[Federal Register Volume 87, Number 40 (Tuesday, March 1, 2022)]
[Rules and Regulations]
[Pages 11275-11286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03837]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 
 ========================================================================
 

  Federal Register / Vol. 87, No. 40 / Tuesday, March 1, 2022 / Rules 
and Regulations  

[[Page 11275]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3560

[Docket No. RHS-21-MFH-0026]
RIN 0575-AD17


Multi-Family Housing (MFH) Direct Loan Programs

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Housing Service (RHS or Agency), an agency in the 
United States Department of Agriculture (USDA) Rural Development 
Mission area, published a proposed rule in the Federal Register on 
September 23, 2020, to amend its regulations for the Multi-Family 
Housing Direct Loans and Grants Programs to implement changes related 
to the development of a sustainable plan for the Rental Assistance (RA) 
program. Through this action, RHS is adopting the changes as proposed. 
The regulation updates are intended to provide additional RA program 
flexibility and transparency, and to improve the efficiency of managing 
assets in the Direct Loan portfolio.

DATES: The final rule is effective March 31, 2022.

FOR FURTHER INFORMATION CONTACT: Jennifer Larson, Multi-Family Housing 
Asset Management Division, Rural Housing Service, Stop 0782, 1400 
Independence Avenue SW, Washington, DC 20250-0782. Telephone 202-720-
1615.

SUPPLEMENTARY INFORMATION:

I. Background Information

    Rural Development (RD) is a mission area within the United States 
Department of Agriculture (USDA) comprised of the Rural Utilities 
Service (RUS), Rural Housing Service (RHS) and Rural Business-
Cooperative Service (RBCS). RD's mission is to increase economic 
opportunity and improve the quality of life for all rural Americans. RD 
meets its mission by providing loans, loan guarantees, grants, and 
technical assistance through more than 40 programs aimed at creating 
and improving housing, businesses, and infrastructure throughout rural 
America. We help rural residents buy or rent safe, affordable housing 
and make health and safety repairs to their homes.
    The RHS Multi-Family Housing (MFH) programs, provide affordable 
multi-family rental housing in rural areas by financing projects geared 
for low-income, elderly and disabled individuals and families as well 
as domestic farm laborers. MFH Programs extends its reach by 
guaranteeing loans for affordable rental housing designed for low to 
moderate-income residents in rural areas and towns. MFH Programs are 
administered, subject to appropriations, by the USDA as authorized 
under Sections 514, 515 and, 516 and 521 of the Housing Act of 1949, as 
amended. The Agency operates a multifamily rural rental housing direct 
loan program under section 515 for off-farm labor housing and section 
514 for farm labor housing. The Agency also provides grants under the 
section 516 farm labor housing program and section 521 provides 
project-based rental assistance payments to property owners.
    The RHS published a proposed rule on September 23, 2020 (85 FR 
59682) to: (1) Implement programmatic changes related to development of 
a ``sustainability plan'' for the Rental Assistance (RA) Program, 
including new Agency flexibilities in managing the RA distribution; (2) 
integrate new asset management policies; and (3) incorporate technical 
corrections to clarify reference and formatting issues in the 
regulation. The purpose of this action is to finalize these provisions 
as proposed in the proposed rule on September 23, 2020.
    RHS published an interim rule on November 26, 2004 (69 FR 69032), 
with an effective date of 2/24/2005. On February 22, 2005, a delay of 
effective date was published in the Federal Register (70 FR 8503) to 
indefinitely delay the following sections: 3560.152(a)(1), 
3560.154(a)(7), 3560.156(c)(12), and 3560.254(c)(3). The delay of 
effective date remains in effect for these sections until a future 
final rule is published to lift the stay.

II. Comments and Responses

    The 60-day comment period for the proposed rule ended on November 
23, 2020. A total of 16 comments were received. Commenters included 
non-profit housing organizations or associations representing housing 
providers and private citizens.
    The following actions in the proposed rule will be included in the 
final rule with full consideration of public comments, included below, 
with the Agency's responses.
    Issue 1: A Commenter pointed to include change to Sec.  3560.72 to 
consistently use ``Leadership Designee,'' instead of MFH Leadership 
Designee. As noted in the proposed rule, page 59684, the Agency's 
intent is to change State Director to Leadership Designee to allow 
flexibility for future staff. The commenter supported not limiting the 
change to only ``MFH Leadership Designee,'' for even greater 
flexibility.
    Agency Response 1: The Agency acknowledges the commenter's support 
for this modification. The Agency agrees, as the commenter stated, that 
the language under Sec.  3560.72 should be amended by removing the 
words 'State Director' and adding in their place 'Leadership Designee' 
in the second sentence of paragraph (b).
    Issue 2: Several commenters requested more contact information 
about the Leadership Designee positions throughout the Agency.
    Agency Response 2: The Agency has established a list of Field 
Operations servicing officials for all projects available on the public 
Rural Development website with email contact information provided for 
each team member. The Regional Director for each region is also 
provided on the public Rural Development website.
    Issue 3: Several commenters requested more detail on the MFH 
program eligibility requirements regarding domestic farm laborers. This 
included persons legally admitted on a temporary or permanent basis, 
including the U.S. Citizenship and Immigration Services (USCIS) H2A 
Program for Temporary Agricultural Workers.
    Agency Response 3: The proposed ``Domestic Farm Laborer'' 
definition reflects the Agency's compliance with the statutory 
requirements of the Consolidated Appropriations Act of 2018, 
permanently amending Section

[[Page 11276]]

