of interest or premium on, or principal of, a debt obligation guaranteed under the Act, the first recourse of the holder shall be a claim under the guarantee for payment of defaulted interest, premium, or principal. Upon payment thereof in accordance with the terms of such guarantee, the holder shall have no further recourse. All payments thereunder shall be made in cash from the Revolving Fund.

§ 720.32

Other financial requirements.

The Developer shall comply with the following financial requirements except as otherwise approved by the Secretary. For the purpose of this section, the Developer shall be deemed to include any Restricted Affiliate.

(a) Financial tests. The Developer shall comply with financial tests designed by the Secretary for the purpose of assuring the Developer's ability to meet its liabilities.

(b) Maintenance of good standing and properties. The Developer and any Subsidiary shall maintain its legal existence, pay all taxes, assessments and governmental charges and all claims for labor, materials and supplies which might result in property encumbrance, maintain its properties in good repair, and service and preserve prior security interests on property which is security for the Secretary's guarantee.

(c) Insurance. The Developer shall maintain insurance coverage in form and amount satisfactory to the Secretary.

(d) Condemnation. In the event that any property subject to the lien of the Indenture be taken by eminent domain, any award for the property so taken shall be paid to the Trustee to be held as security for the guarantee.

(e) Non-project activities. The Developer shall not engage in Non-Project Activities.

(f) Limitation on debt. The Developer shall not create, incur, assume, or suffer to exist any debt other than: debt evidenced by the guaranteed debt obligations; debt subject to an agreement subordinating such debt to both principal and interest on the Government-guaranteed debt obligations; debt, if any, secured by permitted encumbrances; and other debt specifically permitted in writing by the Secretary.

(g) Sale or acquisition of assets; merger. The Developer shall not enter into any merger or consolidation or acquire all or substantially all the assets of any

Person, or sell, lease or otherwise dispose of any substantial portion of its assets except in the ordinary course of business.

(h) Extension of credit. The Developer shall not lend to any Person except as provided in the Project Documents.

(i) Investments of developer. The Developer shall not purchase, acquire or hold obligations or stock of, or any interest in, any Person other than as provided in the Project Documents.

(j) Sale and leaseback. The Developer shall not directly or indirectly enter into any arrangements whereby the Developer shall sell or transfer any part of its assets and thereupon, or within one year thereafter, lease the assets so sold or transferred.

(k) Leases. The Developer shall not enter into any lease of real property except as provided in the Project Documents.

(1) Change in form or control. No sale, transfer, pledge or other disposition of the stock or other equity which directly or indirectly represents ownership or control of any interest in a Developer or Subsidiary shall be made without the written approval of the Secretary.

(m) Transactions with interested persons. The Developer shall not enter into any transaction directly or indirectly involving the transfer of money or other items of value with any "Interested Person," except as authorized in writing by the Secretary. This prohibition shall not extend to ordinary employment contracts between the developer and an officer, director or employee of the Developer. "Interested Person" means any:

(1) Person who is a limited or general partner of the Developer;

(2) Person who is an officer, director or employee of the Developer;

(3) Person who is a stockholder of the Developer;

(4) Person owning or having Control of any interest in the profits or voting rights of the Developer;

(5) Person directly or indirectly owning or having control of a 3.5% or greater interest in any Person described in paragraphs (m) (1)—(4) of this section, but excluding stockholders of any entity which directly or indirectly owns the Developer and whose stock is publicly traded, unless the Project Documents' definition of Interested Person specifically includes such stockholders;

(6) Person of which a 10% or greater interest in profits or a 10% or greater share of voting rights is directly or in

directly owned by or under the control of a Person described in paragraphs (m) (1)-(5) of this section or the Developer;

(7) Person which has contributed capital to the Developer;

(8) Person owning or claiming an interest in debt of the Developer except trade debt incurred in the ordinary course of business;

(9) Person of which the Developer or any Person described in paragraph (m) (1)-(8) of this section has direct or reasonably inferable control by reason of a dependent relationship or relationship of special influence, including without limitation a close personal relationship, established course of dealing, relationship as guarantor or source of substantial financial assistance, relationship as primary supplier, user or controller of critical resources of common concern, or interlocking or interdependent management. Any community association, or governmental or quasi-governmental authority or special purpose district which functions primarily to deal with any Project or aspect thereof shall be rebuttably presumed to be an Interested Person under this clause.

