county to be subrecipients for 
almost all purposes. However, since the urban county is simply a 
jurisdiction composed of a group of local governments (including a 
county) joined into one entity for the purpose of receiving a CDBG 
entitlement, any loan by the administering entity (the county 
government) to a member of the jurisdiction is a loan by the urban 
county to itself, and, as such, is not permissible.
    HUD has adjusted Sec. 570.500(c), defining ``subrecipient'' to 
clarify that a subrecipient may receive funds from the recipient or 
from another subrecipient.

D. Program Income Generated by Loans to Subrecipients

    The intent of this provision is to permit grantees to accept loan 
payments derived from program income from subrecipients while 
eliminating any double-counting of program income received through that 
process. HUD received two comments on the revisions to program income 
in relation to loans to subrecipients, one from an urban county and one 
from a national public interest organization. HUD made no changes to 
the rule as the result of these comments.
    One commenter objected to excluding from the calculation of total 
program income received any loan repayments received by grantees from 
subrecipients when such payments are made from program income received 
by the subrecipient. The commenter stated that while it may be 
appropriate in some cases for the repayment of principal to be 
classified as a ``return or transfer of grant funds,'' interest 
payments should always be treated as new income. The comment suggests a 
misunderstanding of what HUD intended by the new Sec. 570.500(a)(3). 
This section does not classify loan repayments to grantees by 
subrecipients using program income as a ``return of grant funds,'' as 
that term is generally used in the CDBG program. It classifies them as 
``transfer[s] of program income.''
    If the funds used by a subrecipient to make principal or interest 
payments on a CDBG loan it received from a grantee consist solely of 
program income received by the subrecipient, no amount of those 
payments to the grantee represents ``new income'' to the grantee's CDBG 
program as a whole. If, however, the subrecipient uses non-CDBG funds 
to make the principal or interest payments, those payments to the 
grantee are ``new income'' to the CDBG program. The new 
Sec. 570.500(a)(3) does not affect the treatment of such payments.

VI. Provisions From the March 28, 1990 Proposed Rule

    HUD received a number of comments on the March 28, 1990 proposed 
rule. This final rule will not be implementing citizen participation 
changes resulting from the Housing and Community Development Act of 
1987. These changes were included in the Consolidated Plan final rule, 
published on January 5, 1995 (60 FR 1878). Additional CDBG citizen 
participation changes, most notably requirements regarding float-funded 
activities, were published in the August 10, 1994 proposed rule 
discussed above. This rule will also not be implementing the 
substantial reconstruction provision of the March 28, 1990 proposed 
rule at this time, because pending legislative proposals would make 
this change unnecessary.

A. Use of CDBG Funds for Assisting Certain Uniform Emergency Telephone 
Number Systems

    This provision increases grantee flexibility by implementing a new 
eligibility provision. HUD received nine comments on the proposed 
provisions implementing this use of CDBG funds. Two of the commenters 
were national organizations, one of them having an interest in the 
administration of the CDBG program generally, and the other 
representing persons involved in administering emergency number 
systems. Three of those commenting were officials of urban county grant 
recipients under the CDBG program. Two others represented law 
enforcement agencies that would presumably be involved in a uniform 
emergency number system. The remaining two commenters were from 
Congress--one Senator and one Representative. The commenters generally 
did not provide a basis for changing the proposed provisions, and the 
final rule reflects only minor clarifying changes to the proposed rule.
    Two of the commenters argued that the information that grantees 
would be required to submit to HUD for approval under these provisions 
for the use of CDBG funds for uniform emergency telephone number 
systems (ETNS) would be too costly and impractical, especially for 
large metropolitan cities and urban counties. They believed that 

[[Page 56903]]
since grantees can only use CDBG funds under this provision for the 
activity for two years, it would not be worth the expenditure of time 
and effort to gather and submit the proposed material. HUD acknowledges 
this possibility, but has been unable to identify any other more 
suitable ways to determine that the proposed activity meets all of the 
requirements set forth in the Act. The Act requires HUD to determine 
that at least 51 percent of the users of the system in question will be 
low- and moderate-income persons. It is not possible for HUD to make 
such a determination without factual information about the system and 
its likely users. Since the commenters did not offer any other 
approaches for HUD to consider, the final rule does not vary much from 
the proposal.
    However, some of the commenters appeared to misunderstand how the 
proposed provision would operate in the CDBG program. The proposal 
would only come into play with respect to those emergency number 
systems that serve a geographical area that does not contain a high 
enough percentage of low- and moderate-income persons to qualify under 
the present regulations. (See Sec. 570.208(a)(1) as it existed before 
this rule.) For emergency systems serving areas having percentages of 
such persons amounting to 51 percent or more, or where the service 
area's percentage is less than 51 percent but still falls within the 
community's ``highest quartile'' (see Sec. 570.208(a)(1)(ii)), there 
would be no need for the grantee to submit information to HUD or for 
HUD to make any of the determinations called for in this rule.
    One commenter believed the requirement that the CDBG contribution 
to the cost of the system be limited in proportion to the percentage of 
low- and moderate-income persons residing in the service area 
constituted a ``method and perhaps a test of proportional accounting.'' 
This may have been a reference to HUD's announced intention several 
years ago to seek legislation aimed at changing the benefit accounting 
method for the program, which HUD subsequently decided not to pursue. 
However, HUD derived this portion of the proposed rule directly from 
the statute, and does not have any intention to change the method of 
accounting used generally in the CDBG program.
    Two commenters suggested that HUD adopt a rule on the use of CDBG 
funds for ETNS that would allow all communities the opportunity to use 
funds to develop, establish, and operate ETNS to meet their own 
specific needs. The commenters were concerned that the proposed rule 
limited the usage to communities in which more than 51 percent of the 
residents of the area were low- and moderate-income (except for those 
communities covered by the ``highest quartile'' provision in the 
regulations). However, this is not the case. HUD designed the proposed 
rule to allow communities to use CDBG funds for ETNS in areas in which 
less than 51 percent of the residents are low- and moderate-income, if 
51 percent of the users of the system will be low- and moderate-income. 
(In making this determination, HUD will assume that the distribution of 
income among the callers generally reflects the distribution of income 
among the entire population residing in the same area where the callers 
reside.)
    For example, a community has an ETNS that covers three census 
tracts (tracts A, B, and C) with low- and moderate-income residents 
consisting of 20 percent for tract A, 80 percent for tract B, and 40 
percent for tract C. (The percentages of low- and moderate-income 
persons are derived by dividing the total number of low- and moderate-
income persons per census tract by the total number of persons within 
the census tract.) A total of 95 calls were received: 15 calls from 
tract A, 50 from tract B, and 30 from tract C. HUD would presume that 3 
of the calls from tract A, 40 calls from tract B, and 12 calls from 
tract C were from low- and moderate-income persons (20% x 15 = 3; 
80% x 50 = 40; and 40% x 30 = 12). Thus, HUD would consider 55 of the 
95 calls to be from low- and moderate-income persons, which is 
equivalent to 57.89 percent, exceeding the minimum required threshold 
of 51 percent.
    One commenter, a rural county, suggested that rural communities be 
allowed to apply directly to HUD for CDBG funds for ETNS. The Housing 
and Community Development Act of 1974 requires States to distribute 
CDBG funds to nonentitled areas, unless a State has elected not to 
carry out the CDBG program. Only two States, Hawaii and New York, have 
made such an election. Therefore, nonentitled communities may not 
receive funds directly from HUD in the other States. This commenter 
also stated that grants for ETNS in the rural counties in its State had 
not been included in the State's most recent final statement. Because 
this provision has not yet been made a part of the regulations, a State 
would not have been expected to include activities qualifying under 
this provision in its final statement. For years, however, States have 
been able to make grants to be used for ETNS serving areas in which at 
least 51 percent of the residents are low- and moderate-income.
    Another commenter sought clarification concerning the extent to 
which CDBG funds may be used to support an ETNS. The statute itself 
limits the percentage of the total cost of the ETNS development, 
establishment, or operation that is to be provided using CDBG funds to 
be no higher than the percentage of low- and moderate-income persons 
residing in the area served by the system. For example, using the same 
hypothetical situation as described above, assume that the grantee's 
jurisdiction consists of three census tracts (tract A having 20 
percent, tract B having 80 percent, and tract C having 40 percent low- 
and moderate-income persons), and that the ETNS would serve the entire 
community. Also assume that tracts A and C each contain 100 people, 
while tract B contains only 80. Thus, the number of low- and moderate-
income persons residing in these tracts would be 20 persons in tract A, 
64 in tract B, and 40 in tract C. The total number of low- and 
moderate-income persons in the service area would be 124 out of a total 
of 280 persons. The percentage of low- and moderate-income persons in 
the service area would then equal 44.3 percent. CDBG funds for 
developing, establishing, and operating an ETNS during a one- or two-
year period could therefore not exceed 44.3 percent of the total cost 
of developing, establishing, or operating the system. If it is assumed 
that the grantee only wanted to assist the operation of the system for 
one year, and that such an operation would cost $100,000 in total, CDBG 
funds in an amount not to exceed $44,300 could be used for this 
purpose.
    The same commenter also asked what research had been done before 
the proposed rule was developed, arguing that the guidelines would have 
been quite different had research been done regarding what segment of 
the population actually used ETNS. HUD sought information from various 
State, local, and national organizations before developing the proposed 
rule. None of them was aware of any data already available that would 
demonstrate that any particular percentage of the total users of an 
ETNS would likely be of low or moderate income. In fact, one national 
organization suggested that interested communities should be required 
to gather data over a three-year period to determine the 
characteristics of the system's users. HUD determined, however, that 
such a requirement would be unnecessarily onerous for grantees, and 
decided instead that one year's 

[[Page 56904]]
experience would be adequate for this purpose.
    One of the commenters, a grantee, sought clarification on several 
issues not related to applying for approval of an ETNS under the 
proposed provisions. Noting apparent inconsistencies in the preamble to 
the proposed rule, the grantee asked which HUD office was to be making 
the required HUD determinations that: (1) The system will contribute 
substantially to the safety of the residents of the area served by the 
system; (2) not less than 51 percent of the use of the system will be 
by persons of low- and moderate-income; and (3) other Federal funds 
received by the recipient are not available for the development, 
establishment, and operation of the system due to the insufficiency of 
the amount of the funds, restrictions on the use of the funds, or the 
prior commitment of the funds for other purposes by the recipient. This 
determination is to be made by the appropriate local HUD office.
    This commenter also asked about HUD's definition of ``emergency 
services.'' HUD did not propose a definition of emergency services, 
believing that communities would only include services that involve 
emergency situations under their respective ETNS. HUD believes the 
emergency services that would typically be included in an ETNS are 
police, fire, and ambulance services. However, it recognizes that 
larger communities could be expected to include others, such as a 
suicide hotline. The same commenter also argued that, particularly in 
some rural communities, information on the number of calls received 
over the preceding 12-month period and the location from which those 
calls were made may not be available. This final rule provides that the 
grantee is to submit ``information that serves as a basis for HUD to 
determine whether 51 percent of the use of the system will be by low- 
and moderate-income persons.'' The information on past users discussed 
by the commenter is to be supplied ``as available.'' HUD is unaware of 
any basis upon which it could make the required determination about the 
income levels of likely users of a ETNS other than that specified in 
the rule. However, the grantee may submit whatever it believes could be 
used for this purpose, and HUD will review it as necessary to make a 
judgment about its usefulness. Since HUD expects that a grantee not 
having the past-use data mentioned in the rule may contemplate 
expending considerable effort to acquire other data for submission to 
HUD for this purpose, the rule suggests that the grantee make known its 
planned methodology to HUD in advance, in order to find out if HUD 
would consider the planned methodology to be acceptable as a basis for 
making its required determination.
    The same commenter also recommended that the requirement that 51 
percent of the users be low- and moderate-income should be reduced, 
pointing to the provision in Sec. 570.208(a)(3)(i)(B) that permits as 
little as 20 percent occupancy by low- and moderate-income residents in 
cases in which CDBG funds are used to assist newly constructed, 
multifamily, nonelderly rental housing. However, the statute provides 
specific requirements for activities that benefit an area generally, 
such as an ETNS. These requirements are more exacting than those 
required for housing activities. For an ETNS that cannot qualify under 
the provisions in the regulations as they existed before this rule, the 
requirement to determine that at least 51 percent of the users will be 
low- and moderate-income persons is statutory and cannot be changed by 
regulation.
    The commenter also thought that HUD should consider permitting ETNS 
to be carried out in Urban Development Action Grant (UDAG) eligible 
areas, because these areas qualify as distressed communities. However, 
the UDAG program has been terminated, and HUD no longer determines 
community distress levels for that program. Moreover, a designation of 
UDAG eligibility could not necessarily be substituted for the 
determination of income status of the likely users of an ETNS for the 
community, which the statute requires for this purpose.
    One commenter stated that, given the regulatory requirements in the 
proposed rule, it was unlikely that significant amounts of CDBG funds 
would be spent on ETNS. While this may be the case, HUD does not have 
flexibility under the statute to reduce the requirements associated 
with this provision to increase the likelihood of use of CDBG funds.