514(f)(3)(A) of the Housing Act of 1949 (42 U.S.C. 1484(f)(3)(A)). The 
Agency believes that additional clarification is not required.
    Issue 4: One commenter expressed concern that clarification 
regarding the Agency's authority to establish agency-held escrows in 
the proposed rule did not include an explanation as to why this 
authority is needed and did not place any conditions on the Agency's 
exercise of this authority. The commenter urged the Agency to remove 
this provision without an explanation of the need and establish 
standards for when this requirement can be imposed on a borrower.
    Agency's Response 4: The proposed rule clarified that in Sec.  
3560.65, the authorization of an agency-held escrow account only 
applies to the Reserve Account. ``The Agency may establish an escrow 
account for the collection and disbursement of reserve account funds.'' 
This authority was historically included in the loan documents but was 
not addressed in the regulation. This provision was prompted by MFH 
borrowers that had identified Supervised Bank Account requirements in 
RD's regulations, which made it difficult to obtain these accounts with 
commercial banks. This amendment will allow the Agency, if needed, to 
establish an escrow reserve account to collect and disperse an MFH 
project's funds. The Agency finds that no change to the proposed 
regulatory language is needed.
    Issue 5: Several commenters concurred that self-managed properties 
must also sign the Management Certification. Two commenters requested 
that additional tasks be mentioned as a project expense or an add-on 
fee to the management fee if required of the management agent. They 
also requested that outside payroll companies used to pay on-site 
staff, be an allowable expense to the property.
    Agency's Response 5: The Agency finds that no change is required to 
the proposed rule language. The rule expands the language at Sec.  
3560.102(b) to clarify that performance assessments of management 
agents will be used when determining the allowable management fee, and 
that the management plan should describe whether administrative 
expenses are to be paid from management agent fees or project 
operations, including a task list of charges covered by the fee.
    Issue 6: One commenter noted the Affirmative Fair Housing Marketing 
Plan (AFHMP) change in minimum required rental units to prepare and 
maintain an AFHMP increased from 4 to 5 units, and requested details on 
how many projects, would be affected by this change. This update allows 
the Agency to align with the Affirmative Fair Housing Marketing Plan 
(AFHMP) as defined in 24 CFR part 200, subpart M. Borrowers must comply 
with the requirements of the Fair Housing Amendments Act of 1988, and 
this section to meet their fair housing responsibilities.
    Agency's Response 6: Currently, there are 95 4-unit Rural Rental 
Housing and Farm Labor Housing properties in the Multi-Family Housing 
portfolio. These properties will no longer be required to maintain an 
AFHMP.
    Issue 7: Three commenters included praise for the proposed rule's 
changes to management flexibilities that would provide a more 
streamlined process by which RA funds can be made available. The 
commenters did not request any changes to the rule.
    Agency's Response 7: The Agency acknowledges the commenters 
support.
    Issue 8: One commenter requested that there first be notice and 
opportunity to resolve a late tenant certification submission to the 
Agency, so that the owner and manager can resolve the matter amongst 
themselves. The commenter did not approve of requiring the owner to pay 
overage, i.e., to pay for a paperwork delay.
    Agency's Response 8: The parameters established for timely tenant 
certification submission are beyond the scope of the proposed rule. The 
Agency notes that the timely submission of tenant certifications is a 
basic responsibility of the borrower/management agent under the MFH 
program's existing Loan Documents requirements. The proposed language 
clarifies that the borrower may lose RA as well. No change to the 
language is needed.
    Issue 9: Two commenters expressed concern regarding the admission 
of persons with criminal histories. They pointed to the regulations not 
specifying whether a disqualification is only authorized when there was 
a conviction or if a mere arrest is sufficient. Additional concern 
regarded the privacy implications of checks on criminal history.
    Agency's Response 9: The Agency finds that the proposed change has 
no impact on allowing exceptions for denial under the U.S. Department 
Housing and Urban Development (HUD) regulations in 24 CFR 5.854, 5.855, 
5.856, 5.857. This also allows a time frame of 3 years from conviction. 
The Borrower must establish their own standards that prohibit admission 
of applicants with a criminal history, based on their determination of 
reasonable cause. This qualifies the individualized assessment 
requirement of an applicant's criminal background as per HUD's Office 
of General Counsel Guidance on Application of Fair Housing Act 
Standards to the Use of Criminal Records by Providers of Housing and 
Real Estate-Related Transactions issued on April 4, 2016, and the Fair 
Housing Act, 42 U.S.C. Sections 3601-19.
    Issue 10: Several commenters requested that the Agency cross-
reference the existing HUD Violence Against Women Act (VAWA) 
regulations or amend MFH program requirements in the lease requirement 
section so that owners and residents know what their respective rights 
and responsibilities are, including notices of VAWA rights, 
documentation, confidentiality, evictions, and transfers.
    Agency Response 10: The Agency is working to update guidance on 
VAWA and will take recommendations into consideration. Additional 
changes may be included at that time.
    Issue 11: Three of the commenters questioned whether there were 
unnecessary restrictions being placed on the eligibility for a Letter 
of Priority Engagement (LOPE).
    Agency's Response 11: This is a misinterpretation of the change to 
this section. The regulation does not discuss the benefits for 
residents specifically due to a Federally declared disaster, under the 
Uniform Relocation Act. The LOPE would be based on the termination of 
occupancy beyond the resident's control, such as the unavailability of 
the unit due to rehabilitation, which may be due to a disaster. 
Further, the proposed changes reduce restrictions on timing of LOPE 
requests. This effectively adds that they do not have to wait until the 
expiration of the declaration.
    Issue 12: Several commenters pointed out that the change in Sec.  
3560.205, regarding the notification of rent change, would better serve 
tenants to include ``at least'' 30 calendar days from the date of 
notification.
    Agency's Response 12: The Agency agrees that this suggestion allows 
more ample notification, in some instances. The proposed revision will 
include ``at least'' before the 30 days from the date of notification.
    Issue 13: Several commenters provided positive support for the 
clarification in RA eligibility requirements, for tenants or applicants 
with delinquent Agency unauthorized assistance repayment agreements. 
Several commenters discussed citizenship requirements under other

[[Page 11277]]

sections of the regulation, not included in the proposed rule.
    Agency's Response 13: The Agency acknowledges the commenters' 
support. The citizenship requirement is not under the purview of the 
published amendments. This amendment applies only to tenants with 
unauthorized RA who are delinquent on their repayment agreement. This 
would apply in cases where it is known that the tenant is delinquent 
directly with the Agency. The requested changes would require an 
additional CFR to be removed, since the existing CFR does not require 
citizenship requirements. We will be providing more guidance on 
implementation on future handbook updates.
    Issue 14: Several commenters provided positive support for the 
update in the proposed rule regarding the optional use of the remaining 
obligation balances of RA units, identified in Sec.  3560.259(a)(2) and 
(3), for renewal purposes. However, some commenters were concerned that 
the ability to use ``inactive'' RA obligations will assist fewer 
residents (MFH tenants).
    Agency's Response 14: The Agency acknowledges these concerns. The 
ability, however, to use ``inactive'' remaining RA obligations will 
assist more residents, rather than less residents. Further, the use of 
these ``inactive'' funds would not decrease the overall RA budget so in 
following years, new units of RA could be offered. By utilizing these 
funds, the Agency is protecting properties from payment shortfalls 
where the predicted amount of RA was misjudged. Furthermore, RA is 
funded through dollar amount and not by unit amount.
    Issue 15: Several commenters stated opposition to the proposed 
change to Sec.  3560.259, which clarifies that when any RA units have 
not been used for a 6-month period (for Section 515 properties) or 12 
months (for Section 514 properties), they will be eligible for 
transfer. These commenters believed that this may reduce the total 
number of RA units and restrict eligible uses of RA. Additional concern 
regarded restricting the unused RA obligations to be used only for 
``renewal purposes''. The inference is that this would reduce the 
number of RA units available for servicing or preservation.
    Agency's Response 15: The Agency notes these concerns about the 
ability to use ``inactive'' RA obligations. This amendment will allow 
the Agency the flexibility to assist more residents, rather than fewer. 
Furthermore, the use of these ``inactive'' funds would not decrease the 
overall RA budget, so in following years new units of RA could be 
offered. By utilizing these funds, the Agency is protecting properties 
from payment shortfalls, where the predicted amount of RA was 
misjudged. Furthermore, RA is funded through dollar amount and not by 
unit amount. RA is not tied to a specific unit within the property; 
revolving vacancies would not affect whether there was unused RA over a 
6-month period.
    Issue 16: Some commenters suggested that the Agency include various 
project and management expenses, as allowable project expenses.
    Agency's Response 16: The Agency acknowledges the need for 
consistency when appropriate; and acknowledges the need for clarity in 
eligible Section 514 and 515 property expenses. Property expenses are 
monitored by the Agency to ensure they are proper and reasonable; but 
as expenses increase, more income is needed, which results in rent 
increases and additional cost to rental assistance. Borrowers have 
often sought clarification on how expenses should be treated. 
Implementing this change will improve compliance, reduce unnecessary 
and unsupportable expenses, and result in stronger, more financially 
stable properties.
    Issue 17: A commenter suggested non-ad valorem and special 
assessments need to be included as allowable project expenses as they 
are frequently included in a project's received tax notices.
    Agency's Response 17: The Agency agrees with the comments and will 
include clarification to staff in the internal agency guidance to 
clarify that ``expenses relating to controlling or reducing taxes'' may 
include special assessments and service charges which are not based 
upon the value of the property and mileage.
    Issue 18: One commenter requested a clarification of why asset 
management costs incurred by a non-profit entity must be prorated 
across all entities, and why this does not extend to all project 
owners. Other commenters requested more information on regulatory 
requirements not included in the proposed rule.
    Agency's Response 18: The Agency appreciates the opportunity to 
address the issue on non-profit entities' asset management fee 
reimbursement of specifically identified costs. Specifically, for-
profit entities are excluded due to the availability of financial 
means, such as the Return to Owner, to cover these costs.
    The Agency acknowledges the additional questions on this section of 
the regulation, although not currently being revised. This will be 
taken under future consideration.
    Issue 19: One commenter offered support for the requirement that 
needed capital improvements be completed within a reasonable time 
frame. The commenter requested guidance on what would be considered a 
``reasonable time frame,'' particularly emergency improvements.
    Agency's Response 19: The Agency appreciates the support on this 
revision, and notes that ``reasonable time frame'' allows flexibility 
for the property manager, the borrower, and the property.
    Issue 20: One commenter objected to a conversion of project loans 
from the Daily Interest Accrual System (DIAS) to the Predetermined 
Amortization Schedule System (PASS). The commenter added that many 
owners are anticipating their loan maturity under DIAS, would be 
materially harmed if they de facto have their loan terms extended by a 
slower pay-down or recasting of principal and interest payments.
    Agency's Response 20: The Agency notes the commenter's concerns 
about borrowers under the DIAS loan terms. The Agency finds that no 
change is needed since the proposed rule only shortens the sentence to 
``loan servicing action''.
    Issue 21: One commenter noted that the proposed rule changes from 
``will'' to ``may'' in Sec.  3560.656, which authorizes the Agency to 
offer an incentive to avoid prepayment. They noted that it would imply 
that the Agency will exercise discretion in offering incentives. The 
commenter believes that would be contrary to the current law.
    Other commenters opposed the change, as they saw it as inconsistent 
with the mandatory obligation that Congress adopted for the express 
purpose of preserving and retaining to the maximum extent practicable. 
They commented that the Agency should abandon this change and continue 
to offer incentives to all owners seeking to prepay their loans.
    Agency's Response 21: The Agency is implementing section 
502(c)(4)(B) of the Housing Act, which uses the term ``may.'' The 
Agency finds that this correction is necessary, to align regulations 
with the Housing Act.