For the purposes of this definition, any direct or indirect ownership or control held by a Person's spouse or by any parent, child, grandchild, brother or sister of such Person or such Person's spouse shall be attributed to such Person.

(n) Reimbursement of payments under guarantees; interest on delinquent payments. Immediately upon the payment by the United States of any amount under any guarantee, the Developer shall pay to the Secretary the amount of such guarantee payment, with interest at the rate borne by the guaranteed debt obligations with respect to which such payment has been made from the date of such guarantee payment until reimbursement thereof to the Secretary in full. The Developer shall pay to the Secretary on demand the amount of any overdue annual fee (as specified in §720.81(e)) due the Secretary, with interest at the highest rate borne by any of the underlying debt obligations from the due date until repayment in full.

(0) Accounting systems and records. The Developer shall keep and shall cause each Subsidiary to keep true and complete books of records and accounts satisfactory to the Secretary. The Developer and each Subsidiary shall maintain an accounting system which shall include

complete books of original entry supported by adequately detailed journals and underlying source documents maintained in accordance with sound management practices. The accounting system shall also include a system of internal accounting controls satisfactory to the Secretary. The Developer and each Subsidiary shall use the same fiscal year.

(p) Financial reporting and monitoring. The Developer shall submit to the Secretary, in accordance with a schedule and in a format prescribed by the Secretary, operating and budget plans, financial reports and financial statements that show the financial performance and financial condition of the Developer, each Subsidiary, and each community association. The Developer shall submit annually financial statements that have been audited by a certified public accountant, or public accountant licensed by a regulatory authority of a State or other political subdivision prior to December 31, 1970, who has been approved by the Secretary.

(q) Agreement of restricted affiliates. The Developer shall cause each Restricted Affiliate to agree to financial, record, and other covenants satisfactory to the Secretary.

§ 720.33 Accounting standards and audit.

(a) Financial statement standards. All financial statements and financial test calculations shall be prepared in accordance with generally accepted accounting principles, and examinations required shall be conducted in accordance with generally accepted auditing standards. The terms "generally accepted accounting principles" and "generally accepted auditing standards" refer to the principles, standards, methods, and practices of accounting and auditing sanctioned by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board or any successor thereof, as evidenced in its Statement of Auditing Standards and Opinion, bulletins and circulars published periodically by them or by authoritative bodies designated by them, and applied on a consistent basis. The form, frequency, and scope of the financial statements and reports shall conform to the requirements of the Secretary.

(b) Auditing by the government. Upon request, all records and all agreements relevant thereto shall be made available for examination by the Secretary. Inso

far as such records and agreements relate to any grants, loans or guarantees from the Government, the financial transactions may also be audited by the General Accounting Office (GAO) under rules and regulations issued by the Comptroller General of the United States. The Scretary and representatives of the Secretary and GAO shall have access to all books, accounts, records, files, and all other papers, materials or property belonging to or in use by such recipients of Federal assistance which pertain to such financial transactions and are necessary to facilitate the audit. Such documents shall be retained by recipients of Federal assistance for audit purposes until the Secretary notifies such recipients in writing that they are no longer required. § 720.34 Other requirements.

(a) Labor standards. (1) All laborers and mechanics employed by the Developer or by contractors or subcontractors in Land Development assisted under this Part shall be paid wages at rates not less than those prevailing on similar construction in the locality as determined by the Secretary of Labor in accordance with the Davis-Bacon Act, as amended (40 U.S.C. 276a et seq.) and as it may be amended from time to time. No assistance shall be extended under this part for any Project without first obtaining adequate assurance that these labor standards will be maintained upon the construction work involved in Land Development within the Project. The Secretary of Labor shall have, with respect to the labor standards specified in this paragraph, the authority and functions set forth in Reorganization Plan No. 14 of 1950 (5 U.S.C. p. 242) and (40 U.S.C. 276c). Proceeds of debt obligations guaranteed under this Part may not be disbursed to a Developer with respect to Land Development construction unless these labor standards have been complied with to the satisfaction of the Secretary.

