HUD Provides Clarity on the Granting of HOME Funds to Entities That Then Loan the HOME Funds

person A.J. Johnson today 10/02/2021

In a recent edition of HOMEfires, HUD made it clear that a Participating Jurisdiction (PJ) may not grant or provide HOME funds to an entity that then lends the HOME funds to the owner of an affordable rental project. This is because HOME statutory and regulatory requirements require the PJ to ensure compliance with HOME requirements through binding contractual agreements with the project owner. A PJ may only provide HOME funds to an entity to lend to the owner of an affordable housing development if the entity is a sub-recipient to the PJ.

Background

Section 226 of Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended (NAHA) requires a PJ to have a contractual relationship with the owner of a HOME rental project to ensure compliance with the HOME requirements (42 U.S.C. 12756).

Section 226 requires that the PJ ensure long-term compliance with the HOME statute and provide remedies for a breach through both agreements with project owners and other such measures of enforcement of HOME requirements by the PJ or beneficiaries (e.g., deed restrictions, liens or real estate, or covenants running with the land). PJs must enter into written agreements with project owners to provide the HOME funds for the development or rehabilitation of affordable rental housing and to impose HOME requirements on the project.

If a PJ provides HOME funds to an entity that then lends the HOME funds to the project owner, the PJ is not providing HOME funds to the project owner but rather to an intermediary. Even if the intermediary entity imposes HOME requirements on the owner, the PJ is still in violation of the HOME statutory requirements to "ensure long-term compliance" through "binding contractual agreements with owners."

If a PJ provides HOME funds under a written agreement with an entity that is not the owner, it is not a valid commitment of HOME funds under the HOME regulations.

The HOME statute and regulations do not permit HOME funds to be disbursed to any entity for the purpose of then loaning the HOME funds to an owner of rental housing unless the entity loaning the HOME funds to the owner is a public entity or nonprofit acting as a subrecipient or State recipient of the PJ. Only then do the HOME regulations permit an entity other than the PJ to provide HOME funds under written agreements with owners to carry out HOME eligible activities (See 24 CFR 92.2(2); 24 CFR 92.205; and 24 CFR 92.504). Subrecipients may not loan HOME funds to an owner it owns or controls in whole or in part.

Noncompliance or violations of HOME requirements may result in repayment of the HOME funds, remedies under 2 CFR 200.338, or other legally available actions against the PJ and subrecipient (but not against the owner of the project).

HUD has the discretion to pursue enforcement actions for any violations. For violations that occurred prior to this guidance, HUD may require invalid agreements to be restated or non-compliant written agreements and associated documents to be assigned to the HOME PJ. HUD has indicated that they are going to pursue compliance actions for all agreements executed after the date of this guidance (September 30, 2021) that do not comply with the noted requirements.

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