B. Use of CDBG Funds To Pay Special Assessments

    This provision increases grantee flexibility, furthering the 
principles of reinventing government, by allowing assistance for an 
eligible activity to consist solely of special assessments made on 
behalf of low- and moderate-income households. HUD received four 
comments on this proposed provision. None of the comments provided a 
basis for changing the rule. One commenter suggested that when CDBG 
funds are used just for the special assessments and are not used to pay 
for the construction of the public improvement directly, the project 
should not be subject to all the requirements of the CDBG program, such 
as Davis-Bacon and citizen participation. However, there is no 
eligibility category under which CDBG funds can be used for paying a 
special assessment except for the eligibility of the improvement for 
which the assessment is made. Thus, even when the only form of CDBG 
usage assisting a public improvement is in paying for special 
assessments levied for that improvement, all of the CDBG program rules 
are triggered with respect to the construction (see 
Sec. 570.200(c)(3)).
    Two commenters suggested that HUD amend this provision to limit the 
use of CDBG funds for the payment of assessments. One suggested that it 
should be limited to payments on behalf of low-income households, 
instead of both low- and moderate-income households, in order to avoid 
the use of CDBG funds in what they described as the ``better parts of 
town.'' However, the statutory provision itself authorizes the use of 
funds for both categories of households, and HUD does not believe there 
is a need to so limit the regulatory provision. The second commenter 
suggested that the rule allow the use of CDBG funds to pay for the 
assessments for the very lowest-income households among those assessed, 
without having to pay the assessments on behalf of all of the low- and 
moderate-income households involved. To the degree that the statute 
allows, the regulations do provide for an exception only with respect 
to moderate-income households in certain circumstances. Given the clear 
statutory provisions, HUD cannot allow additional payment limitations 
based on income.

VII. Statutory Amendment Provisions

    Title I of the Housing and Community Development Act (the Act) has 
been amended a number of times since 1987. Several self-implementing 
changes to the Act affecting the CDBG program are included in this rule 
merely to conform the regulations with statutory provisions. This 
furthers government reinvention by bringing the CDBG rule current with 
all its authorizing legislation, as grantees have requested. An updated 
entitlement CDBG rule will simplify program administration for CDBG 
entitlement grantee staff who currently must research back and forth 
among various statutes and outdated regulations, handbooks, and 
guidance to determine activity eligibility and program standards. The 
statutory additions largely increase grantee options and enhance CDBG 
flexibility. 

[[Page 56905]]


A. National Affordable Housing Act

    Subtitle A of title IX of the Cranston-Gonzalez National Affordable 
Housing Act (Pub. L. 101-625, approved November 28, 1990) (the NAHA) 
amends the Housing and Community Development Act of 1974 (the Act). 
Section 903 of the NAHA amends section 102 of the Act, which includes 
the definitions of ``metropolitan city'' and ``urban county.'' HUD has 
amended the definition of ``metropolitan city'' in Sec. 570.3 to 
reflect the statute. No amendment is needed to the definition of 
``urban county'' in Sec. 570.3, because the regulation includes any 
other county eligible under section 102(a)(6) of the Act.
    Section 904 of the NAHA amends section 102(a)(12) of the Act, which 
includes the definition of ``extent of growth lag,'' to provide for 
boundary changes for a metropolitan city or urban county as a result of 
annexation. HUD has amended Sec. 570.3 to add the new statutory 
language. In Sec. 570.3, however, HUD refers to the more appropriate 
1990 census, rather than the 1980 census to which section 102(a)(12) 
refers. This modification is required by section 102(b) of the Act.
    Section 912 of the NAHA amends section 109 of the Act to prohibit 
discrimination on the basis of religion. HUD has amended Sec. 570.602 
to add the term ``religion.''

B. Housing and Community Development Act of 1992

    Section 807 of the Housing and Community Development Act of 1992 
(Pub. L. 102-550, approved October 28, 1992) (the 1992 Act) amends 
section 105(a) of the Act to establish two new categories of eligible 
CDBG activities: the provision of technical assistance to public or 
private entities to increase their capacity to carry out eligible 
neighborhood revitalization or economic development activities as 
outlined in a new Sec. 570.201(p), and the provision of assistance to 
institutions of higher education for carrying out eligible activities.
    Provision of technical assistance to public or nonprofit entities 
to increase their capacity to carry out eligible neighborhood 
revitalization or economic development activities is specifically 
exempted from the 20 percent limitation on planning and administrative 
costs under Secs. 570.205 and 570.206. Since this new provision became 
effective upon enactment, any costs incurred after October 28, 1992 for 
building such capacity should be considered eligible under the new 
provision and not subject to the 20 percent limitation, provided that 
the use of such funds after the effective date can be shown to meet one 
of the national objectives.
    Since this provision of the statute clarifies that the capacity 
building must be linked to CDBG-eligible neighborhood revitalization or 
economic development activities, a grantee must determine the 
eligibility of the activity for which it is attempting to build 
capacity. It must also determine which national objective can 
reasonably be expected to be met once the entity has received the 
technical assistance and undertakes the activity. For example, a 
grantee may provide CDBG record-keeping, work write-up, loan 
underwriting, and rehabilitation inspection training to a nonprofit 
organization that anticipates carrying out a housing rehabilitation 
loan program. The grantee's contract with the nonprofit should identify 
the eligible activity and the national objective expected to be met by 
the rehabilitation program that is to be undertaken as a result of this 
capacity building effort. In determining the national objective to be 
met, the grantee should: (1) Review the nature of the organization, the 
type and eligibility of the activity expected to be carried out, the 
location of the activity, and the entity's expected (or traditional) 
clientele; and (2) as a result of the review, have a reasonable 
expectation that the activity to be undertaken by the nonprofit entity 
would comply with a national objective. For example, the grantee might 
reasonably conclude that the contemplated activity would meet the 
national objective of benefit to low- and moderate-income persons based 
on a review of the nonprofit's charter that showed the organization's 
activities would be directed toward and benefit the low- and moderate-
income persons in the neighborhood in which it operates. HUD makes 
conforming changes to reflect the recipient determinations at 
Secs. 570.200(e) and 570.506(c).
     The 1992 Act also added a new paragraph 105(a)(22) to the Act. 
CDBG funds may now be used by colleges and universities that have the 
demonstrated capacity to use the funds for eligible activities. HUD 
intends to permit grantees to make this determination of demonstrated 
capacity using their own judgment. A grantee determination is the most 
effective way to meet this requirement, since the grantee is most 
familiar with the entities to which it proposes to give CDBG funds and 
is therefore in the best position to make a judgment of capacity. This 
rule adds a new paragraph Sec. 570.201(q), and makes conforming changes 
to reflect the recipient determinations at Secs. 570.200(e) and 
570.506(c).
    Section 807(b) of the 1992 Act amended section 907(b)(2) of the 
NAHA by extending the date that use of funds for direct homeownership 
assistance is eligible under the CDBG program to October 1, 1994. In 
addition, the date to which the Secretary of HUD may, under certain 
circumstances, extend such eligibility was changed to October 1, 1995. 
HUD received three comments in response to the publication of the 
direct homeownership assistance provision in the June 17, 1992 interim 
rule. All three commenters supported the extension. Two commenters 
recommended extending it beyond the original NAHA date of October 1, 
1992 and making it a permanent eligible use of CDBG funds. HUD 
published a Federal Register notice on September 30, 1994 (59 FR 49954) 
extending the provision to October 1, 1995, and this final rule amends 
the regulations to reflect that date. Although the provision terminated 
when the extension period ended, HUD has requested that Congress change 
the statute to reinstate the activity's eligibility. Thus, HUD has 
retained the provision for now, although it is not in effect. HUD also 
made a conforming change to Sec. 570.506.
    Section 807(c)(1) of the 1992 Act amended section 105(g)(2) of the 
Act to authorize training, technical assistance, or other support 
services to increase the capacity of small businesses, 
microenterprises, the recipient, or subrecipient to carry out CDBG 
economic development activities. These costs were not to be included in 
the limitation on administration and planning expenditures. This 
provision was effective upon enactment. The Economic Development 
Guidelines, published on January 5, 1995 (60 FR 1922), incorporated 
into the CDBG regulations at Sec. 570.201(o) the portions of the 
statute dealing with the microenterprises. This rule adds a new 
Sec. 570.201(o)(4), allowing capacity building for the grantee and 
subrecipient as microenterprise activities.
    Section 807(e) of the 1992 Act amended section 105(a)(3) of the Act 
with respect to the current restrictions on areas in which CDBG funds 
may be used for code enforcement activities, and now permits grantees 
to take into account privately funded development. Previously, CDBG-
funded code enforcement was only permitted in deteriorated or 
deteriorating areas in which such enforcement, together with public 
improvements and services to be provided, would be expected to arrest 
the decline of the area. This rule 

[[Page 56906]]
amends Sec. 570.202(c) to permit consideration of private improvements 
in determining areas in which CDBG-assisted code enforcement may be 
provided. Section 570.202(c) now also clarifies that only the costs of 
inspections, not the costs of any improvements done as a result, are 
eligible in this category.
    Section 809 of the 1992 Act amends section 105(a)(13) of the Act to 
make eligible the use of CDBG funds to pay for the reasonable 
administrative costs related to establishing and administering a 
Federally approved Enterprise Zone. While this authority became 
effective upon enactment, its utility is dependent on the implementing 
regulations at 24 CFR part 597, published January 12, 1995 (60 FR 
3434), for the Federal Empowerment Zone and Enterprise Community 
legislation. This rule adds a new paragraph (i) to Sec. 570.206 to 
provide authority for such costs for officially designated Federal 
Empowerment Zones and Enterprise Communities (EZ/EC).