III. Summary of Changes

    To increase transparency, improve efficiency in managing portfolio 
assets, and ensure compliance with program requirements; RHS will 
implement the following updates to 7 CFR part 3560 for the Section 514 
Farm Labor Direct Loan, Section 515 Multi-family Housing Direct Loan, 
Section 516 Farm Labor Grant,

[[Page 11278]]

and Section 521 Rental Assistance Program.
    (1) Update language to Sec.  3560.259(d) regarding the optional use 
of the remaining obligation balances of units identified in Sec.  
3560.259(a)(2) and (3) for renewal purposes.
    (2) Update Sec.  3560.259(a)(4) to clarify that when any rental 
assistance units have not been used for a 6-month period (for Section 
515 properties) or 12 months (for Section 514 properties) they will be 
eligible for transfer.
    (3) The definitions of Domestic farm laborer, Management agreement, 
and Management fee will be revised to reflect requirements in the 
Consolidated Appropriations Act, 2018 (Pub. L. 115-141, March 23, 2018) 
permanently amending Section 514(f)(3)(A) of the Housing Act of 1949 
(42 U.S.C. 1484(f)(3)(A)) that the FLH tenant eligibility includes ``a 
person legally admitted to the United States and authorized to work in 
agriculture.''
    (4) Adding a paragraph at Sec.  3560.65 to allow the Agency to 
establish an escrow account to collect and disperse funds. This will 
allow the Agency to establish agency-held escrows which historically 
was provided for in the loan documents but was not addressed in the 
regulation.
    (5) In Sec.  3560.303(a)(1), the Agency will require that the 
annual project budget include anticipated expenditures on the project's 
long-term capital needs as specified in Sec.  3560.103(c) and will 
provide a metric for the Agency to determine current or future rent 
increase requests based on the Borrower's utilization of the reserve 
account. This will ensure that borrowers are utilizing project revenue 
for ongoing capital improvements needed to maintain compliance and 
reduced risk of the property.
    (6) A change will be made to Sec.  3560.303(c) to add payables as a 
priority for budget expenditures. This will allow for the Agency to 
ensure that all payables are being paid from project revenues in a 
timely manner and not accrued, without agency consent, causing 
increased costs and penalties and adding risk.
    (7) In Sec.  3560.303, the Agency will clarify what are allowable 
project expenses and provide for a comparable ``reasonableness'' test 
by the Agency. Generally, expenses charged to project operations for 
expenses, must be reasonable, typical, necessary and show a clear 
benefit to the residents of the property.
    (8) In Sec.  3560.303(b)(1)(vii), the Agency will add the 
requirements for a non-profit entity to pro-rate certain organizational 
reimbursable costs across all properties owned by that entity.
    (9) In Sec.  3560.105(f)(10), the Agency will clarify that if an 
insurance deductible is met, there is no need to track with a 
replacement reserve account.
    (10) The Agency has updated the wording of ``State Director'' to 
``Leadership Designee'' to allow for future staff flexibility.
    (11) Update Sec.  3560.152 by removing term ``elderly units in 
mixed housing''.
    (12) The Agency will revise Sec.  3560.154 to correct ``sex'' to 
``gender'' and update policy on criminal activity for admissions.
    (13) Update Sec.  3560.205 to include the notification of all 
household members of rent change effective at least 30 days from date 
of notification.
    (14) Section 3560.252 will now include the Agency's housing voucher 
program to allow for the proper allowance of rental subsidies.
    (15) In Sec.  3560.402 the Agency will clarify that any loan 
servicing action will require DIAS accounts to be converted to the 
current PASS system of accounting.

Executive Order 12866

    The Office of Management and Budget (OMB) has designated this final 
rule as not significant under Executive Order 12866.

Executive Order 12988, Civil Justice Reform

    This final rule has been reviewed under Executive Order 12988. In 
accordance with this rule: (1) Unless otherwise specifically provided, 
all State and local laws that conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule except 
as specifically prescribed in the rule; and (3) administrative 
proceedings of the National Appeals Division of the Department of 
Agriculture (7 CFR part 11) must be exhausted before bringing suit in 
court that challenges action taken under this rule.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act (UMRA), Public Law 
104-4, establishes requirements for Federal Agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
Governments and on the private sector. Under section 202 of the UMRA, 
Federal Agencies generally must prepare a written statement, including 
cost-benefit analysis, for proposed and Final Rules with ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
Governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, section 205 of the UMRA generally requires a Federal Agency to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost-effective, or least burdensome 
alternative that achieves the objectives of the rule.
    This final rule contains no Federal mandates (under the regulatory 
provisions of title II of the UMRA) for State, local, and tribal 
Governments or for the private sector. Therefore, this rule is not 
subject to the requirements of sections 202 and 205 of the UMRA.

National Environmental Policy Act

    In accordance with the National Environmental Policy Act of 1969, 
Public Law 91-190, this final rule has been reviewed in accordance with 
7 CFR part 1970 (``Environmental Policies and Procedures''). The Agency 
has determined that (i) this action meets the criteria established in 7 
CFR 1970.53(f); (ii) no extraordinary circumstances exist; and (iii) 
the action is not ``connected'' to other actions with potentially 
significant impacts, is not considered a ``cumulative action'' and is 
not precluded by 40 CFR 1506.1. Therefore, the Agency has determined 
that the action does not have a significant effect on the human 
environment, and therefore neither an Environmental Assessment nor an 
Environmental Impact Statement is required.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on States, on the relationship between the National 
Government and the States, or on the distribution of power and 
responsibilities among the various levels of government. This rule does 
not impose substantial direct compliance costs on State and local 
governments; therefore, consultation with States is not required.

Regulatory Flexibility Act

    The final rule has been reviewed with regard to the requirements of 
the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has 
determined and certified by signature on this document that this rule 
will not have a significant economic impact on a substantial number of 
small entities since this rulemaking action does not involve a new or 
expanded program nor does it require any more action on the part of a 
small business than required of a large entity.

[[Page 11279]]

Executive Order 12372, Intergovernmental Review of Federal Programs

    These loans are subject to the provisions of Executive Order 12372, 
which require intergovernmental consultation with State and local 
officials. RHS conducts intergovernmental consultations for each loan 
in accordance with 2 CFR part 415, subpart C.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    Executive Order 13175 imposes requirements on RHS in the 
development of regulatory policies that have tribal implications or 
preempt tribal laws. RHS has determined that the rule does not have a 
substantial direct effect on one or more Indian tribe(s) or on either 
the relationship or the distribution of powers and responsibilities 
between the Federal Government and Indian tribes. Thus, this rule is 
not subject to the requirements of Executive Order 13175. If tribal 
leaders are interested in consulting with RHS on this rule, they are 
encouraged to contact USDA's Office of Tribal Relations or RD's Native 
American Coordinator at: [email protected] to request such a consultation.

Programs Affected

    The programs affected by this regulation are listed in the 
Assistance Listing Catalog (formerly Catalog of Federal Domestic 
Assistance) under number 10.427--Rural Rental Assistance Payments.

Paperwork Reduction Act

    The information collection requirements contained in this 
regulation have been approved by OMB and have been assigned OMB control 
number 0575-0189. This final rule contains no new reporting and 
recordkeeping requirements that would require approval under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

E-Government Act Compliance

    RHS is committed to complying with the E-Government Act by 
promoting the use of the internet and other information technologies in 
order to provide increased opportunities for citizen access to 
Government information, services, and other purposes.

