On August 6, 2015, the Rural Housing Service (RHS) published a proposed rule in the Federal Register that will amend current regulations to change program requirements regarding financial reporting. The proposed change will align RHS requirements with those of the Department of Housing & Urban Development (HUD) and will reduce the requirement on borrowers to produce multiple financial reports. Comments on the proposed rule are due no later than October 5, 2015.
The programs affected by the proposed rule are (1) Farm Labor Housing Loans and Grants; (2) Rural Rental Housing Loans; and (3) Rural Rental Assistance.
Section 515 (z) (1) of the Housing Act of 1949 requires that borrowers maintain accounting records in accordance with generally accepted accounting principles for all projects that receive funds from loans made or guaranteed by the Department of Agriculture under the Section 515 program. RHS considers Section 514 loans to have similar risks as 515 loans; therefore, the regulatory accounting requirements apply to both types of loans.
This proposed change is a result of RHS’s participation in the White House’s Domestic Policy Counsel’s Rental Policy Working Group (RPWG) on an initiative to reduce duplicative requirements on customers, and align program requirements in the affordable rental housing industry. The RPWG believes high-risk properties, which consist of properties that have combined federal financial assistance of $500,000 or more, should receive more stringent evaluation of financial performance. Therefore, RHS plans to implement a risk-based threshold to set the standard for audit guidelines. It will require financial reporting to include audits based on a modified version of the HUD OIG Consolidated Audit Guide, which are also acceptable to HUD.
Combined Federal financial assistance is defined as a combination of any or all of the following sources:
- The outstanding principal balance of a USDA Mortgage, a mortgage insured by the Federal Housing Administration (FHA) or HUD-held mortgages or loans (including flexible subsidy loans);
- Any USDA Rental Assistance or Project-based Section 8 assistance received during the fiscal year;
- Interest reduction payments received during the year (interest subsidy); and/or
- Federal grant funds received during the year.
The new policy eliminates a financial reporting burden by allowing owners who receive less than $500,000 in combined Federal assistance to submit owner certified financial statements instead of audited financial statements.
Section 514 and 515 proposals for new construction are still subject to cost certification.
In addition to the financial reporting change, RHS is proposing two additional certifications:
- The borrower will be asked to certify that there have been no changes in project ownership other than those approved by the Agency and identified in the certification; and
- Real estate taxes have been paid in accordance with state and/or local requirements and are current.
Owners subject to this proposed rule should obtain a copy and provide any comments to RHS by October 5, 2015.