[Code of Federal Regulations]
[Title 24, Volume 3]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 24CFR570.913]

[Page 167-171]
 
                 TITLE 24--HOUSING AND URBAN DEVELOPMENT
 
  CHAPTER V--OFFICE OF ASSISTANT SECRETARY FOR COMMUNITY PLANNING AND 
        DEVELOPMENT, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
 
PART 570_COMMUNITY DEVELOPMENT BLOCK GRANTS--Table of Contents
 
                      Subpart O_Performance Reviews
 
Sec. 570.913  Other remedies for noncompliance.

    (a) Action to enforce compliance. When the Secretary acts to enforce 
the civil rights provisions of Section 109, as described in Sec. 
570.602 and 24 CFR part 6, the procedures described in 24 CFR parts 6 
and 180 apply. If the Secretary finds, after reasonable notice and 
opportunity for hearing, that a recipient has failed to comply 
substantially with any other provisions of this part, the provisions of 
this section apply. The Secretary, until he/she is satisfied that there 
is no longer any such failure to comply, shall:
    (1) Terminate payments to the recipient;
    (2) Reduce payments to the recipient by an amount equal to the 
amount of such payments which were not expended in accordance with this 
part; or
    (3) Limit the availability of payments to programs or activities not 
affected by such failure to comply.
    Provided, however, that the Secretary may on due notice suspend 
payments at any time after the issuance of a notice of opportunity for 
hearing pursuant to paragraph (c)(1) of this section, pending such 
hearing and a final decision, to the extent the Secretary determines 
such action necessary to preclude the further expenditure of funds for 
activities affected by such failure to comply.
    (b) In lieu of, or in addition to, any action authorized by 
paragraph (a) of this section, the Secretary may, if he/she has reason 
to believe that a recipient has failed to comply substantially with any 
provision of this part;
    (1) Refer the matter to the Attorney General of the United States 
with a recommendation that an appropriate civil action be instituted; 
and
    (2) Upon such a referral, the Attorney General may bring a civil 
action in any United States district court having venue thereof for such 
relief as may be appropriate, including an action to recover the amount 
of the assistance furnished under this part which was not expended in 
accordance with it, or for mandatory or injunctive relief;
    (c) Proceedings. When the Secretary proposes to take action pursuant 
to this section, the respondent is the unit of general local government 
or State receiving assistance under this part. These procedures are to 
be followed prior to imposition of a sanction described in paragraph (a) 
of this section:
    (1) Notice of opportunity for hearing: The Secretary shall notify 
the respondent in writing of the proposed action and of the opportunity 
for a hearing. The notice shall:
    (i) Specify, in a manner which is adequate to allow the respondent 
to prepare its response, allegations with respect to a failure to comply 
substantially with a provision of this part;
    (ii) State that the hearing procedures are governed by these rules;
    (iii) State that a hearing may be requested within 10 days from 
receipt of the notice and the name, address and telephone number of the 
person to whom any request for hearing is to be addressed:
    (iv) Specify the action which the Secretary proposes to take and 
that the authority for this action is section 111(a) of the Act;
    (v) State that if the respondent fails to request a hearing within 
the time specified a decision by default will be rendered against the 
respondent; and
    (vi) Be sent to the respondent by certified mail, return receipt 
requested.
    (2) Initiation of hearing. The respondent shall be allowed at least 
10 days from receipt of the notice within which to notify HUD of its 
request for a hearing. If no request is received within the time 
specified, the Secretary may proceed to make a finding on the issue of 
compliance with this part and to take the proposed action.
    (3) Administrative Law Judge. Proceedings conducted under these 
rules shall be presided over by an Administrative Law Judge (ALJ), 
appointed as provided by section 11 of the Administrative Procedures Act 
(5 U.S.C. 3105). The case shall be referred to the ALJ by the Secretary 
at the time a hearing is requested. The ALJ shall promptly notify the 
parties of the time and place at which the hearing will be held. The ALJ 
shall conduct a fair and impartial hearing and take all action necessary 
to avoid delay in the disposition of proceedings and to maintain order. 
The ALJ shall have all powers necessary to those ends, including but not 
limited to the power to:

[[Page 168]]