Non-Discrimination Statement

    In accordance with Federal civil rights laws and U.S. Department of 
Agriculture (USDA) civil rights regulations and policies, the USDA, its 
Mission Areas, agencies, staff offices, employees, and institutions 
participating in or administering USDA programs are prohibited from 
discriminating based on race, color, national origin, religion, sex, 
gender identity (including gender expression), sexual orientation, 
disability, age, marital status, family/parental status, income derived 
from a public assistance program, political beliefs, or reprisal or 
retaliation for prior civil rights activity, in any program or activity 
conducted or funded by USDA (not all bases apply to all programs). 
Remedies and complaint filing deadlines vary by program or incident.
    Program information may be made available in languages other than 
English. Persons with disabilities who require alternative means of 
communication to obtain program information (e.g., Braille, large 
print, audiotape, American Sign Language) should contact the 
responsible Mission Area, agency, or staff office; the USDA TARGET 
Center at (202) 720-2600 (voice and TTY); or the Federal Relay Service 
at (800) 877-8339.
    To file a program discrimination complaint, a complainant should 
complete a Form AD-3027, USDA Program Discrimination Complaint Form, 
which can be obtained online at https://www.ocio.usda.gov/document/ad-3027, from any USDA office, by calling (866) 632-9992, or by writing a 
letter addressed to USDA. The letter must contain the complainant's 
name, address, telephone number, and a written description of the 
alleged discriminatory action in sufficient detail to inform the 
Assistant Secretary for Civil Rights (ASCR) about the nature and date 
of an alleged civil rights violation. The completed AD-3027 form or 
letter must be submitted to USDA by:
    (1) Mail: U.S. Department of Agriculture, Office of the Assistant 
Secretary for Civil Rights, 1400 Independence Avenue SW, Washington, DC 
20250-9410; or
    (2) Fax: (833) 256-1665 or (202) 690-7442; or
    (3) Email: [email protected].
    USDA is an equal opportunity provider, employer, and lender.

List of Subjects in 7 CFR Part 3560

    Accounting, Administrative practice and procedure, Aged, Conflict 
of interest, Government property management, Grant programs--housing 
and community development, Insurance, Loan programs--agriculture, Loan 
programs--housing and community development, Low and moderate income 
housing, Migrant labor, Mortgages, Nonprofit organizations, Public 
housing, Rent subsidies, Reporting and recordkeeping requirements, 
Rural areas.

    For the reasons set forth in the preamble, the Rural Housing 
Service amends 7 CFR part 3560 as follows:

PART 3560--DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS

0
1. The authority citation for part 3560 continues to read as follows:

    Authority:  42 U.S.C. 1480.

Subpart A--General Provisions and Definitions


Sec.  3560.8  [Amended]

0
2. Amend Sec.  3560.8 by removing the words ``State Director'' and 
adding in their place ``Leadership Designee'' in the last sentence.

0
3. Amend Sec.  3560.11 as follows:
0
a. Remove the acronym ``MFHMFH'' wherever it appears in the section and 
adding ``MFH'' in its place; and
0
b. Revise the definitions of ``Domestic farm laborer'', ``Management 
agreement'', and ``Management fee''.
    The revisions read as follows:


Sec.  3560.11  Definitions.

* * * * *
    Domestic farm laborer. A person who, consistent with the 
requirements in Sec.  3560.576(b)(2), receives a substantial portion of 
his or her income from farm labor employment (not self-employed) in the 
United States, Puerto Rico, or the Virgin Islands and either is a 
citizen of the United States or resides in the United States, Puerto 
Rico, or the Virgin Islands after being legally admitted for permanent 
residence, or a person legally admitted to the United States and 
authorized to work in agriculture. This definition may include the 
immediate family members residing with such a person.
* * * * *
    Management agreement. A written agreement between a borrower and an 
identity-of-interest (IOI) management agent or independent fee 
management agent setting forth the management agent's responsibilities 
and fees for management services.
    Management fee. The compensation provided to a management agent for 
services provided in accordance with an approved management 
certification, Form RD 3560-13, ``Multi-Family Project Borrower's/
Management Agent's Management Certification.''
* * * * *

[[Page 11280]]

Subpart B--Direct Loan and Grant Origination

0
4. Amend Sec.  3560.65 by adding paragraph (d) to read as follows:


Sec.  3560.65  Reserve account.

* * * * *
    (d) The agency may establish an escrow account for the collection 
and disbursement of reserve account funds.


Sec.  3560.72  [Amended]

0
5. Amend Sec.  3560.72 by removing the words ``State Director'' and 
adding in their place ``Leadership Designee'' in the second sentence of 
paragraph (b).

Subpart C--Borrower Management and Operations Responsibilities

0
6. Amend Sec.  3560.102 as follows:
0
a. Revise paragraph (b);
0
b. Remove the word ``and'' at the end of paragraph (g)(1)(ii);
0
c. Remove ``any of the above.'' at the end of paragraph (g)(1)(iii) and 
adding ``anyone listed in paragraphs (g)(1)(i) and (ii) of this 
section;'' in its place;
0
d. Add paragraph (g)(1)(iv); and
0
e. Revise paragraphs (i) and (j).
    The revisions and addition read as follows:


Sec.  3560.102  Housing project management.

* * * * *
    (b) Management plan. Borrowers must develop and maintain a 
management plan for each housing project covered by their loan or 
grant. The management plan must establish the systems and procedures 
necessary to ensure that housing project operations comply with Agency 
requirements in this part. The management plan should describe whether 
administrative expenses are to be paid from management agent fees or 
project operations, including a task list of charges covered by the fee 
as outlined in paragraph (i)(3)(i)(A) of this section. The management 
plan must meet the standards set out in this part.
* * * * *
    (g) * * *
    (1) * * *
    (iv) Any borrower's entity control, or interest held or possessed 
by a person's spouse, parent, child, grandchild, or sibling or other 
relation by blood or marriage is attributed to that person for the 
determination under this paragraph (g)(1).
* * * * *
    (i) Management fees. Management fees will be an allowable expense 
to be paid from the housing project's general operating account only if 
the fee is approved by the Agency as a reasonable cost to the housing 
project and documented on the management certification. Management fees 
must be developed in accordance with the following:
    (1) The management fee may compensate the management entity for the 
following costs and services:
    (i) Supervision by the management agent and its staff (time, 
knowledge, and expertise) of overall operations and capital 
improvements of the site.
    (ii) Hiring, supervision, and termination of on-site staff.
    (iii) General maintenance of project books and records (general 
ledger, accounts payable and receivable, payroll, etc.). Preparation 
and distribution of payroll for all on-site employees, including the 
costs of preparing and submitting all appropriate tax reports and 
deposits, unemployment and workers' compensation reports, and other 
IRS- or state-required reports.
    (iv) In-house training provided to on-site staff by the management 
company.
    (v) Preparation and submission of proposed annual budgets and 
negotiation of approval with the Agency.
    (vi) Preparation and distribution of the Agency forms and routine 
financial reports to borrowers.
    (vii) Preparation and distribution of required year-end reports to 
the Agency.
    (viii) Preparation of requests for reserve withdrawals, rent 
increases, or other required adjustments.
    (ix) Arranging for preparation by outside contractors of utility 
allowance analysis.
    (x) Preparation and implementation of Affirmative Fair Housing 
Marketing Plans as well as general marketing plans and efforts.
    (xi) Review of tenant certifications and submission of monthly 
rental assistance requests, and overage. Submission of payments where 
required.
    (xii) Preparation, approval, and distribution of operating 
disbursements; oversight of project receipts; and reconciliation of 
deposits.
    (xiii) Overhead of management agent, including:
    (A) Establish, maintain, and control an accounting system 
sufficient to carry out accounting supervision responsibilities.
    (B) Maintain agent office arrangements, staff, equipment, 
furniture, and services necessary to communicate effectively with the 
properties, to include consultation and support to site-staff, the 
Agency and with the borrowers.
    (C) Postage expenses unrelated to site operation.
    (D) Expense of telephone and facsimile communication, unrelated to 
site operations.
    (E) Direct costs of insurance (fidelity bonds covering central 
office staff, computer and data coverage, general liability, etc.) 
directly related to protection of the funds and records of the 
borrower. Insurance coverage for agent's office and operations 
(Property, Auto, Liability, Errors and Omissions, Casualty, Workers 
Compensation, etc.).
    (F) Central office staff training and ongoing certifications.
    (G) Maintenance of all required profession and business licenses 
and permits. (This does not include project site office permits or 
licenses.)
    (H) Travel of agent staff to the properties for on-site inspection, 
training, or supervision activities.
    (I) Agent bookkeeping for their own business.
    (xiv) Attendance at meetings (including travel) with tenants, 
owners, and the Agency or other governmental agency.
    (xv) Development, preparation, and revision of management plans, 
agreements, and management certifications.
    (xvi) Directing the investment of project funds into required 
accounts.
    (xvii) Maintenance of bank accounts and monthly reconciliations.
    (xviii) Preparation, request for, and disbursement of borrower's 
initial operating capital (for new projects) as well as administration 
of annual owner's return on investment.
    (xix) Account maintenance, settlement, and disbursement of security 
deposits.
    (xx) Working with auditors for initial Agency annual financial 
reports.
    (xxi) Storage of records, to include electronic records, and 
adherence to records retention requirements.
    (xxii) Assist on-site staff with tenant relations and problems. 
Provide assistance to on-site staff in severe actions (eviction, death, 
insurance loss, etc.).
    (xxiii) Oversight of general and preventive maintenance procedures 
and policies.
    (xxiv) Development and oversight of asset replacement plans.
    (xxv) Oversight of preparation of section 504 reviews, development 
of plans, and implementation of improvements necessary to comply with 
plans and section 504 requirements.
    (2) Management fees may consist of a base per occupied revenue 
producing unit fee and add-on fees for specific housing project 
characteristics. Management entities may be eligible to receive the 
full base per occupied unit