C. Residential Lead-Based Paint Hazard Reduction Act of 1992

    The Residential Lead-Based Paint Hazard Reduction Act of 1992 is 
title X of the 1992 Act. This final rule includes one statutory 
provision from this Act requiring little or no regulatory elaboration. 
The provision allows for evaluation and reduction of lead-based paint 
hazards as a separate activity. While reduction of lead-based paint 
hazards has always been a CDBG-eligible activity (provided the activity 
could meet a national objective), evaluation was heretofore only 
eligible in conjunction with a rehabilitation activity. Section 
570.202(f) provides authority for evaluation as a rehabilitation 
activity in itself.

D. Multifamily Housing Property Disposition Reform Act

    The Multifamily Housing Property Disposition Reform Act of 1994 
(Pub. L. 103-233, approved April 11, 1994) (the 1994 Act) included two 
eligibility enhancements and expanded CDBG waiver authority for 
disaster areas. Section 234 of the 1994 Act added section 122 to the 
Act to provide flexibility to the CDBG program for disaster areas. This 
rule adds this provision to the regulatory waiver provisions at 
Sec. 570.5. When a CDBG recipient designates its CDBG funds to address 
the damage in an area for which the President has declared a disaster 
under title IV of the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act (42 U.S.C. 5170-5189b), the Secretary may suspend all 
requirements for purposes of assistance under section 106 of the Act 
for that area, except for those related to public notice of funding 
availability, nondiscrimination, fair housing, labor standards, 
environmental standards, and requirements that activities benefit 
persons of low- and moderate-income.
    To use this provision, a CDBG recipient may designate funds from 
existing or future grants to address damage in a Presidentially 
declared disaster area and request the Secretary to waive provisions of 
law or regulation for the purpose of making such funds available for 
disaster recovery purposes. Local HUD offices receiving disaster 
recovery waiver requests will expedite the forwarding of such requests, 
together with local office reviews and recommendations, to the 
Assistant Secretary for Community Planning and Development for 
consideration.
    Assuming HUD grants the waivers, the activities being carried out 
with the designated funds would operate under different requirements 
than the regular CDBG program. Therefore, the grantee will be required 
to annotate its performance report in such a way that activities for 
which waivers have been granted are distinguishable from regular 
program activities. Also, the grantee will be required to annotate and 
describe the activity in such a way in its annual action plan or 
amended action plan, as appropriate, that the activity is clearly 
distinguishable as a designated disaster recovery activity.
    Section 207 of the 1994 Act also amended section 105(a)(13) of the 
Act to allow payment of reasonable administrative costs and carrying 
charges related to administering the HOME program under title II of the 
NAHA. This provision is included together with the EZ/EC provision at 
Sec. 570.206(i). The costs covered by these provisions do not include 
planning costs under Sec. 570.205. All administrative costs, whether 
used to administer the EZ/EC, HOME, or CDBG programs, are summed before 
applying the CDBG 20 percent limit on planning and administration 
expenditures. Activities may not be carried out under Sec. 570.206(g), 
which currently is not available because of its link to a Housing 
Assistance Plan (HAP) that is no longer in effect for any grantees. HUD 
is currently exploring possible ways to update this provision.
    Section 207 of the 1994 Act also amended section 105(a)(21) of the 
Act, authorizing housing services, such as housing counseling in 
connection with tenant-based rental assistance and affordable housing 
projects assisted under title II of the NAHA, energy auditing, 
preparation of work specifications, loan processing, inspections, 
tenant selection, management of tenant-based rental assistance, and 
other services related to assisting owners, tenants, contractors, and 
other entities participating or seeking to participate in housing 
activities assisted under title II of the NAHA.
    These activities have been eligible since the enactment of CDBG 
amendments in 1992, but otherwise ineligible CDBG assistance in support 
of the HOME program was subject to the 20 percent limit on 
administrative and planning expenditures. The current amendment removes 
this restriction. This rule includes this provision at Sec. 570.201(k).
    Any costs of delivering the housing services made eligible under 
the amended section 105(a)(21) are eligible. CDBG grantees using the 
two programs together should be reminded that the eligibility and 
benefit requirements of the two programs differ, that the HOME term 
``project'' and the CDBG term ``activity'' are not synonymous, and that 
care should be exercised in management and documentation of blended 
activities. To simplify this process, this rule adds a new paragraph at 
Sec. 570.208(a)(3)(iii), which states that when CDBG funds are used for 
housing services eligible under Sec. 570.201(k), such funds shall be 
considered to benefit low- and moderate-income persons when the housing 
for which the services are provided is to be occupied by low- and 
moderate-income households. Documentation demonstrating that the HOME 
project (or projects) supported by the CDBG housing services activity 
meets the HOME income targeting criteria at 24 CFR 92.252 and 92.254 
should be sufficient to demonstrate compliance with this provision.

VIII. Miscellaneous Technical Updates and Corrections

    This rule replaces the obsolete references in subpart J to OMB 
Circular A-110 with references to 24 CFR part 84, and this rule updates 
the references to OMB Circular A-87 to reflect recent revisions to that 
document. In conjunction with this update, HUD is clarifying and 
broadening the rule at Sec. 570.200(h) defining pre-agreement (now pre-
award) costs. The current CDBG rule authorizes a few types of costs 
that may be incurred prior to execution of the annual grant agreement; 
this rule permits grantees to incur any cost that meets certain 
standards (e.g., the activity is included 

[[Page 56907]]
in the consolidated plan and citizens have been informed) and then 
charge the costs to the grant after the effective date of the grant 
agreement. Further, until now when a cost was not one of the types 
specified in the rule, the grantee had to request a pre-agreement cost 
waiver from HUD Headquarters. Under this rule, a grantee wishing to 
incur a cost that does not meet the new, broader standards may request 
certain pre-award cost exceptions from the local HUD office. This 
change furthers reinvention by providing local jurisdictions greater 
flexibility to determine use of resources and by devolving 
responsibility for decisionmaking to the local offices, thereby greatly 
limiting the number of cases that will need the Assistant Secretary's 
approval.
    Another technical change is to replace the term ``handicapped'' in 
Secs. 570.208 and 570.506 with terms compatible with available income 
data on persons with a disability provided by the Bureau of the Census' 
Current Population Reports. The data, issued in 1993 from the Survey of 
Income and Program Participation, provide a basis for a national 
presumption that adults meeting the Census criteria for severe 
disability meet the low- and moderate-income national objective under 
the CDBG program. The Census definition of severe disability only 
applies in the CDBG program for purposes of making presumptions about 
income levels for groups of disabled persons; it does not apply for 
purposes of meeting responsibilities under section 504 of the 
Rehabilitation Act of 1973, the Americans With Disabilities Act, or the 
Architectural Barriers Act. Therefore, HUD is changing the terminology 
in this rule to clarify the distinction between the income presumption 
provision and the civil rights requirements. Also, this rule adds the 
term ``persons living with AIDS'' to Sec. 570.208(a)(2)(i)(A), because 
reliable national data has become available from the Center for Disease 
Control in Atlanta to support a reasonable presumption that at least 51 
percent of such persons in a given geographic area are low- and 
moderate-income. This rule also clarifies provisions under which the 
use of CDBG funds is authorized for the removal of barriers to 
accessibility for elderly and disabled persons. Section 105(a)(5) of 
the Act makes eligible the use of program funds for special projects 
directed to the removal of material and architectural barriers that 
restrict the mobility and accessibility of elderly and handicapped 
persons. Under current law and regulation, this provision has very 
limited usefulness and has caused confusion. HUD believes that it is 
important that the rules clearly state how CDBG funds may be used for 
barrier removal. The real questions arise with respect to national 
objective compliance. Virtually all public facilities and improvements 
serve an area generally and are thus subject to the limitations imposed 
by section 105(c)(2) of the Act. This provision states that activities 
that serve an area generally may be considered to address the national 
objective of benefit to low- and moderate-income persons only if the 
percentage of residents in the service area who are of such income 
meets certain minimum levels. In the regulations, this limitation is 
implemented at Sec. 570.208(a)(1). Where accessibility barriers exist 
in a facility or improvement that serves an area that does not meet 
this requirement, the use of CDBG funds to remove such barriers can be 
problematic. Many years ago, to provide a way to authorize the use of 
CDBG funds to remove barriers in such cases, Sec. 570.208(a)(2) was 
added to the regulations allowing use of CDBG funds for the following 
to be considered to meet the national objective of benefit to low- and 
moderate-income persons:

      ``(ii) A special project directed to removal of material and 
architectural barriers which restrict the mobility and accessibility 
of elderly or handicapped persons to publicly owned and privately 
owned non-residential buildings, facilities and improvements and the 
common areas of residential structures containing more than one 
dwelling unit.''

This presumption assumes that the principal benefit will go to elderly 
and disabled persons, and that the general public will not also benefit 
substantially from the activity, since if it did the activity might not 
meet the general rule that the majority of the beneficiaries must be 
low- and moderate-income persons. A number of recent policy cases have 
arisen from grantee confusion about the current language. To clarify 
the eligibility of architectural barrier removal, this rule removes the 
separate eligibility category at Sec. 570.201(k) and describes in 
Sec. 570.201(c) and Sec. 570.202(b) that architectural barrier removal 
is an eligible activity. This rule also changes Sec. 570.208(a)(2) to 
clarify in which circumstances the limited clientele presumption may be 
applied to such activities.
    Another technical change at Secs. 570.304(a), 570.429(g), and 24 
CFR 91.500 restores language inadvertently deleted by the Consolidated 
Plan final rule, and clarifies that HUD retains authority under the 
CDBG program to require additional assurances from grantees when 
substantial evidence exists that a certification of future performance 
is not valid. This CDBG authority is in addition to the current 
Consolidated Plan final rule (based on the Comprehensive Housing 
Affordability Strategy statutory language) that simply provides for 
certifications to be wholly accepted or wholly rejected. Requiring 
additional assurances and potentially delaying or limiting the 
grantee's access to funds may trigger CDBG due process hearing 
requirements. Therefore HUD will coordinate such actions between HUD 
local offices and Headquarters.
    Another technical change reinstates the applicability of the 
Architectural Barriers Act of 1968 (42 U.S.C. 4151-4157) (the ABA) to 
the CDBG Entitlement program. The ABA requires certain Federal and 
Federally funded buildings and other facilities to be designed, 
constructed, or altered in accordance with standards that ensure 
accessibility to, and use by, persons with physical disabilities. HUD's 
original regulations implementing the CDBG program required compliance 
with accessibility standards issued pursuant to the ABA. (See former 24 
CFR 570.606, 39 FR 40148, November 13, 1974; 42 FR 33020, June 28, 
1977.) By final rule published September 23, 1983, and made effective 
November 2, 1983 (48 FR 43538), HUD amended its regulations governing 
the CDBG program to reflect changes made in the Act by the Housing and 
Community Development Act of 1980 (Pub. L. 96-399, approved October 8, 
1980), and the Housing and Community Development Amendments of 1981 
(Pub. L. 97-35, approved August 13, 1981). The purpose of the amending 
regulations, as noted by HUD in the proposed rule published October 4, 
1982 (47 FR 43900), was to eliminate requirements not mandated by 
statute. On this basis, HUD eliminated the requirement that the CDBG 
program comply with the ABA accessibility standards (47 FR 43909, 48 FR 
43549). HUD stated that the CDBG program was not statutorily subject to 
the accessibility standards of the ABA because the CDBG statute does 
not provide authority for imposing design, construction, or alteration 
standards on CDBG-funded facilities, as required by section 4151(3) of 
the ABA, and that it had imposed the ABA standards on the CDBG program 
as an administratively adopted requirement (47 FR 43909). HUD noted, 
however, that some facilities constructed or altered with CDBG 
assistance would remain subject to accessibility standards 

