Neil, HUD Has guidelines on these items.  The information is located in several HUD Handbooks.  Here is what we find there.

Handbook 4350.1, Chapter 4-2

Regulatory Agreements for projects generally contain the following typical language pertaining to the Reserve Fund for Replacements to the effect that owners shall establish or continue to maintain a reserve fund for replacements by the allocation to such reserve fund in a separate account with the mortgagee or in a safe and responsible depository designated by the mortgagee, concurrently with the beginning of payments towards amortization of principal of the mortgage insured or held by the Federal Housing Commissioner of an amount equal to $_____ per month unless a different date or amount is approved in writing by the Commissioner. Such fund, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America shall at all times be under the control of the mortgagee. Disbursements from such fund, whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project, for the cure of mortgage defaults, or for any other purpose, may be made only after receiving the consent in writing of the Commissioner. In the case of Section 202, 162, 801, or 811 projects, where HUD serves as the mortgagee, the project owner escrows the funds but may not withdraw them from the Reserve for Replacements Account without the Asset Management Branch Chief’s written permission. For HUD-Held mortgages, HUD shall exercise control over the Reserve Fund for Replacements by acting pursuant to its own authority as well as in the stead of the mortgagee. This authority may be exercised only by HUD Headquarters.

4-22 Investment of Reserve for Replacements Funds. Consistent with program * regulations and the Regulatory Agreement, the reserve for replacement funds must be maintained by the mortgagee. Investment options should be determined jointly by the mortgagor and mortgagee. The Regulatory Agreement requires, “.. such fund, whether in the form of a cash deposit, or invested in obligations of, or fully guaranteed by the United States of America, shall at all times be under the control of the mortgagee.”

A. This paragraph suspends this provision by authorizing the mortgagee to invest funds in excess of $100,000 in U. S. government-backed securities and to hold funds in excess of $100,000 in institutions under the control of, and whose deposits are insured by, the Federal Deposit Insurance Corporation, National Credit Union Association, or other U.S. government insurance corporations under the following conditions:

1. Mortgagees must determine that the institution has a rating consistent at all times with current minimally acceptable ratings as established and published by Government National Mortgage Association (GNMA).

2. Mortgagees must monitor the institution’s ratings no less than on a quarterly basis, and change institutions when necessary. The mortgagee must document the ratings of the institutions where the funds are deposited and maintain the documentation in the administrative record for three years, including the current year.

3. If the mortgagee does not perform the required quarterly review of the institutions where there are deposits in excess of $100,000 and does not maintain the funds in an institution with a rating consistent with current minimally acceptable ratings as established and published by GNMA, and the institution fails, the mortgagee is held responsible for replacing any lost funds. In addition, the mortgagee shall be subject to sanctions. In the event the mortgagee fails to replace the lost funds, HUD will seek all available remedies to recover whatever funds are lost as a result of the failed institution.

There is similar language for the Residual Receipts Account.

I hope this helps.

From: AHACPA Support <support@ahacpa.org>
Sent: Wednesday, September 18, 2019 1:44 PM
To: les@ahacpa.org
Subject: Cash Investments [NEW]