[[Page 11281]]

fee for any month or part of a month during which the unit is occupied.
    (i) Periodically, the Agency will develop a range of base per 
occupied unit fees that will be paid in each state. The Agency will 
develop the fees based on a review of housing industry data. The final 
base for occupied unit fees for each state will be made available to 
all borrowers.
    (ii) Periodically, the Agency will develop the amount and 
qualifications to receive add-on fees. The final set of qualifications 
will be made available to all borrowers.
    (3) Management plans and agreements must describe if administrative 
expenses are to be paid from the management fee or paid for as a 
project cost.
    (i) A task list should be used to identify which services are 
included in the management fee, which services are included in project 
operations, and which are pro-rated along with the methodology used to 
pro-rating of expenses between management agent fees and project 
operations. Some property responsibilities are completed at the 
property and some offsite. Agent responsibilities may be performed at 
the property, the management office, or at some other location.
    (ii) Disputes may arise as to who performs certain services. The 
management plan and job descriptions should normally provide sufficient 
clarity to avoid or resolve any such disputes; however, sometimes 
clarifications and supporting materials may be required to resolve 
disputes. The decision must be made based on the most complete 
evaluation of the facts presented.
    (j) Management certification. (1) As a condition of approval of 
project management, including borrowers who self-manage, borrower and 
management agents must execute an Agency-approved certification 
certifying that:
    (i) Borrowers and management agent agree to operate the housing 
project in accordance with the management plan;
    (ii) Borrowers and the management agent will comply with Agency 
requirements, loan or grant agreements, applicable local, State, 
Tribal, and Federal laws and ordinances, and contract obligations, will 
certify that no payments have been made to anyone in return for 
awarding the management contract to the management agent, and will 
agree that such payments will not be made in the future;
    (iii) Borrowers and the management agent will comply with Agency 
notices or other policy directives that relate to the management of the 
housing project;
    (iv) Management agreement between the borrower and management agent 
complies with the requirements of this section;
    (v) Allowable management fees are assessed and paid out of the 
housing projects' general operating account. Borrowers and management 
agents will comply with Agency requirements regarding management fees 
as specified in paragraph (i) of this section, and allocation of 
management costs between the management fee and the housing project 
financial accounts specified in Sec.  3560.302(c)(3);
    (vi) The borrower and the management agent will not purchase goods 
and services from entities that have an identity-of-interest (IOI) with 
the borrower or the management agent until the IOI relationship has 
been disclosed to the Agency according to paragraph (g) of this 
section, not denied by the Agency under paragraph (d)(3) of this 
section, and it has been determined that the costs are as low as or 
lower than arms-length, open-market purchases; and
    (vii) The borrower and the management agent agree that all records 
related to the housing project are the property of the housing project 
and that the Agency, OIG, or GAO may inspect the housing records and 
the records of the borrower, management agent, and suppliers of goods 
and services having an IOI with the borrower or with a management agent 
acting as an agent of the borrower upon demand.
    (2) A certification will be executed each time new management is 
proposed and/or a management agreement is executed or renewed. Any 
amendment to a management certification must be approved by the Agency 
and the borrower.
* * * * *

0
7. Amend Sec.  3560.104 by revising paragraph (b)(1) to read as 
follows:


Sec.  3560.104  Fair housing.

* * * * *
    (b) * * *
    (1) Borrowers with housing projects that have five or more rental 
units must prepare and maintain an Affirmative Fair Housing Marketing 
Plan (AFHMP) as defined in 24 CFR part 200, subpart M.
* * * * *

0
8. Amend Sec.  3560.105 by revising paragraphs (c)(4) and (f)(10) to 
read as follows:


Sec.  3560.105  Insurance and taxes.

* * * * *
    (c) * * *
    (4) If the best insurance policy a borrower can obtain at the time 
the borrower receives the loan or grant contains a loss deductible 
clause greater than that allowed by paragraph (f)(9) of this section, 
the insurance policy and an explanation of the reasons why more 
adequate insurance is not available must be submitted to the Agency 
prior to loan or grant approval.
* * * * *
    (f) * * *
    (10) Deductible amounts (excluding flood, windstorm, earthquake and 
sinkhole insurance, or mine subsidence insurance) must be accounted for 
in the replacement reserve account, unless the deductible does not 
exceed the maximum deductible allowable as indicated in paragraph 
(f)(9)(i) of this section. Borrowers who wish to increase the 
deductible amount must deposit an additional amount to the reserve 
account equal to the difference between the Agency's maximum deductible 
and the requested new deductible. The Borrower will be required to 
maintain this additional amount so long as the higher deductible is in 
force.
* * * * *

Subpart D--Multi Family Housing Occupancy

0
9. Amend Sec.  3560.152 by revising paragraphs (c) heading and 
introductory text, (c)(1) introductory text, and (e)(2)(iv) to read as 
follows:


Sec.  3560.152  Tenant eligibility.

* * * * *
    (c) Requirements for elderly housing, congregate housing, and group 
homes. In addition to the requirements of paragraph (a) of this 
section, the following occupancy requirements apply to elderly housing 
and congregate housing or group homes:
    (1) For elderly housing and congregate housing, the following 
provisions apply:
* * * * *
    (e) * * *
    (2) * * *
    (iv) Since tenant certifications are used to document interest 
credit and rental assistance eligibility and are a basic responsibility 
of the borrower under the loan documents, borrowers who fail to submit 
annual or updated tenant certification forms within the time period 
specified in paragraph (e)(2)(iii) of this section will be charged 
overage, as specified in Sec.  3560.203(c) and lost rental assistance. 
Unauthorized assistance, if any, will be handled in accordance with 
subpart O of this part.
* * * * *

0
10. Amend Sec.  3560.154 by revising paragraphs (a)(9) introductory 
text and (j) to read as follows:

[[Page 11282]]

Sec.  3560.154  Tenant selection.

    (a) * * *
    (9) Race, ethnicity, and gender designation. The following 
disclosure notice shall be used:
* * * * *
    (j) Criminal activity. Borrowers will deny admission for criminal 
activity or alcohol abuse by household members in accordance with the 
provisions of 24 CFR 5.854, 5.855, 5.856, and 5.857.

0
11. Amend Sec.  3560.156 as follows:
0
a. Revise paragraph (c)(1);
0
b. Remove ``and'' at the end of paragraph (c)(6)(iii);
0
c. Remove the period at the end of paragraph (c)(6)(iv) and add ``; 
and'' in its place;
0
d. Add paragraph (c)(6)(v); and
0
e. Revise paragraphs (c)(15) and (16).
    The revisions and addition read as follows:


Sec.  3560.156  Lease requirements.