(2) All construction contracts and subcontracts for Land Development assisted under this Part shall contain labor standards clauses in furtherance of the Act and of the applicable regulations of the Secretary of Labor as they may be amended from time to time. The Developer shall comply with the provisions of said labor standards clauses. The regulations of the Secretary and the Secretary of Labor with respect to ineligible contractors shall be observed by the Developer. The Developer shall furnish such

certification for filing as necessary to assure compliance with the provisions of said labor standards clauses.

(b) Small builders. The Developer shall, in a manner satisfactory to the Secretary, encourage and help maintain a diversified, local homebuilding industry by making an adequate supply of building sites available to local and small builders and contractors at competitive prices and terms.

(c) Work safety and health standards. No laborer or mechanic employed by the Developer or by contractors or subcontractors in Land Development assisted under this Part shall be required to work in surroundings or under working conditions which are insanitary, hazardous, or dangerous to his health or safety as determined under construction safety and health standards promulgated by the Secretary of Labor by regulation pursuant to Section 107 of the Contract Work Hours and Safety Standards Act (52 U.S.C. 333).

(d) Ineligible contractors. No contract shall be entered into with a contractor or subcontractor where the name of such contractor or subcontractor or their affilate's name appears on the Consolidated List of Debarred, Suspended and Ineligible Contractors and Grantees established by the Secretary pursuant to the regulations contained in 24 CFR, Chapter I Part 24. Proceeds of debt obligations guaranteed under this Part may not be disbursed to a Developer with respect to Land Development performed by a contractor or subcontractor whose name or whose affiliate's name appears on such list.

(e) Interstate land sales. The Developer shall comply with the regulations issued by the Office of Interstate Land Sales (24 CFR, Chapter IX).

(f) Relocation. Relocation activities carried out pursuant to a Project Agreement shall, to the extent applicable, comply with the provisions of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (42 U.S.C. 4601 et seq.), and other applicable Federal, State and local laws and regulations.

(g) Regulation of utilities. Utilities or other public facilities which are established to provide services to a Project and which are operated by a non-public body shall be regulated as to rates and charges, capital structure, rate of return, and methods of operation by a public

After acquainting themselves with the Act and the Regulations, prospective applicants for an initial guarantee or a Determination of Eligibility are encouraged to meet with the General Manager or his designated representatives to discuss their proposals and obtain an understanding of the goals and requirements of the program.

§ 720.42 Pre-application.

(a) Purpose. The pre-application procedures for initial guarantee assistance and for a Determination of Eligibility under the Act are designed to provide an initial screening, prior to submission of detailed plans by the Developer. This will permit an initial determination as to whether the Developer and the selected site have the potential to comply with the requirements of the Act, these Regulations and other policies and priorities of the Secretary and the Board. It will also provide an opportunity to work with the Developer from the earliest stages of Project planning.

(b) Submission. The first formal step by an applicant seeking assistance under the Act is the submission of a preapplication to the General Manager, New Community Development Corporation, U.S. Department of Housing and Urban Development, Washington, D.C. 20410. The pre-application should deal in summary form with the criteria for Project evaluation set forth in Subpart B of this Part and should contain evidence that initial notice has been submitted (in accordance with § 720.43) to each appropriate clearinghouse for review and comment.

(c) Review and action. The General Manager, upon completion of his review of a pre-application, shall inform the applicant in writing of his findings and:

(1) state his willingness to accept a full application where the pre-application appears to meet and be consistent with the program criteria and priorities mentioned above;

(2) discourage an application, listing the reasons therefor, where the proposal does not appear to be consistent with program criteria and priorities; or

(3) require the resolution of certain problems and issues before proceeding with an application.

(d) Significance of action. Acceptance of or indication of willingness to accept an application does not constitute or imply an assurance of eventual approval of such an application.

(e) Resubmission. If the applicant is not encouraged to submit an application, but nevertheless believes that the Project may qualify under the Act, he may resubmit the pre-application for further review with such changes as, in his opinion, will overcome the initial objections of the General Manager.

(a) Applicability and purpose. The provision of initial guarantee assistance under the Act is subject to compliance with the provisions of Attachment A. Part I of Circular A-95 issued by the Office of Management and Budget (41 FR 2052).