    (i) Administer oaths and affirmations;
    (ii) Issue subpoenas as authorized by law;
    (iii) Rule upon offers of proof and receive relevant evidence;
    (iv) Order or limit discovery prior to the hearing as the interests 
of justice may require;
    (v) Regulate the course of the hearing and the conduct of the 
parties and their counsel;
    (vi) Hold conferences for the settlement or simplification of the 
issues by consent of the parties;
    (vii) Consider and rule upon all procedural and other motions 
appropriate in adjudicative proceedings; and
    (viii) Make and file initial determinations.
    (4) Ex parte communications. An ex parte communication is any 
communication with an ALJ, direct or indirect, oral or written, 
concerning the merits or procedures of any pending proceeding which is 
made by a party in the absence of any other party. Ex parte 
communications are prohibited except where the purpose and content of 
the communication have been disclosed in advance or simultaneously to 
all parties, or the communication is a request for information 
concerning the status of the case. Any ALJ who receives an ex parte 
communication which the ALJ knows or has reason to believe is 
unauthorized shall promptly place the communication, or its substance, 
in all files and shall furnish copies to all parties. Unauthorized ex 
parte communications shall not be taken into consideration in deciding 
any matter in issue.
    (5) The hearing. All parties shall have the right to be represented 
at the hearing by counsel. The ALJ shall conduct the proceedings in an 
expeditious manner while allowing the parties to present all oral and 
written evidence which tends to support their respective positions, but 
the ALJ shall exclude irrelevant, immaterial or unduly repetitious 
evidence. The Department has the burden of proof in showing by a 
preponderance of the evidence that the respondent failed to comply 
substantially with a provision of this part. Each party shall be allowed 
to cross-examine adverse witnesses and to rebut and comment upon 
evidence presented by the other party. Hearings shall be open to the 
public. So far as the orderly conduct of the hearing permits, interested 
persons other than the parties may appear and participate in the 
hearing.
    (6) Transcripts. Hearing shall be recorded and transcribed only by a 
reporter under the supervision of the ALJ. The orginal transcript shall 
be a part of the record and shall constitute the sole official 
transcript. Respondents and the public, at their own expense, may obtain 
copies of the transcript.
    (7) The ALJ's decision. At the conclusion of the hearing, the ALJ 
shall give the parties a reasonable opportunity to submit proposed 
findings and conclusions and supporting reasons therefor. Within 25 days 
after the conclusion of the hearing, the ALJ shall prepare a written 
decision which includes a statement of findings and conclusions, and the 
reasons or basis therefor, on all the material issues of fact, law or 
discretion presented on the record and the appropriate sanction or 
denial thereof. The decision shall be based on consideration of the 
whole record or those parts thereof cited by a party and supported by 
and in accordance with the reliable, probative, and substantial 
evidence. A copy of the decision shall be furnished to the parties 
immediately by certified mail, return receipt requested, and shall 
include a notice that any requests for review by the Secretary must be 
made in writing to the Secretary within 30 days of the receipt of the 
decision.
    (8) The record. The transcript of testimony and exhibits, together 
with the decision of the ALJ and all papers and requests filed in the 
proceeding, constitutes the exclusive record for decision and, on 
payment of its reasonable cost, shall be made available to the parties. 
After reaching his/her initial decision, the ALJ shall certify to the 
complete record and forward the record to the Secretary.
    (9) Review by the Secretary. The decision by the ALJ shall 
constitute the final decision of the Secretary unless, within 30 days 
after the receipt of the decision, either the respondent or the 
Assistant Secretary for Community

[[Page 169]]

Planning and Development files an exception and request for review by 
the Secretary. The excepting party must transmit simultaneously to the 
Secretary and the other party the request for review and the basis of 
the party's exceptions to the findings of the ALJ. The other party shall 
be allowed 30 days from receipt of the exception to provide the 
Secretary and the excepting party with a written reply. The Secretary 
shall then review the record of the case, including the exceptions and 
the reply. On the basis of such review, the Secretary shall issue a 
written determination, including a statement of the reasons or basis 
therefor, affirming, modifying or revoking the decision of the ALJ. The 
Secretary's decision shall be made and transmitted to the parties within 
80 days after the decision of the ALJ was furnished to the parties.
    (10) Judicial review. The respondent may seek judicial review of the 
Secretary's decision pursuant to section 111(c) of the Act.