* * * * *
    (c) * * *
    (1) Leases for tenants who hold a Letter of Priority Entitlement 
(LOPE) issued according to Sec.  3560.660(c) and are temporarily 
occupying a unit for which they are not eligible must include a clause 
establishing the tenant's responsibility to move when a suitable unit 
becomes available in the housing project.
* * * * *
    (6) * * *
    (v) The Violence Against Women Reauthorization Act of 2013 and any 
amendments thereto.
* * * * *
    (15) Leases, including renewals, must include the following 
language:
    ``It is understood that the use, or possession, manufacture, sale, 
or distribution of an illegal controlled substance (as defined by 
local, State, Tribal or Federal law) while in or on any part of this 
apartment complex premises or cooperative is an illegal act. It is 
further understood that such action is a material lease violation. Such 
violations (hereafter called a ``drug violation'') may be evidenced 
upon the admission to or conviction of the use, possession, 
manufacture, sale, or distribution of a controlled substance (as 
defined by local, State, Tribal, or Federal law) in any local, State, 
Tribal or Federal court.
    The landlord may require any lessee or other adult member of the 
tenant household occupying the unit (or other adult or non-adult person 
outside the tenant household who is using the unit) who commits a drug 
violation to vacate the leased unit permanently, within timeframes set 
by the landlord, and not thereafter to enter upon the landlord's 
premises or the lessee's unit without the landlord's prior consent as a 
condition for continued occupancy by the remaining members of the 
tenant's household. The landlord may deny consent for entry unless the 
person agrees to not commit a drug violation in the future and is 
either actively participating in a counseling or recovery program, 
complying with court orders related to a drug violation, or has 
successfully completed a counseling or recovery program.
    The landlord may require any lessee to show evidence that any non-
adult member of the tenant household occupying the unit, who committed 
a drug violation, agrees not to commit a drug violation in the future, 
and to show evidence that the person is either actively seeking or 
receiving assistance through a counseling or recovery program, 
complying with court orders related to a drug violation, or has 
successfully completed a counseling or recovery program within 
timeframes specified by the landlord as a condition for continued 
occupancy in the unit.
    Should a further drug violation be committed by any non-adult 
person occupying the unit the landlord may require the person to be 
severed from tenancy as a condition for continued occupancy by the 
lessee.
    If a person vacating the unit, as a result of the above policies, 
is one of the lessees, the person shall be severed from the tenancy and 
the lease shall continue among any other remaining lessees and the 
landlord. The landlord may also, at the option of the landlord, permit 
another adult member of the household to be a lessee.
    Should any of the above provisions governing a drug violation be 
found to violate any of the laws of the land the remaining enforceable 
provisions shall remain in effect. The provisions set out above do not 
supplant any rights of tenants afforded by law.''
    (16) Leases for rental units accessible to individuals with 
disabilities occupied by those not needing the accessibility features 
must establish the tenant's responsibility to move to another unit 
within 30-days of written notification that the unit is needed by an 
eligible qualified person with disabilities who requires the 
accessibility features of the unit. Additionally, the lease clause must 
ensure that the household may remain in the rental unit with 
accessibility features until an appropriately sized vacant unit within 
the project becomes available and then must move or vacate within 30 
days of notification from borrower.
* * * * *

0
12. Amend Sec.  3560.158 by revising paragraph (d)(3) introductory text 
to read as follows:


Sec.  3560.158  Changes in tenant eligibility.

* * * * *
    (d) * * *
    (3) After the death of a tenant or co-tenant in elderly housing, 
the surviving members of the household, regardless of age but taking 
into consideration the conditions of paragraph (d)(1) of this section, 
may remain in the rental unit in which they were residing at the time 
of the tenant's or co-tenant's death, even if the household is over 
housed according to the housing project's occupancy rules except as 
follows:
* * * * *

0
13. Amend Sec.  3560.159 by revising paragraph (c) to read as follows:


Sec.  3560.159  Termination of occupancy.

* * * * *
    (c) Other terminations. Should occupancy be terminated due to 
conditions which are beyond the control of the tenant, such as a 
condition related to required repair or rehabilitation of the building, 
or a natural disaster, and prior to expiration of the disaster 
declaration, the tenants who are affected by such a circumstance are 
entitled to benefits under the Uniform Relocation Act and may request a 
Letter of Priority Entitlement (LOPE) from the Agency. If tenants need 
additional time to secure replacement housing, the Agency may, at the 
tenant's request, extend the LOPE entitlement period.
* * * * *

Subpart E--Rents

0
14. Amend Sec.  3560.205 by revising paragraph (e) to read as follows:


Sec.  3560.205  Rent and utility allowance changes.

* * * * *
    (e) Approval. If the Agency approves a rent or utility allowance 
increase request on which the comments were solicited, tenants or 
members receiving notice of a proposed rent or utility allowance change 
in accordance with paragraph (d)(2) of this section shall be notified 
of the rent or utility allowance change to be effective, at least 30 
calendar days from the date of the notification.
* * * * *

0
15. Amend Sec.  3560.207 by revising paragraph (b) to read as follows:


Sec.  3560.207  Annual adjustment factors for Section 8 units.

* * * * *

[[Page 11283]]

    (b) Establishing rents in housing with HUD rent assistance. 
Borrowers will set basic, note, and HUD contract rents for housing 
receiving HUD project-based Section 8 assistance, as specified in Sec.  
3560.202(c).
* * * * *

Subpart F--Rental Subsidies

0
16. Amend Sec.  3560.252 as follows:
0
a. Redesignate paragraphs (b)(2) through (4) as paragraphs (b)(3) 
through (5), respectively, and add new paragraph (b)(2); and
0
b. Revise paragraph (c)(2) introductory text.
    The addition and revisions read as follows:


Sec.  3560.252  Authorized rental subsidies.

* * * * *
    (b) * * *
    (2) Agency housing vouchers;
* * * * *
    (c) * * *
    (2) Tenants with subsidies from sources other than the Agency may 
be eligible for Agency rental assistance if all the following 
conditions are met.
* * * * *

0
17. Amend Sec.  3560.254 by revising paragraphs (c)(1), (2), (4), and 
(5) and adding paragraph (c)(6) to read as follows:


Sec.  3560.254  Eligibility for rental assistance.

* * * * *
    (c) * * *
    (1) With very low- or low-incomes who are eligible to live in MFH;
    (2) Whose net tenant contribution to rent determined in accordance 
with Sec.  3560.203(a)(1) is less than the basic rent for the unit;
* * * * *
    (4) Who meet the occupancy rules/policies established by the 
borrower in accordance with Sec.  3560.155(e);
    (5) Who have a signed, unexpired tenant certification form on file 
with the borrower; and
    (6) Who is not delinquent on any Agency unauthorized assistance 
repayment agreements.

0
18. Revise Sec.  3560.258 to read as follows:


Sec.  3560.258  Terms of agreement.

    (a) Term of agreement. Rental assistance agreements will have a 
term of the later of 12 months from the first disbursement of the 
obligation or when funds under the agreement are exhausted.
    (b) Replacing expiring obligations. Rental assistance agreements 
may be renewed in accordance with Sec.  3560.255(a)(1).

0
19. Amend Sec.  3560.259 by revising paragraphs (a)(3) and (4) and 
adding paragraph (d) to read as follows:


Sec.  3560.259  Transferring rental assistance.

    (a) * * *
    (3) After a liquidation, prepayment, or natural maturity;
    (4) To the extent permitted by law, when any rental assistance 
units have not been used for a 6-month period (Section 515) or a 12-
month period (Section 514 or 516); or
* * * * *
    (d) Agency use of obligation balances. In lieu of transferring 
rental assistance units, the Agency may elect to utilize the remaining 
obligation balances of units identified in paragraphs (a)(2) and (3) of 
this section for renewal purposes.

Subpart G--Financial Management

0
20. Amend Sec.  3560.302 by revising paragraphs (c)(3)(ii) and (iii) 
and (c)(5)(i), (ii), and (iv) to read as follows:


Sec.  3560.302  Accounting, bookkeeping, budgeting, and financial 
management systems.