[[Page 56908]]
by reason of the applicability of section 504 of the Rehabilitation Act 
of 1973.
    Since HUD's decision in 1983 to remove compliance with the ABA as a 
CDBG program requirement, two significant events caused HUD to 
reconsider this decision. The first event was the passage of the Fair 
Housing Amendments Act of 1988 (Pub. L. 100-430, approved September 13, 
1988) (Fair Housing Act), which amended Title VIII of the Civil Rights 
Act of 1968 to add prohibitions against discrimination in housing on 
the basis of handicap and familial status. The Fair Housing Act also 
made it unlawful to design and construct certain multifamily dwellings 
for first occupancy after March 13, 1991 in a manner that makes them 
inaccessible to persons with disabilities. Further, the Fair Housing 
Act made it unlawful to refuse to permit, at the expense of the person 
with a disability, reasonable modifications to existing premises 
occupied or to be occupied by such person if such modifications are 
necessary to afford such person full enjoyment of the premises.
    The second event was the passage of the Americans with Disabilities 
Act (Pub. L. 101-336, approved July 26, 1990) (ADA), which provides 
comprehensive civil rights to individuals with disabilities in the 
areas of employment, public accommodations, State and local government 
services, and telecommunications. The ADA provides that discrimination 
includes a failure to design and construct facilities for first 
occupancy no later than January 26, 1993 that are readily accessible to 
and usable by individuals with disabilities. Further, the ADA requires 
the removal of architectural barriers and communication barriers that 
are structural in nature in existing facilities, where such removal is 
readily achievable--that is, easily accomplishable and able to be 
carried out without much difficulty or expense. (See the final rule 
implementing the ADA published by the Department of Justice on July 26, 
1991 (56 FR 35544, 35568)).
    The Fair Housing Act and the ADA indicate a clear policy that 
housing and commercial facilities and public accommodations should be 
``readily accessible and usable by'' individuals with disabilities. In 
light of these developments and to foster consistency in the 
administration of HUD's programs, this final rule reinstates compliance 
with the ABA as a CDBG program requirement.
    Compliance with the requirements of the ABA will be applicable to 
funds allocated or reallocated under the CDBG Entitlement, State, and 
HUD-administered Small Cities programs and the Section 108 Loan 
Guarantee program, after the effective date of this final rule. 
Assisted facilities must meet the requirements of the Uniform Federal 
Accessibility Standards for alterations if the alterations are financed 
in whole or in part by CDBG funds made available after the effective 
date of this final rule. Although alterations made without the use of 
Federal funds would not have to comply with the accessibility 
requirements of the ABA, alterations made to these facilities, in most 
instances, will have to comply with the accessibility requirements of 
the public accommodations provisions of the ADA. This final rule makes 
this regulatory change at Sec. 570.614(a).
    This final rule also provides a specific listing at Sec. 570.614(b) 
for the ADA. The ADA is (and has been) covered by the grantee's annual 
certification that it will comply with ``applicable laws.'' The 
addition of the specific provision highlighting the ADA is being made 
for consistency with other applicable laws for which HUD has 
enforcement responsibilities. The Federal Communications Commission has 
enforcement authority for enforcing the portion of the ADA applicable 
to emergency telephone numbering systems (the CDBG-eligibility of which 
is highlighted and enhanced in this regulation) and to common carriers.
    This final rule replaces an obsolete reference to the Small Cities 
Application in Sec. 570.405(e) on Insular Areas with a requirement that 
insular area applicants submit a final application and certifications 
to the appropriate HUD office in a form prescribed by HUD. This rule 
clarifies how HUD-administered Small Cities in New York will be treated 
under the consolidated plan. Section 570.423(a) has been revised to 
state clearly that New York HUD-administered Small Cities applicants 
that submit an abbreviated consolidated plan must prepare and publish a 
proposed application and comply with the citizen participation 
requirements of Sec. 570.431 whether or not their application contains 
housing activities. HUD has previously determined that the Insular area 
grantees were subject to Sec. 570.200(a)(3), which requires compliance 
with the primary objective of the Act. HUD is specifically adding 
insular areas recipients to this section to enhance clarity.

IX. Other Matters

A. Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review, issued by the 
President on September 30, 1993. Any changes made in this rule 
subsequent to its submission to OMB are identified in this docket file, 
which is available for public inspection between 7:30 a.m. and 5:30 
p.m. weekdays in the Office of the Rules Docket Clerk, Office of the 
General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

B. Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule does not have a significant 
economic impact on a substantial number of small entities. This rule 
does not affect the portion of the CDBG regulations that affects small 
entities.

C. Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The finding is available for public inspection 
between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules 
Docket Clerk at the address provided under the section of this preamble 
entitled ``Executive Order 12866.''

D. 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 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 rule is not subject to review under the Order. This rule is limited 
to implementing statutory provisions and responding to identified 
deficiencies in the CDBG program.

E. Executive Order 12606, The Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this rule does not have 
potential for significant impact on 

[[Page 56909]]
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 rule, as 
those policies and programs relate to family concerns.

List of Subjects

24 CFR Part 91

    Aged, Grant programs--housing and community development, Homeless, 
Individuals with disabilities, Low and moderate income housing, 
Reporting and recordkeeping requirements.

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, 24 CFR part 91 is amended; and part 570 is amended by 
adopting the interim rule published June 17, 1992 (57 FR 27116) as 
final, and is further amended, as follows:

PART 91--CONSOLIDATED SUBMISSIONS FOR COMMUNITY PLANNING AND 
DEVELOPMENT PROGRAMS

    1. The authority citation for part 91 continues to read as follows:

    Authority: 42 U.S.C. 3535(d), 3601-3619, 5301-5315, 11331-11388, 
12701-12711, 12741-12756, and 12901-12912.

    2. Section 91.500 is amended by revising paragraph (b) introductory 
text to read as follows:


Sec. 91.500  HUD approval action.

* * * * *
    (b) Standard of review. HUD may disapprove a plan or a portion of a 
plan if it is inconsistent with the purposes of the Cranston-Gonzalez 
National Affordable Housing Act (42 U.S.C. 12703), if it is 
substantially incomplete, or, in the case of certifications applicable 
to the CDBG program under Sec. 91.225 (a) and (b), if it is not 
satisfactory to the Secretary in accordance with Sec. 570.304 or 
Sec. 570.429(g) of this title, as applicable. The following are 
examples of consolidated plans that are substantially incomplete:
* * * * *

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

    3. The authority citation for part 570 continues to read as 
follows:

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

    4. Section 570.2 is amended by revising the second sentence to read 
as follows:


Sec. 570.2  Primary objective.

    * * * Consistent with this primary objective, not less than 70 
percent of CDBG funds received by the grantee under subparts D, F, and 
M of this part, and under section 108(q) of the Housing and Community 
Development Act of 1974 shall be used in accordance with the applicable 
requirements for activities that benefit persons of low and moderate 
income.
    5. Section 570.3 is amended by revising the definitions of ``CDBG 
funds'', ``Extent of growth lag'', ``Low- and moderate-income 
household'', ``Low- and moderate-income person'', ``Low-income 
household'', ``Low-income person'', ``Metropolitan city'', ``Moderate-
income household'', and ``Moderate-income person'', and by adding a new 
definition of ``Income'' in alphabetical order, to read as follows:


Sec. 570.3  Definitions.

* * * * *
    CDBG funds means Community Development Block Grant funds, including 
funds received in the form of grants under subparts D or F of this 
part, funds awarded under section 108(q) of the Housing and Community 
Development Act of 1974, loans guaranteed under subpart M of this part, 
urban renewal surplus grant funds under subpart N of this part, and 
program income as defined in Sec. 570.500(a).
* * * * *
    Extent of growth lag means the number of persons who would have 
been residents in a metropolitan city or urban county, in excess of the 
current population of the metropolitan city or urban county, if such 
metropolitan city or urban county had a population growth rate between 
1960 and the date of the most recent population count available from 
the United States Bureau of the Census referable to the same point or 
period in time equal to the population growth rate for that period of 
all metropolitan cities. Where the boundaries for a metropolitan city 
or urban county used for the 1990 census have changed as a result of 
annexation, the current population used to compute extent of growth lag 
shall be adjusted by multiplying the current population by the ratio of 
the population based on the 1990 census within the boundaries used for 
the 1990 census to the population based on the 1990 census within the 
current boundaries.
* * * * *
    Income. For the purpose of determining whether a family or 
household is low- and moderate-income under subpart C of this part, 
grantees may select any of the three definitions listed below for each 
activity, except that integrally related activities of the same type 
and qualifying under the same paragraph of Sec. 570.208(a) shall use 
the same definition of income. The option to choose a definition does 
not apply to activities that qualify under Sec. 570.208(a)(1) (Area 
benefit activities), except when the recipient carries out a survey 
under Sec. 570.208(a)(1)(iv). Activities qualifying under 
Sec. 570.208(a)(1) generally must use the area income data supplied to 
recipients by HUD. The three definitions are as follows:
    (1)(i) ``Annual income'' as defined under the Section 8 Housing 
Assistance Payments program at 24 CFR 813.106 (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); or
    (ii) Annual Income as reported under the Census long-form for the 
most recent available decennial Census. This definition includes:
    (A) Wages, salaries, tips, commissions, etc.;
    (B) Self-employment income from own nonfarm 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' (VA) payments, unemployment compensation, and alimony; or
    (iii) Adjusted gross income as defined for purposes of reporting 
under Internal Revenue Service (IRS) Form 1040 for individual Federal 
annual income tax purposes. 

[[Page 56910]]

    (2) Estimate the annual income of a family or household by 
projecting the prevailing rate of income of each person at the time 
assistance is provided for the individual, family, or household (as 
applicable). Estimated annual income shall include income from all 
family or household members, as applicable. Income or asset enhancement 
derived from the CDBG-assisted activity shall not be considered in 
calculating estimated annual income.
* * * * *
    Low- and moderate-income household means a household having an 
income equal to or less than the Section 8 low-income limit established 
by HUD.
    Low- and moderate-income person means a member of a family having 
an income equal to or less than the Section 8 low-income limit 
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 limit established by HUD.
    Low-income person means a member of a family that has an income 
equal to or less than the Section 8 very low-income limit established 
by HUD. Unrelated individuals shall be considered as one-person 
families for this purpose.
* * * * *
    Metropolitan city means:
    (1) A city within a metropolitan area that is the central city of 
such area, as defined and used by the Office of Management and Budget.
    (2) Any other city within a metropolitan area that has a population 
of 50,000 or more.
    (3)(i) Any city that was classified as a metropolitan city for at 
least two years pursuant to paragraph (1) or (2) of this definition 
shall remain classified as a metropolitan city.
    (ii) Any unit of general local government that becomes eligible to 
be classified as a metropolitan city, and was not classified as a 
metropolitan city in the immediately preceding fiscal year, may, upon 
submission of written notification to HUD, defer its classification as 
a metropolitan city for all purposes under the Act, if it elects to 
have its population included in an urban county.
    (iii) Notwithstanding paragraph (3)(i) of this definition, a city 
may elect not to retain its classification as a metropolitan city.
    (iv) Any city classified as a metropolitan city under this 
definition, and that no longer qualifies as a metropolitan city in a 
fiscal year beginning after fiscal year 1989, shall retain its 
classification as a metropolitan city for the fiscal year in which the 
city ceases to qualify, and for the succeeding fiscal year, except that 
in the succeeding fiscal year the amount of the grant to that city 
shall be 50 percent of the amount calculated under section 106(b) of 
the Act, the remaining 50 percent shall be added to the amount 
allocated under section 106(d) of the Act to the State in which the 
city is located, and the city shall be eligible, in that succeeding 
fiscal year, to receive a distribution from the State allocation under 
section 106(d) of the Act.
* * * * *
    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 that 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.
* * * * *
    6. Section 570.5 is revised to read as follows:


Sec. 570.5  Waivers.

