Sec. 05.04.08.15. Loan Disbursements

A. Monitoring.

(1) The local administrator shall monitor loans and disbursement of loan funds during rehabilitation to assist borrowers and to assure that loan funds are properly used.

(2) Based on Program guidelines, the local administrator shall determine the frequency and level of inspections during rehabilitation, taking into consideration:

(a) The capability of the borrower;

(b) The demonstrated experience and reliability of the contractor;

(c) The amount of the loan;

(d) The availability of the local technical assistance; and

(e) Other factors considered relevant by the Department.

(3) The local administrator may charge borrowers a fee for inspections during rehabilitation, as approved by the Department.

B. Payments Generally.

(1) Loan funds shall be disbursed in full at the closing of the loan to an account held on behalf of the borrower by either the political subdivision that is the local administrator or the subcontractor for the loan. The loan funds shall be held in an account established under §C of this regulation.

(2) The local administrator or the subcontractor shall disburse the loan proceeds in accordance with the following requirements:

(a) Loan funds may not be disbursed if payments of interest or escrows required by the loan documents are in arrears;

(b) Payments of draws shall be by joint payee check issued to the borrower and contractor unless an alternative payment method is approved by the Program Director;

(c) Except as provided in §D of this regulation, payments shall be made only for work completed, and payments may not be made for material delivered to the site but not installed in the project;

(d) Payment of draws shall be requested by the borrower, and loan funds may be disbursed to the borrower upon request except for final draws or as otherwise provided for in §E of this regulation.

C. Loan Accounts.

(1) Loan funds shall be held in a non-interest-bearing account established by the local administrator or the subcontractor and approved by the Department. The account may be:

(a) An account with a depository institution that is separate from the other operating accounts of the local administrator or subcontractor;

(b) An account with a depository institution that is not separate from the other operating accounts of the local administrator or subcontractor using a separate reconciled general ledger account for all Program funds;

(c) An escrow account or attorney's trust account held and managed by an escrow agent if the escrow agent meets the following minimum criteria to the satisfaction of the Department:

(i) Any employee of the escrow agent with access to the account shall be covered by a fidelity bond, or insured with employee dishonesty liability insurance, in an amount not less than $100,000,

(ii) The escrow agent shall provide the local administrator or the subcontractor, if any, and the Department with the quarterly statements required under §C(2) of this regulation, and

(iii) Any other requirements established by the Department; or

(d) Another type of account approved by the Department.

(2) The local administrator or the subcontractor shall provide the Department with quarterly statements of all loan funds in a loan account. The Department shall review these quarterly statements and shall reconcile the loan balances in the records of the local administrator or the subcontractor with the loan balances in the records of the Department. If the quarterly statements do not correspond with the Department's records of loan funds in the account, the local administrator or subcontractor shall work with the Department to reconcile the differences.

(3) The Department may revoke, at any time, its approval of any loan account established under this regulation.

D. Advance Payments. Advances or down payments may be made to contractors to purchase materials delivered on site or valid purchase requisitions not to exceed 10 percent of the contract costs.

E. Progress Payments.

(1) Progress payments may not be made until the borrower has delivered satisfactory evidence, such as receipts or bills, of the amount of the payment requested.

(2) Progress payments may not be made without an inspection to verify completion of the work, except at the discretion of the local administrator where the entire cost of the project is $30,000 or less, or otherwise by the Department. At a minimum, however, the local administrator shall verify completion of the work before disbursing the final payment, as described in §F of this regulation.

(3) If a borrower's request for payment is refused, the local administrator shall notify the borrower. The determination of the local administrator as to percentage of work completed shall be final.

F. Final Payment.

(1) Final payment shall be made as set forth in §E(2)-----(5) of this regulation.

(2) The borrower shall submit to the local administrator a certificate of completion, executed by the borrower and contractor, certifying that all work has been completed in accordance with the contract documents.

(3) Upon final inspection and receipt and approval of the certificate of completion, final payment shall be processed.

(4) Borrower's Refusal to Make Final Payment.

(a) If, in the opinion of the local administrator, the contractor has satisfied the contract and the borrower refuses to request or release the final payment, then the local administrator may follow the procedure in §F(4)(b)-----(d) of this regulation.

(b) The local administrator may require the borrower to explain in writing within 10 days why the local administrator should not make direct payment to the contractor.

(c) If the borrower responds within the 10-day period and requests a meeting, the local administrator shall hold a meeting at which the borrower shall present the borrower's objections to requesting or releasing the final payment.

(d) The local administrator, in its discretion, may then either approve or disapprove direct payment to the contractor or the borrower.

(5) If the local administrator receives written notice that subcontractors, materialmen, or suppliers have not been paid for work done or material supplied to and for the project, and all loan funds have not yet been disbursed, the local administrator shall retain an amount equal to the lesser of all funds not yet disbursed and the amount sufficient to satisfy the claims until satisfactory evidence of satisfaction and release by the subcontractors, materialmen, or suppliers is presented. The contractor shall promptly pay or bond any liens established.

G. Retainage.

(1) The local administrator shall retain until final payment 10 percent of the contract proposal costs for all projects for which the borrower is responsible for interim project inspections.

(2) The local administrator, at its discretion, may elect to retain until the final payment 10 percent of the contract proposal costs for any other project, taking into consideration:

(a) The type of project,

(b) The contractor's experience, and

(c) Other factors the Program considers relevant.

(3) The retainage shall be released at final payment upon verification that all contracted rehabilitation items are complete and acceptable to the local administrator.

H. Payment for Additional Work. Payment for any additional cost to complete work not included in the approved contract proposal is the obligation of the borrower. A borrower may apply to the local administrator for a loan increase to cover some or all of the increased costs. Any loan increase shall be subject to approval or disapproval in accordance with the provisions of these regulations. The Department has no obligation to pay for increased costs.

I. Construction Disputes.

(1) The local administrator and the Department shall coordinate with the borrower and the contractor to resolve any dispute concerning workmanship, the quality of materials, damaged property, the completion schedule, and other matters pertinent to the contract documents.

(2) The local administrator and the Department shall recognize the findings of the Maryland Home Improvement Commission and the Consumer Protection Division of the Office of the Attorney General, if the dispute is submitted to their arbitration.

J. Termination of Contracts. Contracts may be terminated for cause in accordance with the loan documents, contract documents, and Program policies and procedures.

K. Closeout Procedures.

(1) After final payment or payout is made, the local administrator or the subcontractor shall reconcile all receipts and disbursements.

(2) A copy of the closeout statement shall be forwarded to the Program and the servicer.