[53 FR 34466, Sept. 6, 1988, as amended at 64 FR 3802, Jan. 25, 1999]

Appendix A to Part 570--Guidelines and Objectives for Evaluating Project 
                    Costs and Financial Requirements

    I. Guidelines and Objectives for Evaluating Project Costs and 
Financial Requirements. HUD has developed the following guidelines that 
are designed to provide the recipient with a framework for financially 
underwriting and selecting CDBG-assisted economic development projects 
which are financially viable and will make the most effective use of the 
CDBG funds. The use of these underwriting guidelines as published by HUD 
is not mandatory. However, grantees electing not to use these 
underwriting guidelines would be expected to conduct basic financial 
underwriting prior to the provision of CDBG financial assistance to a 
for-profit business. States electing not to use these underwriting 
guidelines would be expected to ensure that the state or units of 
general local government conduct basic financial underwriting prior to 
the provision of CDBG financial assistance to a for-profit business.
    II. Where appropriate, HUD's underwriting guidelines recognize that 
different levels of review are appropriate to take into account 
differences in the size and scope of a proposed project, and in the case 
of a microenterprise or other small business to take into account the 
differences in the capacity and level of sophistication among businesses 
of differing sizes.
    III. Recipients are encouraged, when they develop their own programs 
and underwriting criteria, to also take these factors into account. For 
example, a recipient administering a program providing only technical 
assistance to small businesses might choose to apply underwriting 
guidelines to the technical assistance program as a whole, rather than 
to each instance of assistance to a business. Given the nature and 
dollar value of such a program, a recipient might choose to limit its 
evaluation to factors such as the extent of need for this type of 
assistance by the target group of businesses and the extent to which 
this type of assistance is already available.
    IV. The objectives of the underwriting guidelines are to ensure:
    (1) that project costs are reasonable;
    (2) that all sources of project financing are committed;
    (3) that to the extent practicable, CDBG funds are not substituted 
for non-Federal financial support;
    (4) that the project is financially feasible;
    (5) that to the extent practicable, the return on the owner's equity 
investment will not be unreasonably high; and
    (6) that to the extent practicable, CDBG funds are disbursed on a 
pro rata basis with other finances provided to the project.
    i. Project costs are reasonable. i. Reviewing costs for 
reasonableness is important. It will help the recipient avoid providing 
either too much or too little CDBG assistance for the proposed project. 
Therefore, it is suggested that the grantee obtain a breakdown of all 
project costs and that each cost element making up the project be 
reviewed for reasonableness. The amount of time and resources the 
recipient expends evaluating the reasonableness of a cost element should 
be commensurate with its cost. For example, it would be appropriate for 
an experienced reviewer looking at a cost element of less than $10,000 
to judge the reasonableness of that cost based upon his or her knowledge 
and common sense. For a cost element in excess of $10,000, it would be 
more appropriate for the reviewer to compare the cost element with a 
third-party, fair-market price quotation for that cost element. Third-
party price quotations may also be used by a reviewer to help determine 
the reasonableness of cost elements below $10,000 when the reviewer 
evaluates projects infrequently or if the reviewer is less experienced 
in cost estimations. If a recipient does not use third-party price 
quotations to verify cost elements, then the recipient would need to 
conduct its own cost analysis using appropriate cost estimating manuals 
or services.
    ii. The recipient should pay particular attention to any cost 
element of the project that will be carried out through a non-arms-

[[Page 170]]