    (a) The Secretary may waive any requirement of this part not 
required by law whenever it is determined that undue hardship will 
result from applying the requirement and when application of the 
requirement would adversely affect the purposes of the Act.
    (b) For funds designated under this part by a recipient to address 
the damage in an area for which the President has declared a disaster 
under title IV of the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act (42 U.S.C. 5170-5189b), the Secretary may suspend all 
requirements for purposes of assistance under section 106 of the Act 
for that area, except for those related to public notice of funding 
availability, nondiscrimination, fair housing, labor standards, 
environmental standards, and requirements that activities benefit 
persons of low- and moderate-income.
    7. Section 570.200 is amended by revising the second sentence of 
paragraph (a)(3), paragraph (a)(5), the second sentence of paragraph 
(d)(1), the third sentence of paragraph (e), and paragraphs (g) and 
(h), to read as follows:


Sec. 570.200  General policies.

    (a) * * *
    (3) Compliance with the primary objective. * * * Consistent with 
this objective, Entitlement, HUD-administered Small Cities, and Insular 
area recipients must ensure that, over a period of time specified in 
their certification not to exceed three years, not less than 70 percent 
of the aggregate of CDBG fund expenditures shall be for activities 
meeting the criteria under Sec. 570.208(a) or Sec. 570.208(d)(5) or (6) 
for benefiting low- and moderate-income persons. * * *
* * * * *
    (5) Cost principles. Costs incurred, whether charged on a direct or 
an indirect basis, must be in conformance with OMB Circulars A-87, 
``Cost Principles for State, Local and Indian Tribal Governments''; A-
122, ``Cost Principles for Non-profit Organizations''; or A-21, ``Cost 
Principles for Educational Institutions,'' as applicable.\1\ All items 
of cost listed in Attachment B of these Circulars that require prior 
Federal agency approval are allowable without prior approval of HUD to 
the extent they comply with the general policies and principles stated 
in Attachment A of such circulars and are otherwise eligible under this 
subpart C, except for the following:

    \1\ These circulars are available from the American Communities 
Center by calling the following toll-free numbers: (800) 998-9999 or 
(800) 483-2209 (TDD).
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    (i) Depreciation methods for fixed assets shall not be changed 
without HUD's specific approval or, if charged through a cost 
allocation plan, the Federal cognizant agency.
    (ii) Fines and penalties (including punitive damages) are 
unallowable costs to the CDBG program.
    (iii) Pre-award costs are limited to those authorized under 
paragraph (h) of this section.
* * * * *
    (d) * * *
    (1) Employer-employee type of relationship. * * * In no event, 
however, shall such compensation exceed the equivalent of the daily 
rate paid for Level IV of the Executive Schedule. * * *
* * * * *
    (e) Recipient determinations required as a condition of 
eligibility. * * * A written determination is required for any activity 
carried out under the authority of Secs. 570.201(f), 570.201(i)(2), 
570.201(p), 570.201(q), 570.202(b)(3), 570.202(f)(2), 570.206(f), 
570.209, and 570.309.
* * * * *
    (g) Limitation on planning and administrative costs. No more than 
20 percent of the sum of any grant, plus 

[[Page 56911]]
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 of this 
part shall conform with this requirement by limiting the amount of CDBG 
funds obligated for planning plus administration during each program 
year to an amount no greater than 20 percent of the sum of its 
entitlement grant made for that program year (if any) plus the program 
income received by the recipient and its subrecipients (if any) during 
that program year.
    (h) Reimbursement for pre-award costs. The effective date of the 
grant agreement is the program year start date or the date that the 
consolidated plan is received by HUD, whichever is later. For a Section 
108 loan guarantee, the effective date of the grant agreement is the 
date of HUD execution of the grant agreement amendment for the 
particular loan guarantee commitment.
    (1) Prior to the effective date of the grant agreement, a recipient 
may incur costs or may authorize a subrecipient to incur costs, and 
then after the effective date of the grant agreement pay for those 
costs using its CDBG funds, provided that:
    (i) The activity for which the costs are being incurred is included 
in a consolidated plan action plan or an amended consolidated plan 
action plan (or application under subpart M of this part) prior to the 
costs being incurred;
    (ii) Citizens are advised of the extent to which these pre-award 
costs will affect future grants;
    (iii) The costs and activities funded are in compliance with the 
requirements of this part and with the Environmental Review Procedures 
stated in 24 CFR part 58;
    (iv) The activity for which payment is being made complies with the 
statutory and regulatory provisions in effect at the time the costs are 
paid for with CDBG funds;
    (v) CDBG payment will be made during a time no longer than the next 
two program years following the effective date of the grant agreement 
or amendment in which the activity is first included; and
    (vi) The total amount of pre-award costs to be paid during any 
program year pursuant to this provision is no more than the greater of 
25 percent of the amount of the grant made for that year or $300,000.
    (2) Upon the written request of the recipient, HUD may authorize 
payment of pre-award costs for activities that do not meet the criteria 
at paragraph (h)(1)(v) or (h)(1)(vi) of this section, if HUD 
determines, in writing, that there is good cause for granting an 
exception upon consideration of the following factors, as applicable:
    (i) Whether granting the authority would result in a significant 
contribution to the goals and purposes of the CDBG program;
    (ii) Whether failure to grant the authority would result in undue 
hardship to the recipient or beneficiaries of the activity;
    (iii) Whether granting the authority would not result in a 
violation of a statutory provision or any other regulatory provision;
    (iv) Whether circumstances are clearly beyond the recipient's 
control; or
    (v) Any other relevant considerations.
* * * * *
    8. Section 570.201 is amended by adding a parenthetical sentence 
following the first full sentence in paragraph (c); by revising the 
first two sentences of the introductory text of paragraph (e), 
paragraph (k), and the introductory text of paragraph (n); and by 
adding new paragraphs (o)(4), (p), and (q) to read as follows:


Sec. 570.201  Basic eligible activities.

* * * * *
    (c) * * * (However, activities under this paragraph may be directed 
to the removal of material and architectural barriers that restrict the 
mobility and accessibility of elderly or severely disabled persons to 
public facilities and improvements, including those provided for in 
Sec. 570.207(a)(1).) * * *
* * * * *
    (e) Public services. Provision of public services (including labor, 
supplies, and materials) 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. To be eligible for CDBG assistance, a public service must be 
either a new service or a quantifiable increase in the level of an 
existing service above that which has been provided by or on behalf of 
the unit of general local government (through funds raised by the unit 
or received by the unit from the State in which it is located) in the 
12 calendar months before the submission of the action plan. * * *
* * * * *
    (k) Housing services. Housing services, as provided in section 
105(a)(21) of the Act (42 U.S.C. 5305(a)(21)).
* * * * *
    (n) Homeownership assistance. Until October 1, 1995, CDBG funds may 
be used to provide direct homeownership assistance to low- and 
moderate-income households to:
* * * * *
    (o) * * *
    (4) Assistance under this paragraph (o) may also include training, 
technical assistance, or other support services to increase the 
capacity of the recipient or subrecipient to carry out the activities 
under this paragraph (o).
    (p) Technical assistance. Provision of technical assistance to 
public or nonprofit entities to increase the capacity of such entities 
to carry out eligible neighborhood revitalization or economic 
development activities. (The recipient must determine, prior to the 
provision of the assistance, that the activity for which it is 
attempting to build capacity would be eligible for assistance under 
this subpart C, and that the national objective claimed by the grantee 
for this assistance can reasonably be expected to be met once the 
entity has received the technical assistance and undertakes the 
activity.) Capacity building for private or public entities (including 
grantees) for other purposes may be eligible under Sec. 570.205.
    (q) Assistance to institutions of higher education. Provision of 
assistance by the recipient to institutions of higher education when 
the grantee determines that such an institution has demonstrated a 
capacity to carry out eligible activities under this subpart C.
    9. Section 570.202 is amended by:
    a. Removing ``and'' at the end of paragraph (a)(3);
    b. Redesignating paragraph (a)(4) as paragraph (a)(5);
    c. Adding a new paragraph (a)(4);
    d. Removing ``and'' at the end of paragraph (b)(9), and removing 
the period at the end of paragraph (b)(10) and adding ``; and'' in its 
place;
    e. Adding new paragraphs (b)(11) and (f); and
    f. Revising paragraph (c), to read as follows:


Sec. 570.202  Eligible rehabilitation and preservation activities.

    (a) * * *
    (4) Nonprofit-owned nonresidential buildings and improvements not 
eligible under Sec. 570.201(c); and
* * * * *
    (b) * * *
    (11) Improvements designed to remove material and architectural 

[[Page 56912]]
    barriers that restrict the mobility and accessibility of elderly or 
severely disabled persons to buildings and improvements eligible for 
assistance under paragraph (a) of this section.
    (c) Code enforcement. Costs incurred for inspection for code 
violations and enforcement of codes (e.g., salaries and related 
expenses of code enforcement inspectors and legal proceedings, but not 
including the cost of correcting the violations) in deteriorating or 
deteriorated areas when such enforcement together with public or 
private improvements, rehabilitation, or services to be provided may be 
expected to arrest the decline of the area.
* * * * *
    (f) Lead-based paint hazard evaluation and reduction. Lead-based 
paint hazard evaluation and reduction as defined in section 1004 of the 
Residential Lead-Based Paint Hazard Reduction Act of 1992 (42 U.S.C. 
4851b).
    10. Section 570.206 is amended by adding paragraph (i) to read as 
follows:


Sec. 570.206  Program administration costs.

* * * * *
    (i) Whether or not such activities are otherwise assisted by funds 
provided under this part, reasonable costs equivalent to those 
described in paragraphs (a), (b), (e), and (f) of this section for 
overall program management of:
    (1) A Federally designated Empowerment Zone or Enterprise 
Community; and
    (2) The HOME program under title II of the Cranston-Gonzalez 
National Affordable Housing Act (42 U.S.C. 12701 note).
    11. Section 570.207 is amended by:
    a. Amending the second sentence of paragraph (a)(1) by removing the 
citation ``Sec. 570.201(k)'' and by adding in its place the citation 
``Sec. 570.201(c)''; and
    b. Revising the first sentence of paragraph (b)(2)(i) and paragraph 
(b)(4), to read as follows:


Sec. 570.207  Ineligible activities.

* * * * *
    (b) * * *
    (2) * * *
    (i) Maintenance and repair of publicly owned streets, parks, 
playgrounds, water and sewer facilities, neighborhood facilities, 
senior centers, centers for persons with a disabilities, parking and 
other public facilities and improvements. * * *
* * * * *
    (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), or utilities, but excludes emergency grant payments made 
over a period of up to three consecutive months to the provider of such 
items or services on behalf of an individual or family.
    12. Section 570.208 is amended by:
    a. Redesignating paragraphs (a)(1)(iii), (a)(1)(iv), and (a)(1)(v) 
as paragraphs (a)(1)(v), (a)(1)(vi), and (a)(1)(vii), respectively;
    b. Adding new paragraphs (a)(1)(iii), (a)(1)(iv), and (a)(3)(iii);
    c. Revising the second sentence of paragraph (a)(2)(i)(A), 
paragraph (a)(2)(ii), and the second sentence of paragraph (a)(3) 
introductory text;
    d. Amending the second sentence of paragraph (a)(4)(vi)(F)(2) by 
removing the phrase ``final statement'' and by adding in its place the 
phrase ``action plan under part 91 of this title''; and
    e. Amending paragraphs (d)(5)(i), (d)(6)(i), and (d)(7) by removing 
the citation ``paragraph (a)(1)(v) of this section'' and by adding in 
its place the citation ``paragraph (a)(1)(vii) of this section''; to 
read as follows:


Sec. 570.208  Criteria for national objectives.