* * * * *
    (c) * * *
    (3) * * *
    (ii) Real estate tax and insurance account (if not part of the 
general operating account or unless escrowed by the Agency);
    (iii) Reserve account (unless escrowed by the Agency in accordance 
with Sec.  3560.65);
* * * * *
    (5) * * *
    (i) All housing project funds must be held only in financial 
institution accounts insured by an agency of the Federal Government or 
held in securities meeting the conditions in this subpart.
    (ii) Funds maintained in an institution may not exceed the limit 
established for Federal deposit insurance. Funds exceeding the 
Federally insured limit under a Tax ID Number must be moved to a 
different qualified banking institution that will ensure the funds 
unless the current financial institution provides additional surety 
such as a collateral pledge that may already be in place.
* * * * *
    (iv) All funds received and held in any account, except the tenant 
security deposit, membership fee, and patron capital accounts, are 
considered assets of the property and must be held in trust by the 
borrower for the loan obligations until used and serve as security, 
through transfers or assumptions for the Agency loan or grant until all 
outstanding balances are satisfied.
* * * * *

0
21. Revise Sec.  3560.303 to read as follows:


Sec.  3560.303  Housing project budgets.

    (a) General requirements. (1) Using an Agency-approved format, 
borrowers must submit to the Agency for approval a proposed annual 
housing project budget prior to the start of the housing project's 
fiscal year. The capital budget section of the annual project budget 
must include anticipated expenditures on the project's long-term 
capital needs as specified in Sec.  3560.103(c) and will assist the 
Agency on utilization of the reserve account for current or future rent 
increase requests.
    (2) Budget projections regarding income, expenses, vacancies, and 
contingencies must be realistic given the housing project's history, 
current circumstances, and market conditions.
    (3) Borrowers must document that the operating expenses included in 
the budget accurately reflect reasonable and necessary costs to operate 
the housing project in a manner consistent with the objectives of the 
loan and in accordance with the applicable Agency requirements in this 
part.
    (4) Borrower must submit supporting documentation to justify 
housing project utility allowances.
    (5) Upon Agency request, borrowers must submit any additional 
documentation necessary to establish that applicable Agency 
requirements in this part have been met.
    (b) Allowable and unallowable project expenses. Expenses charged to 
project operations, whether for management agent services or other 
expenses, must be reasonable, typical, necessary and show a clear 
benefit to the residents of the property. Services and expenses charged 
to the property must show value added and be for authorized purposes.
    (1) Allowable expenses. Allowable expenses include those expenses 
that are directly attributable to housing project operations and are 
necessary to carry out successful operations.
    (i) Housing project expenses must not duplicate expenses included 
in the management fee as defined in Sec.  3560.102(i).
    (ii) Actual costs for direct personnel costs of permanent and part-
time staff assigned directly to the project site. This includes 
managers, maintenance staff, and temporary help including their:
    (A) Gross salary;
    (B) Employer Federal Insurance Contributions Act (FICA) 
contribution;

[[Page 11284]]

    (C) Federal unemployment tax;
    (D) State unemployment tax;
    (E) Workers compensation insurance;
    (F) Health insurance premiums;
    (G) Cost of fidelity or comparable insurance;
    (H) Leasing, performance incentive, or annual bonuses that are 
clearly provided for by the site manager salary contract;
    (I) Direct costs of travel to off-site locations by on-site staff 
for property business or training; and/or
    (J) Retirement benefits.
    (iii) Legal fees directly related to the operation and management 
of the property including tenant lease enforcement actions, property 
tax appeals and suits, and the preparation of all legal documents.
    (iv) All outside account and auditing fees, if required by the 
Agency, directly related to the preparation of the annual audit, 
partnership tax returns, and 401-K's, as well as other outside reports 
and year-end reports to the Agency, or other governmental agency.
    (v) All repair and maintenance costs for the project including:
    (A) Maintenance staffing costs and related expenses.
    (B) Maintenance supplies.
    (C) Contract repairs to the projects (e.g., heating and air 
conditioning, painting, roofing).
    (D) Make ready expenses including painting and repairs, flooring 
replacement, and appliance replacement as well as drapery or mini-blind 
replacement. (Turnover maintenance.)
    (E) Preventive maintenance expenses including occupied unit repairs 
and maintenance as well as common area systems repairs and maintenance.
    (F) Snow removal.
    (G) Elevator repairs and maintenance contracts.
    (H) Section 504 and other Fair Housing compliance modifications and 
maintenance.
    (I) Landscaping maintenance, replacements, and seasonal plantings.
    (J) Pest control services.
    (K) Other related maintenance expenses.
    (vi) All operational costs related to the project including:
    (A) The costs of obtaining and receiving credit reports, police 
reports, and other checks related to tenant selection criteria for 
prospective residents.
    (B) Photocopying or printing expense related to actual production 
of project brochures, marketing pieces, forms, reports, notices, and 
newsletters are allowable project expenses no matter what location or 
point of origin the work is performed including outsourcing the work to 
a professional printer.
    (C) All bank charges related to the property including purchases of 
supplies (e.g., checks, deposit slips, returned check fees, service 
fees).
    (D) Costs of site-based telephone including initial installation, 
basic services, directory listings, and long-distances charges.
    (E) All advertising costs related specifically to the operations of 
that project. This can include advertising for applicants or employees 
in newspapers, newsletters, social media, radio, cable TV, and 
telephone books.
    (F) Postage expense to mail out rental applications, third-party 
(asset income and adjustments to income) verifications, application 
processing correspondence (acceptance or denial letters), mailing 
project invoice payments, required correspondence, report submittals to 
various regulatory authorities for the managed property are allowable 
project expenses no matter what location or point of origin the mail is 
generated.
    (G) State taxes and other mandated Tribal, State, or local fees as 
well as other relevant expenses required for operation of the property 
by a third-party governmental unit. Costs of continuation financing 
statements and site license and permit costs.
    (H) Expenses related to site utilities.
    (I) Site office furniture and equipment including site-based 
computer and copiers. Service agreements and warranties for copiers, 
telephone systems and computers are also included (if approved by the 
Agency).
    (J) Real estate taxes (personal tangible property and real property 
taxes) and expenses related to controlling or reducing taxes.
    (K) All costs of insurance including property liability and 
casualty as well as fidelity or crime and dishonesty coverage for on-
site employees and the owners.
    (L) All bookkeeping supplies and recordkeeping items related to 
costs of collecting rents on-site.
    (M) All office supplies and copies related to costs of preparing 
and maintaining tenant files and processing tenant certifications to 
include electronic storage.
    (N) Public relations expense relative to maintaining positive 
relationships between the local community and the tenants with the 
management staff and the borrowers. Chamber of Commerce dues, 
contributions to local charity events, and sponsorship of tenant 
activities, are examples.
    (O) Tax credit compliance monitoring fees imposed by Housing 
Finance Authorities (HFAs).
    (P) All insurance deductibles as well as adjuster expenses.
    (Q) Professional service contracts (audits, owner-certified 
submissions in accordance with Sec.  3560.308(a)(2), tax returns, 
energy audits, utility allowances, architectural, construction, 
rehabilitation and inspection contracts, capital needs assessments 
(CNA), etc.).
    (R) Association dues to be paid by the project should be related to 
training for site managers or management agents. To the extent that 
association dues can document training for site managers or management 
agents related to project activities by actual cost or pro-ration, a 
reasonable expense may be billed to the project.
    (S) Legal fees if found not guilty of civil lawsuits, commercially 
reasonable legal expenses and costs for defending or settling lawsuits.
    (vii) With prior Agency approval, cooperatives and nonprofit 
organizations may use housing project funds to reimburse actual and 
typical asset management expenses directly attributable to ownership 
responsibilities. Such expenses may include:
    (A) Errors and omissions insurance policy for the Board of 
Directors. The cost must be prorated if the policy covers multiple 
Agency housing properties.
    (B) Board of Directors review and approval of proposed Agency's 
annual operating budgets, including proposed repair and replacement 
outlays and accruals. The cost must be prorated if the policy covers 
multiple Agency housing properties.
    (C) Board of Directors review and approval of capital expenditures, 
financial statements, and consideration of any management comments 
noted. The cost must be prorated if the policy covers multiple Agency 
housing properties.
    (D) The cost must be prorated if the policy covers multiple Agency 
housing properties.
    (viii) Agency approved third party debt service for the project.
    (2) Unallowable expenses. Housing project funds may not be used for 
any of the following:
    (i) Equity skimming as defined in 42 U.S.C. 543(a);
    (ii) Purposes unrelated to the housing project;
    (iii) Reimbursement of inaccurate or false claims;
    (iv) Court ordered settlement agreements, court ordered decrees, 
legal fees, or other costs that result from the