length transaction. A non-arms-length transaction occurs when the entity 
implementing the CDBG assisted activity procures goods or services from 
itself or from another party with whom there is a financial interest or 
family relationship. If abused, non-arms-length transactions 
misrepresent the true cost of the project.
    2. Commitment of all project sources of financing. The recipient 
should review all projected sources of financing necessary to carry out 
the economic development project. This is to ensure that time and effort 
is not wasted on assessing a proposal that is not able to proceed. To 
the extent practicable, prior to the commitment of CDBG funds to the 
project, the recipient should verify that: sufficient sources of funds 
have been identified to finance the project; all participating parties 
providing those funds have affirmed their intention to make the funds 
available; and the participating parties have the financial capacity to 
provide the funds.
    3. Avoid substitution of CDBG funds for non-Federal financial 
support. i. The recipient should review the economic development project 
to ensure that, to the extent practicable, CDBG funds will not be used 
to substantially reduce the amount of non-Federal financial support for 
the activity. This will help the recipient to make the most efficient 
use of its CDBG funds for economic development. To reach this 
determination, the recipient's reviewer would conduct a financial 
underwriting analysis of the project, including reviews of appropriate 
projections of revenues, expenses, debt service and returns on equity 
investments in the project. The extent of this review should be 
appropriate for the size and complexity of the project and should use 
industry standards for similar projects, taking into account the unique 
factors of the project such as risk and location.
    ii. Because of the high cost of underwriting and processing loans, 
many private financial lenders do not finance commercial projects that 
are less than $100,000. A recipient should familiarize itself with the 
lending practices of the financial institutions in its community. If the 
project's total cost is one that would normally fall within the range 
that financial institutions participate, then the recipient should 
normally determine the following:
    A. Private debt financing--whether or not the participating private, 
for-profit business (or other entity having an equity interest) has 
applied for private debt financing from a commercial lending institution 
and whether that institution has completed all of its financial 
underwriting and loan approval actions resulting in either a firm 
commitment of its funds or a decision not to participate in the project; 
and
    B. Equity participation--whether or not the degree of equity 
participation is reasonable given general industry standards for rates 
of return on equity for similar projects with similar risks and given 
the financial capacity of the entrepreneur(s) to make additional 
financial investments.
    iii. If the recipient is assisting a microenterprise owned by a low- 
or moderate-income person(s), in conducting its review under this 
paragraph, the recipient might only need to determine that non-Federal 
sources of financing are not available (at terms appropriate for such 
financing) in the community to serve the low- or moderate-income 
entrepreneur.
    4. Financial feasibility of the project. i. The public benefit a 
grantee expects to derive from the CDBG assisted project (the subject of 
separate regulatory standards) will not materialize if the project is 
not financially feasible. To determine if there is a reasonable chance 
for the project's success, the recipient should evaluate the financial 
viability of the project. A project would be considered financially 
viable if all of the assumptions about the project's market share, sales 
levels, growth potential, projections of revenue, project expenses and 
debt service (including repayment of the CDBG assistance if appropriate) 
were determined to be realistic and met the project's break-even point 
(which is generally the point at which all revenues are equal to all 
expenses). Generally speaking, an economic development project that does 
not reach this break-even point over time is not financially feasible. 
The following should be noted in this regard:
    A. some projects make provisions for a negative cash flow in the 
early years of the project while space is being leased up or sales 
volume built up, but the project's projections should take these factors 
into account and provide sources of financing for such negative cash 
flow; and
    B. it is expected that a financially viable project will also 
project sufficient revenues to provide a reasonable return on equity 
investment. The recipient should carefully examine any project that is 
not economically able to provide a reasonable return on equity 
investment. Under such circumstances, a business may be overstating its 
real equity investment (actual costs of the project may be overstated as 
well), or it may be overstating some of the project's operating expenses 
in the expectation that the difference will be taken out as profits, or 
the business may be overly pessimistic in its market share and revenue 
projections and has downplayed its profits.
    ii. In addition to the financial underwriting reviews carried out 
earlier, the recipient should evaluate the experience and capacity of 
the assisted business owners to manage an assisted business to achieve 
the projections. Based upon its analysis of these factors, the recipient 
should identify those elements, if any, that pose the greatest risks

[[Page 171]]

contributing to the project's lack of financial feasibility.
    5. Return on equity investment. To the extent practicable, the CDBG 
assisted activity should provide not more than a reasonable return on 
investment to the owner of the assisted activity. This will help ensure 
that the grantee is able to maximize the use of its CDBG funds for its 
economic development objectives. However, care should also be taken to 
avoid the situation where the owner is likely to receive too small a 
return on his/her investment, so that his/her motivation remains high to 
pursue the business with vigor. The amount, type and terms of the CDBG 
assistance should be adjusted to allow the owner a reasonable return on 
his/her investment given industry rates of return for that investment, 
local conditions and the risk of the project.
    6. Disbursement of CDBG funds on a pro rata basis. To the extent 
practicable, CDBG funds used to finance economic development activities 
should be disbursed on a pro rata basis with other funding sources. 
Recipients should be guided by the principle of not placing CDBG funds 
at significantly greater risk than non-CDBG funds. This will help avoid 
the situation where it is learned that a problem has developed that will 
block the completion of the project, even though all or most of the CDBG 
funds going in to the project have already been expended. When this 
happens, a recipient may be put in a position of having to provide 
additional financing to complete the project or watch the potential loss 
of its funds if the project is not able to be completed. When the 
recipient determines that it is not practicable to disburse CDBG funds 
on a pro rata basis, the recipient should consider taking other steps to 
safeguard CDBG funds in the event of a default, such as insisting on 
securitizing assets of the project.

[60 FR 1953, Jan. 5, 1995]