    (a) * * *
    (1) * * *
    (iii) An activity to develop, establish, and operate for up to two 
years after the establishment of, a uniform emergency telephone number 
system serving an area having less than the percentage of low- and 
moderate-income residents required under paragraph (a)(1)(i) of this 
section or (as applicable) paragraph (a)(1)(ii) of this section, 
provided the recipient obtains prior HUD approval. To obtain such 
approval, the recipient must:
    (A) Demonstrate that the system will contribute significantly to 
the safety of the residents of the area. The request for approval must 
include a list of the emergency services that will participate in the 
emergency telephone number system;
    (B) Submit information that serves as a basis for HUD to determine 
whether at least 51 percent of the use of the system will be by low- 
and moderate-income persons. As available, the recipient must provide 
information that identifies the total number of calls actually received 
over the preceding 12-month period for each of the emergency services 
to be covered by the emergency telephone number system and relates 
those calls to the geographic segment (expressed as nearly as possible 
in terms of census tracts, enumeration districts, block groups, or 
combinations thereof that are contained within the segment) of the 
service area from which the calls were generated. In analyzing this 
data to meet the requirements of this section, HUD will assume that the 
distribution of income among the callers generally reflects the income 
characteristics of the general population residing in the same 
geographic area where the callers reside. If HUD can conclude that the 
users have primarily consisted of low- and moderate-income persons, no 
further submission is needed by the recipient. If a recipient plans to 
make other submissions for this purpose, it may request that HUD review 
its planned methodology before expending the effort to acquire the 
information it expects to use to make its case;
    (C) Demonstrate that other Federal funds received by the recipient 
are insufficient or unavailable for a uniform emergency telephone 
number system. For this purpose, the recipient must submit a statement 
explaining whether the lack of funds is due to the insufficiency of the 
amount of the available funds, restrictions on the use of such funds, 
or the prior commitment of funds by the recipient for other purposes; 
and
    (D) Demonstrate that the percentage of the total costs of the 
system paid for by CDBG funds does not exceed the percentage of low- 
and moderate-income persons in the service area of the system. For this 
purpose, the recipient must include a description of the boundaries of 
the service area of the emergency telephone number system, the census 
divisions that fall within the boundaries of the service area (census 
tracts or enumeration districts), the total number of persons and the 
total number of low- and moderate-income persons within each census 
division, the percentage of low- and moderate-income persons within the 
service area, and the total cost of the system.
    (iv) An activity for which the assistance to a public improvement 
that provides benefits to all the residents of an area is limited to 
paying special assessments (as defined in Sec. 570.200(c)) levied 
against residential properties owned and occupied by persons of low and 
moderate income.
* * * * *
    (2) * * *
    (i) * * *
    (A) * * * Activities that exclusively serve a group of persons in 
any one or a combination of the following categories may be presumed to 
benefit persons, 51 percent of whom are low- and moderate-income: 
abused children, battered spouses, elderly persons, adults meeting the 
Bureau of the Census' 

[[Page 56913]]
Current Population Reports definition of ``severely disabled,'' 
homeless persons, illiterate adults, persons living with AIDS, and 
migrant farm workers; or
* * * * *
    (ii) An activity that serves to remove material or architectural 
barriers to the mobility or accessibility of elderly persons or of 
adults meeting the Bureau of the Census' Current Population Reports 
definition of ``severely disabled'' will be presumed to qualify under 
this criterion if it is restricted, to the extent practicable, to the 
removal of such barriers by assisting:
    (A) The reconstruction of a public facility or improvement, or 
portion thereof, that does not qualify under paragraph (a)(1) of this 
section;
    (B) The rehabilitation of a privately owned nonresidential building 
or improvement that does not qualify under paragraph (a) (1) or (4) of 
this section; or
    (C) The rehabilitation of the common areas of a residential 
structure that contains more than one dwelling unit and that does not 
qualify under paragraph (a)(3) of this section.
* * * * *
    (3) * * * This would include, but not necessarily be limited to, 
the acquisition or rehabilitation of property by the recipient, a 
subrecipient, a developer, an individual homebuyer, or an individual 
homeowner; conversion of nonresidential structures; and new housing 
construction. * * *
* * * * *
    (iii) When CDBG funds are used for housing services eligible under 
Sec. 570.201(k), such funds shall be considered to benefit low- and 
moderate-income persons if the housing units for which the services are 
provided are HOME-assisted and the requirements at 24 CFR 92.252 or 
92.254 are met.
* * * * *
    13. Section 570.301 is added to read as follows:


Sec. 570.301  Activity locations and float-funding.

    The consolidated plan, action plan, and amendment submission 
requirements referred to in this section are those in 24 CFR part 91.
    (a) 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 in the action plan or any 
amendment 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, or in the case of a planned public 
facility or improvement, how it expects to determine its location.
    (b) 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 or action plans for one or more other 
activities that do not need the funds immediately, subject to the 
limitations described below. Such funds shall be referred to as the 
``float'' for purposes of this section and the action plan. 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 
action plan or amend the action plan for the current program year. For 
purposes of this section, an activity that uses such funds will be 
called a ``float-funded activity.''
    (1) Each float-funded activity must be individually listed and 
described as such in the action plan.
    (2)(i) The expected time period 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. An activity from which program 
income sufficient to recover the full amount of the float assistance is 
expected to be generated more than 2.5 years after obligation may not 
be funded from the float, but may be included in an action plan 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) Any extension of the repayment period for a float-funded 
activity shall be considered to be a new float-funded activity for 
these purposes and may be implemented by the grantee only if the 
extension is made subject to the same limitations and requirements as 
apply to a new float-funded activity.
    (3) Unlike other projected program income, the full amount of 
income expected to be generated by a float-funded activity must be 
shown as a source of program income in the action plan containing the 
activity, whether or not some or all of the income is expected to be 
received in a future program year (in accordance with 24 CFR 
91.220(g)(1)(ii)(D)).
    (4) The recipient must also clearly declare in the action plan that 
identifies the float-funded activity the recipient's commitment to 
undertake one of the following options:
    (i) Amend or delete activities in an amount equal to any default or 
failure to produce sufficient income in a timely manner. If the 
recipient makes this choice, it must include a description of the 
process it will use to select the activities to be amended or deleted 
and how it will involve citizens in that process; and it must amend the 
applicable statement(s) or action plan(s) showing those amendments or 
deletions promptly upon determining that the float-funded activity will 
not generate sufficient or timely program income;
    (ii) 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 action plan 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;
    (iii) 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; or
    (iv) A method approved in writing by HUD for securing timely return 
of the amount of the float funding. Such method must ensure that funds 
are available to meet any default or shortfall within 30 days of the 
float-funded activity's failure to generate the projected amount of the 
program income on schedule.
    (5) When preparing an action plan 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 or action plan, 
the current action plan shall identify the expected income and explain 
that the planned use of the income has already been described in prior 
statements or action plans, and shall identify the statements or action 
plans in which such descriptions may be found.
    14. Section 570.304 is amended by revising paragraph (a) and by 
removing paragraph (d) to read as follows:


Sec. 570.304  Making of grants.

    (a) Approval of grant. HUD will approve a grant if the 
jurisdiction's submissions have been made and approved in accordance 
with 24 CFR part 91, and the certifications required 

[[Page 56914]]
therein are satisfactory to the Secretary. The certifications will be 
satisfactory to the Secretary for this purpose unless the Secretary has 
determined pursuant to subpart O of this part that the grantee has not 
complied with the requirements of this part, has failed to carry out 
its consolidated plan as provided under Sec. 570.903, or has determined 
that there is evidence, not directly involving the grantee's past 
performance under this program, that tends to challenge in a 
substantial manner the grantee's certification of future performance. 
If the Secretary makes any such determination, however, further 
assurances may be required to be submitted by the grantee as the 
Secretary may deem warranted or necessary to find the grantee's 
certification satisfactory.
* * * * *
    15. Section 570.309 is added to subpart D 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 such an activity is 
necessary to further the purposes of the Act and the recipient's 
community development objectives, and that reasonable benefits from the 
activity will accrue to residents within the jurisdiction of the 
grantee. The grantee shall document the basis for such determination 
prior to providing CDBG funds for the activity.
    16. Section 570.405 is amended by revising paragraph (e)(2), by 
redesignating paragraph (e)(3) as paragraph (e)(4), and by adding a new 
paragraph (e)(3) to read as follows:


Sec. 570.405  The insular areas.

* * * * *
    (e) * * *
    (2) Applicants shall prepare and publish or post a proposed 
application in accordance with the citizen participation requirements 
of paragraph (h) of this section.
    (3) Applicants shall submit to HUD a final application containing 
its community development objectives and activities. This application 
shall be submitted to the appropriate HUD office, together with the 
required certifications, in a form prescribed by HUD.
* * * * *
    17. Section 570.423 is amended by revising paragraph (a) to read as 
follows:


Sec. 570.423  Application for the HUD-administered New York Small 
Cities Grants.

    (a) Proposed application. The applicant shall prepare and publish a 
proposed application and comply with the citizen participation 
requirements as described in Sec. 570.431. The applicant should follow 
the citizen participation requirements of 24 CFR part 91 if it submits 
a complete consolidated plan.
* * * * *
    18. Section 570.429 is amended by revising paragraph (g) to read as 
follows:


Sec. 570.429  Hawaii general and grant requirements.

* * * * *
    (g) Application approval. HUD will approve an application if the 
jurisdiction's submissions have been made and approved in accordance 
with 24 CFR part 91 and the certifications required therein are 
satisfactory to the Secretary. The certifications will be satisfactory 
to the Secretary for this purpose unless the Secretary has determined 
pursuant to subpart O of this part that the grantee has not complied 
with the requirements of this part, has failed to carry out its 
consolidated plan as provided under Sec. 570.903, or has determined 
that there is evidence, not directly involving the grantee's past 
performance under this program, that tends to challenge in a 
substantial manner the grantee's certification of future performance. 
If the Secretary makes any such determination, however, further 
assurances may be required to be submitted by the grantee as the 
Secretary may deem warranted or necessary to find the grantee's 
certification satisfactory.
* * * * *
    19. Section 570.500 is amended by removing and reserving paragraph 
(a)(1)(viii); by revising paragraphs (a)(2), (a)(3), and (c); by adding 
a new paragraph (a)(5); and by adding two sentences to the end of 
paragraph (b), to read as follows:


Sec. 570.500  Definitions.