[[Page 11285]]

filing of civil rights complaints or legal action alleging the 
borrower, or a representative of the borrower, has committed a civil 
rights violation. It is inappropriate to charge for legal services to 
represent any interest other than the borrower's interest (i.e., 
representing a general partner or limited partner to defend their 
individual owner interest is not allowable);
    (v) Fines, penalties, and legal fees where the borrower or a 
borrower's representative has been found guilty of violating laws, 
including, but not limited to, civil rights, and building codes. 
Charging for payment of penalties including opposition legal fees 
resulting from an award finding improper actions on the part of the 
owner or management agent is generally an inappropriate project 
expense. The party responsible generally pays such expenses for 
violating the standards or by their insurance carriers;
    (vi) Association dues unless related to training for site managers 
or management agents. To the extent that association dues can document 
training for site managers or management agents related to project 
activities by actual cost or pro-ration, a reasonable expense may be 
billed to the project;
    (vii) Pay for bonuses or monetary performance awards to site 
managers or management agents that are not clearly provided for by the 
site manager salary contract;
    (viii) Billing for parties or gifts to management agent staff;
    (ix) Billing for practices that are inefficient such as routine use 
of collect calls from a site manager to a management agent office;
    (x) Billing the project for computer hardware, some software, and 
internal connections that are beyond the scope and size reasonably 
needed for the services supplied (i.e., purchasing equipment or 
software for use by a site manager that is clearly beyond that needed 
to support project operations). Note that computer learning center 
activities benefiting tenants are not covered in this prohibition; or
    (xi) Costs of tenant services.
    (c) Priorities. The priority order of planned and actual budget 
expenditures will be:
    (1) Senior position lienholder, if any;
    (2) Operating and maintenance expenses, including taxes and 
insurance;
    (3) Agency debt payments;
    (4) Reserve account requirements;
    (5) All accounts payable;
    (6) Other authorized expenditures; and
    (7) Return on owner investment.
    (d) Determining if expenses are reasonable. Generally, expenses 
charged to project operations, whether for management agent services or 
other expenses, must be reasonable, typical, necessary and show a clear 
benefit to the residents of the property. Services and expenses charged 
to the property must show value added and be for authorized purposes. 
If such value is not apparent, the service or expense should be 
examined.
    (1) Administrative expenses for project operations exceeding 23 
percent, or those typical for the area, of gross potential basic rents 
and revenues (i.e., referred to as gross potential rents in industry 
publications) highlight a need for closer review for unnecessary 
expenditures. Budget approval is required, and project resources may 
not always permit an otherwise allowable expense to be incurred if it 
is not fiscally prudent in the market.
    (2) Excessive administrative expenses can result in inadequate 
funds to meet other essential project needs, including expenditures for 
repair and maintenance needed to keep the project in sound physical 
condition. Actions that are improper or not fiscally prudent may 
warrant budget denial and/or a demand for recovery action.
    (e) Agency review and approval. (1) The Agency will only approve 
housing project budgets that meet the requirements of paragraphs (a) 
through (d) of this section.
    (2) If no rent change is requested, borrowers must submit budget 
documents for Agency approval 60 calendar days prior to the start of 
the housing project's fiscal year. The Agency will notify borrowers if 
the budget submission does not meet the requirements of paragraphs (a) 
through (d) of this section. The borrower will have 10 days to submit 
the additional material.
    (3) If a rent change is requested, the borrower must submit budget 
documents to the Agency and notify tenants of the requested rent change 
at least 90 calendar days prior to the start of the housing project's 
fiscal year.
    (i) The Agency will notify borrowers if the budget submission does 
not meet the requirements of paragraphs (a) through (d) of this 
section, or if the rent and utility allowance request has been denied 
in accordance with Sec.  3560.205(f). The borrower will have 10 days to 
submit the additional material to address any issues raised by the 
Agency.
    (ii) The rent change is not approved until the Agency issues a 
written approval. If there is no response from the Agency within the 
30-day period, the rent change is considered automatic. The following 
budgets are not eligible for automatic approval:
    (A) Budgets with rent increases above $25 per unit; and
    (B) Budgets that are submitted late or that miss other deadlines 
set by the Agency.
    (4) If the Agency denies the budget approval, the Agency will 
notify the borrower in writing.
    (5) If budget approval is denied, the borrower shall continue to 
operate the housing project based on the most recently approved budget.

0
22. Amend Sec.  3560.306 as follows:
0
a. Revise paragraphs (a), (b), (d), and (e)(2);
0
b. Redesignate paragraphs (g)(2) through (5) as paragraphs (g)(3) 
through (6), respectively, and add new paragraph (g)(2); and
0
c. Redesignate paragraph (j)(2) as paragraph (j)(3) and add new 
paragraph (j)(2).
    The revisions and additions read as follows:


Sec.  3560.306  Reserve account.

    (a) Purpose. To meet the major capital expense needs of a housing 
project, borrowers must establish and maintain a reserve account, 
unless escrowed by the Agency.
    (b) Financial management of the reserve account. Unless otherwise 
approved by the Agency, borrower management of the reserve account is 
subject to the requirements of 7 CFR part 1902, subpart A, regarding 
supervised bank accounts.
* * * * *
    (d) Transfer of surplus general operating account funds. (1) The 
general operating account will be deemed to contain surplus funds when 
the balance at the end of the housing project's fiscal year, after all 
payables and priorities, exceeds 20 percent of the operating and 
maintenance expenses. If the borrower is escrowing taxes and insurance 
premiums, include the amount that should be escrowed by year end and 
subtract such tax and insurance premiums from operating and maintenance 
expenses used to calculate 20 percent of the operating and maintenance 
expenses.
    (2) If a housing project's general operating account has surplus 
funds at the end of the housing project's fiscal year as defined in 
paragraph (d)(1) of this section, the Agency will require the borrower 
to use the surplus funds to address capital needs, make a deposit in 
the housing project's reserve account, reduce the debt service on the 
borrower's loan, or reduce rents in the following year. At the end of 
the borrower's fiscal year, if the borrower is required to transfer 
surplus funds from

[[Page 11286]]

the general operating account to the reserve account, the transfer does 
not change the future required contributions to the reserve account.
    (e) * * *
    (2) Reserve accounts must be supervised accounts that require the 
Agency to approve all withdrawals; except, this requirement is not 
applicable when loan funds guaranteed by the Section 538 GRRH program 
are used for the construction and/or rehabilitation of a direct MFH 
loan project. Direct MFH loan borrowers, who are exempted from the 
supervised account requirement, as described in this section, must 
follow Section 538 GRRH program regulatory requirements pertaining to 
reserve accounts. In all cases, Section 538 lenders must get prior 
written approval from the Agency before reserve account funds involving 
a direct MFH loan project can be disbursed to the borrower.
* * * * *
    (g) * * *
    (2) Borrowers should include any needed capital improvements based 
on the needs identified in an Agency approved Capital Needs Assessment 
(if obtained) are completed within a reasonable timeframe.
* * * * *
    (j) * * *
    (2) The Agency will allow for an annual adjustment to increase 
reserve account funding levels by Operating Cost Adjustment Factor 
(OCAF) as published by HUD annually. This will require a modification 
to the Loan agreement and the increase documented with budget 
submission as outlined in Sec.  3560.303.
* * * * *

Subpart I--Servicing

0
23. Amend Sec.  3560.402 by revising paragraph (b) to read as follows:


Sec.  3560.402  Loan payment processing.

* * * * *
    (b) Required conversion to PASS. Borrowers with Daily Interest 
Accrual System (DIAS) accounts must convert to PASS with any loan 
servicing action.
* * * * *

Subpart L--Off Farm Labor Housing


Sec.  3560.576  [Amended]

0
24. Amend Sec.  3560.576 by removing the words ``State Director's'' and 
adding in their place ``MFH Leadership Designee's'' in paragraph (e).

Subpart N--Housing Preservation


Sec.  3560.656  [Amended]

0
25. Amend Sec.  3560.656 by removing the word ``will'' and replacing it 
with ``may'' in paragraph (a) introductory text.

Joaquin Altoro,
Administrator, Rural Housing Service.
[FR Doc. 2022-03837 Filed 2-28-22; 8:45 am]
BILLING CODE 3410-XV-P