(1) A major purpose of the Circular is to secure the assistance of State and areawide planning and development clearinghouses in the coordination of proposals for Federally assisted projects and programs with State, areawide and local planning for orderly growth and development.

(2) To achieve this objective, the Circular establishes a system for review and comment by appropriate State, regional and local agencies of Projects for which Federal assistance is sought and for adequate consideration of such comments by the applicant prior to submission of an application and by the concerned Federal agency prior to taking action on such application.

(b) General procedures. Detailed instructions for compliance will be provided at the time of inquiry ($ 720.41). In general, the following procedures shall be adhered to with respect to Projects for which assistance is sought under the Act.

(1) Notification. (i) At the earliest possible time, but no later than the submission of the pre-application (§ 720.42) to the General Manager, the applicant is required to provide notification (including a summary description of the Project as specified in Circular A-95) of intent

to apply for assistance under the Act to the clearinghouse of the State and, if one exists, of the region in which the Project is to be located. Each clearinghouse under Circular A-95 has up to 30 days after receipt of the notification to transmit to the applicant any comments or recommendations which it or its constituent agencies may have with respect to the Project.

(ii) The applicant shall forward copies of any communications received from each clearinghouse, together with a summary of the nature and status of oral consultations, if any, with each clearinghouse, to the General Manager. No final action on a pre-application proposal shall be taken until the General Manager has received either (A) copies of all written communications and a summary of all oral communications with each clearinghouse following the notification or (B) a statement from the applicant that at least 30 days have elapsed since the filing of notification with each appropriate clearinghouse and that no response therefrom has been received.

(2) Application review and comment. (i) Before submission to the General Manager, the applicant shall send a copy of the proposed application to each clearinghouse for review and comment. Each clearinghouse under Circular A-95 has up to 30 days after receipt in which to review the completed application and to transmit to the applicant any comments or recommendations the clearinghouse or its constituent agencies may have. The applicant shall give appropriate consideration to such comments and recommendations, including such modification of the application as may, in the applicant's judgment, be appropriate. If substantive changes in the application are made at this point, the revised proposed application shall be submitted to each clearinghouse for further review and comment.

(ii) Copies of any comments and recommendations made by or through each clearinghouse, together with a statement that such comments have been considered, shall be appended to the application submitted to the General Manager (§ 720.44). No application shall be processed by the General Manager unless it contains either (A) materials described in the preceding sentence or (B) a statement from the applicant that the procedures outlined in this section have been followed and that no comments or rec

ommendations have been received from the appropriate clearinghouses.

(c) Other procedural requirements. (1) Any substantial amendments to an application made after submission to the General Manager will, at the applicant's initiative or at the request of the General Manager, be sent by the applicant to each clearinghouse for review and comment. In such a case, the procedures set forth in paragraph (b) (2) of this section shall be followed.

(2) An application for additional guarantee assistance may, at the determination of the General Manager, require compliance with the procedures as outlined in paragraph (b) of this section.

(3) Any request for modification of the procedures set forth in this section shall be submitted in writing to the General Manager.

§ 720.44 Application for assistance.

An application for initial guarantee assistance (see $720.49 concerning additional guarantee assistance) or for a Determination of Eligibility may be submitted to the General Manager following submission and review of pre-applications pursuant to § 720.42 and upon payment of the application charge specified in § 720.81(a). The application shall contain information, supporting documentation and analysis adequate to enable the Secretary, acting through the Corporation, to make a determination as to whether or not the Developer and the proposed Project meet the requirements of the Act, of these Regulations and other policies of the Secretary and the Corporation. Applications shall be in a format specified in instructions issued by the General Manager and may be submitted in stages or parts so that basic obstacles to Project approval can be identified early in the application process.

§ 720.45

Compliance with National Environmental Policy Act.

(a) Applicability and purpose. Assistance under the Act is subject to compliance with the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.) (NEPA) and with issuances implementing NEPA which have been promulgated by the Council on Environmental Quality (CEQ), (40 CFR Part 1500) and by HUD (HUD Handbook 1390.1, as amended; 38 FR 19182, 39 FR 38922; 41 FR 23878). The purpose of this section is to indicate to applicants and others the