    (a) * * *
    (1) * * *
    (viii) [Reserved];
* * * * *
    (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) 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 prior to the use of the reimbursed funds for 
eligible purposes.
    (3) The calculation of the amount of program income for the 
recipient's CDBG program as a whole (i.e., comprising activities 
carried out by a grantee and its subrecipients) shall exclude payments 
made by subrecipients of principal and/or interest on CDBG-funded loans 
received from grantees if such payments are made using program income 
received by the subrecipient. (By making such payments, the 
subrecipient shall be deemed to have transferred program income to the 
grantee.) The amount of program income derived from this calculation 
shall be used for reporting purposes, for purposes of applying the 
requirement under Sec. 570.504(b)(2)(iii), and in determining 
limitations on planning and administration and public services 
activities to be paid for with CDBG funds.
* * * * *
    (5) Examples of other receipts that are not considered program 
income are proceeds from fund raising activities carried out by 
subrecipients receiving CDBG assistance (the costs of fundraising are 
generally unallowable under the applicable OMB circulars referenced in 
24 CFR 84.27), 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) for subrecipient-controlled property, or in 
Sec. 570.505 for recipient-controlled property.
    (b) * * * Each revolving loan fund's cash balance must be held in 
an interest-bearing account, and any interest paid on CDBG funds held 
in this account shall be considered interest earned on grant advances 
and must be remitted to HUD for transmittal to the U.S. Treasury no 
less frequently than annually. (Interest paid by borrowers on eligible 
loans made from the revolving loan fund shall be program income and 
treated accordingly.)
    (c) Subrecipient means a public or private nonprofit agency, 
authority, or organization, or a for-profit entity authorized under 
Sec. 570.201(o), receiving CDBG funds from the recipient or 

[[Page 56915]]
another subrecipient to undertake activities eligible for such 
assistance under subpart C of this part. The term excludes an entity 
receiving CDBG funds from the recipient under the authority of 
Sec. 570.204, unless the grantee explicitly designates it as a 
subrecipient. The term includes a public agency designated by a unit of 
general local government to receive a loan guarantee under subpart M of 
this part, but does not include contractors providing supplies, 
equipment, construction, or services subject to the procurement 
requirements in 24 CFR 85.36 or 84.40, as applicable.
    20. Section 570.502 is amended by revising the introductory text of 
paragraph (a) and by revising paragraph (b), to read as follows:


Sec. 570.502  Applicability of uniform administrative requirements.

    (a) Recipients and subrecipients that are governmental entities 
(including public agencies) shall comply with the requirements and 
standards of OMB Circular No. A-87, ``Cost Principles for State, Local, 
and Indian Tribal Governments''; OMB Circular A-128, ``Audits of State 
and Local Governments'' (implemented at 24 CFR part 44); and with the 
following sections of 24 CFR part 85 ``Uniform Administrative 
Requirements for Grants and Cooperative Agreements to State and Local 
Governments'' or the related CDBG provision, as specified in this 
paragraph:
* * * * *
    (b) Subrecipients, except subrecipients that are governmental 
entities, shall comply with the requirements and standards of OMB 
Circular No. A-122, ``Cost Principles for Non-profit Organizations,'' 
or OMB Circular No. A-21, ``Cost Principles for Educational 
Institutions,'' as applicable, and OMB Circular A-133, ``Audits of 
Institutions of Higher Education and Other Nonprofit Institutions'' (as 
set forth in 24 CFR part 45). Audits shall be conducted annually. Such 
subrecipients shall also comply with the following provisions of the 
Uniform Administrative requirements of OMB Circular A-110 (implemented 
at 24 CFR part 84, ``Uniform Administrative Requirements for Grants and 
Agreements With Institutions of Higher Education, Hospitals and Other 
Non-Profit Organizations'') or the related CDBG provision, as specified 
in this paragraph:
    (1) Subpart A--``General'';
    (2) Subpart B--``Pre-Award Requirements,'' except for Sec. 84.12, 
``Forms for Applying for Federal Assistance'';
    (3) Subpart C--``Post-Award Requirements,'' except for:
    (i) Section 84.22, ``Payment Requirements.'' Grantees shall follow 
the standards of Secs. 85.20(b)(7) and 85.21 in making payments to 
subrecipients;
    (ii) Section 84.23, ``Cost Sharing and Matching'';
    (iii) Section 84.24, ``Program Income.'' In lieu of Sec. 84.24, 
CDBG subrecipients shall follow Sec. 570.504;
    (iv) Section 84.25, ``Revision of Budget and Program Plans'';
    (v) Section 84.32, ``Real Property.'' In lieu of Sec. 84.32, CDBG 
subrecipients shall follow Sec. 570.505;
    (vi) Section 84.34(g), ``Equipment.'' In lieu of the disposition 
provisions of Sec. 84.34(g), the following applies:
    (A) In all cases in which equipment is sold, the proceeds shall be 
program income (prorated to reflect the extent to which CDBG funds were 
used to acquire the equipment); and
    (B) Equipment not needed by the subrecipient for CDBG activities 
shall be transferred to the recipient for the CDBG program or shall be 
retained after compensating the recipient;
    (vii) Section 84.51 (b), (c), (d), (e), (f), (g), and (h), 
``Monitoring and Reporting Program Performance'';
    (viii) Section 84.52, ``Financial Reporting'';
    (ix) Section 84.53(b), ``Retention and access requirements for 
records.'' Section 84.53(b) applies with the following exceptions:
    (A) The retention period referenced in Sec. 84.53(b) pertaining to 
individual CDBG activities shall be four years; and
    (B) The retention period starts from the date of submission of the 
annual performance and evaluation report, as prescribed in 24 CFR 
91.520, in which the specific activity is reported on for the final 
time rather than from the date of submission of the final expenditure 
report for the award;
    (x) Section 84.61, ``Termination.'' In lieu of the provisions of 
Sec. 84.61, CDBG subrecipients shall comply with Sec. 570.503(b)(7); 
and
    (4) Subpart D--``After-the-Award Requirements,'' except for 
Sec. 84.71, ``Closeout Procedures.''
    21. Section 570.503 is amended by revising paragraph (b)(3) 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 that, at the end of the program year, the grantee may require 
remittance of all or part of any program income balances (including 
investments thereof) held by the subrecipient (except those needed for 
immediate cash needs, cash balances of a revolving loan fund, cash 
balances from a lump sum drawdown, or cash or investments held for 
Section 108 security needs).
* * * * *
    22. Section 570.504 is amended by revising the introductory text of 
paragraph (b)(2) and by adding a new paragraph (b)(2)(iii), 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:
* * * * *
    (iii) At the end of each program year, the aggregate amount of 
program income cash balances and any investment thereof (except those 
needed for immediate cash needs, cash balances of a revolving loan 
fund, cash balances from a lump-sum drawdown, or cash or investments 
held for Section 108 loan guarantee security needs) that, as of the 
last day of the program year, exceeds one-twelfth of the most recent 
grant made pursuant to Sec. 570.304 shall be remitted to HUD as soon as 
practicable thereafter, to be placed in the recipient's line of credit. 
This provision applies to program income cash balances and investments 
thereof held by the grantee and its subrecipients. (This provision 
shall be applied for the first time at the end of the program year for 
which Federal Fiscal Year 1996 funds are provided.)
* * * * *
    23. Section 570.506 is amended by:
    a. Revising paragraphs (b)(3)(i) and (c);
    b. Removing ``and'' at the end of paragraph (b)(4)(v), removing the 
period at the end of paragraph (b)(4)(vi) and adding a semicolon in its 
place; and
    c. Adding paragraphs (b)(4)(vii) and (b)(4)(viii), to read as 
follows:


Sec. 570.506  Records to be maintained.

* * * * *
    (b) * * *
    (3) * * *
    (i) Documentation establishing that the facility or service is 
designed for the particular needs of or used exclusively by senior 
citizens, adults meeting the Bureau of the Census' Current Population 
Reports definition of ``severely disabled,'' persons living with AIDS, 
battered spouses, abused children, the homeless, illiterate adults, or 
migrant farm workers, for which the 

[[Page 56916]]
regulations provide a presumption concerning the extent to which low- 
and moderate-income persons benefit; or
* * * * *
    (4) * * *
    (vii) For any homebuyer assistance activity qualifying under 
Secs. 570.201(e), 570.201(n), or 570.204, identification of the 
applicable eligibility paragraph and evidence that the activity meets 
the eligibility criteria for that provision; for any such activity 
qualifying under Sec. 570.208(a), the size and income of each 
homebuyer's household; and
    (viii) For a Sec. 570.201(k) housing services activity, 
identification of the HOME project(s) or assistance that the housing 
services activity supports, and evidence that project(s) or assistance 
meet the HOME program income targeting requirements at 24 CFR 92.252 or 
92.254.
* * * * *
    (c) Records that demonstrate that the recipient has made the 
determinations required as a condition of eligibility of certain 
activities, as prescribed in Secs. 570.201(f), 570.201(i)(2), 
570.201(p), 570.201(q), 570.202(b)(3), 570.202(f)(2) 570.206(f), 
570.209, and 570.309.
* * * * *


Sec. 570.600  [Amended]

    24. In Sec. 570.600, the last sentence of paragraph (a) is amended 
by removing the citation ``Sec. 570.496'' and by adding in its place a 
citation ``Sec. 570.487''.


Sec. 570.602  [Amended]

    25. Section 570.602 is amended in paragraphs (a), (b)(1), (b)(2), 
(b)(3), (b)(4)(i), and (b)(4)(ii), by adding the phrase ``religion,'' 
before the phrase ``national origin'' wherever it appears.
    26. Section 570.606 is amended by:
    a. Revising paragraph (b)(2)(i)(A);
    b. Amending the first sentence of paragraph (c)(1)(iii)(G) by 
removing the phrase ``HUD-approved Comprehensive Housing Affordability 
Strategy'' and by adding in its place the phrase ``HUD-approved 
consolidated plan'';
    c. Amending the second sentence of paragraph (c)(1)(iii)(G) by 
removing the phrase ``a Housing Assistance Plan'' and by adding in its 
place the phrase ``a consolidated plan'';
    d. Amending the last sentence of paragraph (c)(1)(iv)(A) by 
removing the phrase ``HUD-approved Comprehensive Housing Affordability 
Strategy'' and by adding in its place the phrase ``HUD-approved 
consolidated plan'';
    e. Revising paragraph (c)(3)(ii)(A)(1), to read as follows:


Sec. 570.606  Displacement, relocation, acquisition, and replacement of 
housing.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (A) After notice by the grantee to move permanently from the 
property, if the move occurs after the initial official submission to 
HUD for grant, loan, or loan guarantee funds under this part that are 
later provided or granted.
* * * * *
    (c) * * *
    (3) * * *
    (ii) * * *
    (A) * * *
    (1) After notice by the grantee to move permanently from the 
property, if the move occurs after the initial official submission to 
HUD for grant, loan, or loan guarantee funds under this part that are 
later provided or granted.
* * * * *
    27. Section 570.610 is revised to read as follows:


Sec. 570.610   Uniform administrative requirements and cost principles.

    The recipient, its agencies or instrumentalities, and subrecipients 
shall comply with the policies, guidelines, and requirements of 24 CFR 
part 85 and OMB Circulars A-87, A-110 (implemented at 24 CFR part 84), 
A-122, A-133 (implemented at 24 CFR part 45), and A-128 2 
(implemented at 24 CFR part 44), as applicable, as they relate to the 
acceptance and use of Federal funds under this part. The applicable 
sections of 24 CFR parts 84 and 85 are set forth at Sec. 570.502.

    \2\  See footnote 1 at Sec. 570.200(a)(5).
---------------------------------------------------------------------------

    28. Section 570.611 is revised to read as follows:


Sec. 570.611  Conflict of interest.

    (a) Applicability. (1) In the procurement of supplies, equipment, 
construction, and services by recipients and by subrecipients, the 
conflict of interest provisions in 24 CFR 85.36 and 24 CFR 84.42, 
respectively, shall apply.
    (2) In all cases not governed by 24 CFR 85.36 and 84.42, the 
provisions of this section shall apply. Such cases include the 
acquisition and disposition of real property and the provision of 
assistance by the recipient or by its subrecipients to individuals, 
businesses, and other private entities under eligible activities that 
authorize such assistance (e.g., rehabilitation, preservation, and 
other improvements of private properties or facilities pursuant to 
Sec. 570.202; or grants, loans, and other assistance to businesses, 
individuals, and other private entities pursuant to Secs. 570.203, 
570.204, 570.455, or 570.703(i)).
    (b) Conflicts prohibited. The general rule is that no persons 
described in paragraph (c) of this section who exercise or have 
exercised any functions or responsibilities with respect to CDBG 
activities assisted under this part, or who are in a position to 
participate in a decisionmaking process or gain inside information with 
regard to such activities, may obtain a financial interest or benefit 
from a CDBG-assisted activity, or have a financial interest in any 
contract, subcontract, or agreement with respect to a CDBG-assisted 
activity, or with respect to the proceeds of the CDBG-assisted 
activity, either for themselves or those with whom they have business 
or immediate family ties, during their tenure or for one year 
thereafter. For the UDAG program, the above restrictions shall apply to 
all activities that are a part of the UDAG project, and shall cover any 
such financial interest or benefit during, or at any time after, such 
person's tenure.
    (c) Persons covered. The conflict of interest provisions of 
paragraph (b) of this section apply to any person who is an employee, 
agent, consultant, officer, or elected official or appointed official 
of the recipient, or of any designated public agencies, or of 
subrecipients that are receiving funds under this part.
    (d) Exceptions. Upon the written request of the recipient, HUD may 
grant an exception to the provisions of paragraph (b) of this section 
on a case-by-case basis when it has satisfactorily met the threshold 
requirements of (d)(1) of this section, taking into account the 
cumulative effects of paragraph (d)(2) of this section.
    (1) Threshold requirements. HUD will consider an exception only 
after the recipient has provided the following documentation:
    (i) A disclosure of the nature of the conflict, accompanied by an 
assurance that there has been public disclosure of the conflict and a 
description of how the public disclosure was made; and
    (ii) An opinion of the recipient's attorney that the interest for 
which the exception is sought would not violate State or local law.
    (2) Factors to be considered for exceptions. In determining whether 
to grant a requested exception after the recipient has satisfactorily 
met the requirements of paragraph (d)(1) of this section, HUD shall 
conclude that such an exception will serve to further the purposes of 
the Act and the effective and efficient administration of the 
recipient's program or project, taking into account the cumulative 
effect of the following factors, as applicable:
    (i) Whether the exception would provide a significant cost benefit 
or an essential degree of expertise to the 

[[Page 56917]]
program or project that would otherwise not be available;
    (ii) Whether an opportunity was provided for open competitive 
bidding or negotiation;
    (iii) Whether the person affected is a member of a group or class 
of low- or moderate-income persons intended to be the beneficiaries of 
the assisted activity, and the exception will permit such person to 
receive generally the same interests or benefits as are being made 
available or provided to the group or class;
    (iv) Whether the affected person has withdrawn from his or her 
functions or responsibilities, or the decisionmaking process with 
respect to the specific assisted activity in question;
    (v) Whether the interest or benefit was present before the affected 
person was in a position as described in paragraph (b) of this section;
    (vi) Whether undue hardship will result either to the recipient or 
the person affected when weighed against the public interest served by 
avoiding the prohibited conflict; and
    (vii) Any other relevant considerations.
    29. Section 570.614 is added to subpart K, to read as follows:


Sec. 570.614  Architectural Barriers Act and the Americans with 
Disabilities Act.

    (a) The Architectural Barriers Act of 1968 (42 U.S.C. 4151-4157) 
requires certain Federal and Federally funded buildings and other 
facilities to be designed, constructed, or altered in accordance with 
standards that insure accessibility to, and use by, physically 
handicapped people. A building or facility designed, constructed, or 
altered with funds allocated or reallocated under this part after 
December 11, 1995 and that meets the definition of ``residential 
structure'' as defined in 24 CFR 40.2 or the definition of ``building'' 
as defined in 41 CFR 101-19.602(a) is subject to the requirements of 
the Architectural Barriers Act of 1968 (42 U.S.C. 4151-4157) and shall 
comply with the Uniform Federal Accessibility Standards (Appendix A to 
24 CFR part 40 for residential structures, and Appendix A to 41 CFR 
part 101-19, subpart 101-19.6, for general type buildings).
    (b) The Americans with Disabilities Act (42 U.S.C. 12131; 47 U.S.C. 
155, 201, 218 and 225) (ADA) provides comprehensive civil rights to 
individuals with disabilities in the areas of employment, public 
accommodations, State and local government services, and 
telecommunications. It further provides that discrimination includes a 
failure to design and construct facilities for first occupancy no later 
than January 26, 1993 that are readily accessible to and usable by 
individuals with disabilities. Further, the ADA requires the removal of 
architectural barriers and communication barriers that are structural 
in nature in existing facilities, where such removal is readily 
achievable--that is, easily accomplishable and able to be carried out 
without much difficulty or expense.
    30. Section 570.900 is amended by revising paragraphs (b)(3), 
(b)(5), and (b)(6) to read as follows:


Sec. 570.900  General.

* * * * *
    (b) * * *
    (3) In conducting performance reviews, HUD will primarily rely on 
information obtained from the recipient's performance report, records 
maintained, findings from monitoring, grantee and subrecipient audits, 
audits and surveys conducted by the HUD Inspector General, and 
financial data regarding the amount of funds remaining in the line of 
credit plus program income. HUD may also consider relevant information 
pertaining to a recipient's performance gained from other sources, 
including litigation, citizen comments, and other information provided 
by or concerning 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.
* * * * *
    (5) If HUD finds that a recipient has failed to comply with a 
program requirement or has failed to meet a performance criterion in 
Sec. 570.902 or Sec. 570.903, HUD will give the recipient an 
opportunity to provide additional information concerning the finding.
    (6) If, after considering any additional information submitted by a 
recipient, HUD determines to uphold the finding, HUD may advise the 
recipient to undertake appropriate corrective or remedial actions as 
specified in Sec. 570.910. HUD will consider the recipient's capacity 
as described in Sec. 570.905 prior to selecting the corrective or 
remedial actions.
* * * * *
    31. In Sec. 570.901, paragraph (a) is amended by removing the 
phrase ``60 percent'' and by adding in its place the phrase ``70 
percent''; and paragraph (e) is revised, to read as follows:


Sec. 570.901  Review for compliance with the primary and national 
objectives and other program requirements.

* * * * *
    (e) For HUD-administered small cities grants only, the citizen 
participation requirements at Sec. 570.431, the amendment requirements 
at Sec. 570.427 (New York HUD-administered small cities) or 
Sec. 570.430(f) (Hawaii HUD-administered small cities), and the 
displacement policy requirements of Sec. 570.606;
* * * * *
    32. Section 570.902 is amended by revising paragraph (a) to read as 
follows:


Sec. 570.902  Review to determine if CDBG funded activities are being 
carried out in a timely manner.

* * * * *
    (a) Entitlement recipients. (1) Before the funding of the next 
annual grant and absent contrary evidence satisfactory to HUD, HUD will 
consider an entitlement recipient to be failing to carry out its CDBG 
activities in a timely manner if:
    (i) Sixty days prior to the end of the grantee's current program 
year, the amount of entitlement grant funds available to the recipient 
under grant agreements but undisbursed by the U.S. Treasury is more 
than 1.5 times the entitlement grant amount for its current program 
year; and
    (ii) The grantee fails to demonstrate to HUD's satisfaction that 
the lack of timeliness has resulted from factors beyond the grantee's 
reasonable control.
    (2) Notwithstanding that the amount of funds in the line of credit 
indicates that the recipient is carrying out its activities in a timely 
manner pursuant to paragraph (a)(1) of this section, HUD may determine 
that the recipient is not carrying out its activities in a timely 
manner if:
    (i) The amount of CDBG program income the recipient has on hand 60 
days prior to the end of its current program year, together with the 
amount of funds in its CDBG line of credit, exceeds 1.5 times the 
entitlement grant amount for its current program year; and
    (ii) The grantee fails to demonstrate to HUD's satisfaction that 
the lack of timeliness has resulted from factors beyond the grantee's 
reasonable control.
    (3) In determining the appropriate corrective action to take with 
respect to a HUD determination that a recipient is not carrying out its 
activities in a timely manner pursuant to paragraphs (a)(1) or (a)(2) 
of this section, HUD will consider the likelihood that the recipient 
will expend a sufficient amount of funds over the next program year to 
reduce the amount of unexpended funds to a level that will fall within 
the standard 

[[Page 56918]]
described in paragraph (a)(1) of this section when HUD next measures 
the grantee's timeliness performance. For these purposes, HUD will take 
into account the extent to which funds on hand have been obligated by 
the recipient and its subrecipients for specific activities at the time 
the finding is made and other relevant information.
* * * * *
    33. Section 570.903 is revised to read as follows:


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

    The consolidated plan, action plan, and amendment submission 
requirements referred to in this section are in 24 CFR part 91.
    (a) Review timing and purpose. HUD will review the consolidated 
plan performance of each entitlement and Hawaii HUD-administered small 
cities grant recipient prior to acceptance of a grant recipient's 
annual certification under 24 CFR 91.225(b)(3) to determine whether the 
recipient followed its HUD-approved consolidated plan for the most 
recently completed program year, and whether activities assisted with 
CDBG funds during that period were consistent with that consolidated 
plan, except that grantees are not bound by the consolidated plan with 
respect to the use or distribution of CDBG funds to meet nonhousing 
community development needs.
    (b) Following a consolidated plan. The recipient will be considered 
to be following its consolidated plan if it has taken all of the 
planned actions described in its action plan. This includes, but is not 
limited to:
    (1) Pursuing all resources that 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 that 
it would support application by other entities, in a fair and impartial 
manner; and
    (3) Not hindering implementation of the consolidated plan by action 
or willful inaction.
    (c) Disapproval. If HUD determines that a recipient has not met the 
criteria outlined in paragraph (b) of this section, HUD will notify the 
recipient and provide the recipient up to 45 days to demonstrate to the 
satisfaction of the Secretary that it has followed its consolidated 
plan. HUD will consider all relevant circumstances and the recipient's 
actions and lack of actions affecting the provision of assistance 
covered by the consolidated plan 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 shall describe:
    (1) Any factors beyond the control of the recipient that prevented 
it from following its consolidated plan, and any actions the recipient 
has taken or plans to take to alleviate such factors; and
    (2) Actions taken by the recipient, if any, beyond those described 
in the consolidated plan performance report to facilitate following the 
consolidated plan, including the effects of such actions.
    (d) New York HUD-administered Small Cities. New York HUD-
administered grantees shall follow the provisions of paragraph (b) of 
this section for their abbreviated or full consolidated plan to the 
extent that the provisions of paragraph (b) of this section are 
applicable. If the grantee does not comply with the requirements of 
paragraph (b) of this section, and does not provide HUD with an 
acceptable explanation, HUD may decide, in accordance with the 
requirements of the notice of fund availability, that the grantee does 
not meet threshold requirements to apply for a new small cities grant.

    Dated: October 30, 1995.
Andrew M. Cuomo,
Assistant Secretary for Community Planning and Development.
[FR Doc. 95-27488 Filed 11-8-95; 8:45 am]
BILLING CODE 4210-29-P