Exhibit C to Subpart C of Part 1930 - Rental and Occupancy Charge and/or Utility Allowance Changes

I. Objectives

This exhibit prescribes the method of processing changes in the monthly rental or occupancy charge rates for tenants or members in Farmers Home Administration (FmHA) or its successor agency under Public Law 103-354 Rural Rental Housing (RRH), Rural Cooperative Housing (RCH), and Labor Housing (LH) projects. This exhibit covers all RRH, RCH, and LH loans (except “nonrental” LH loans), including those approved before the date of this subpart.

II. Definitions

A. Approval official. State Director or designated State and Servicing Office staff with delegated authority according to § 1930.143 of this subpart.

B. Utility. Sewer, water, trash collection, electricity, natural gas, and any other fuel used specifically for cooking, heating, and/or cooling.

C. Rental or occupancy charge rate (rental or occupancy charge). The term rental rate means RRH or LH project rent rates that include utilities; or net project rent rates plus an allowance for utilities, either of which should be equal in value. In RCH projects, the term occupancy charge means the charge for occupancy including utilities; or the net charge for occupancy exclusive of an allowance for utilities according to the operating plan of the cooperative.

III. Initial Understanding With Borrower

A. All RRH, RCH, and LH applicants will be informed at the application stage of the agency's rental or occupancy charge change procedure. All borrowers will be advised that any proposed rent or occupancy charge changes must comply with this exhibit. Utility allowance changes will comply with this exhibit and exhibit A-6 of subpart E of part 1944 of this chapter. This exhibit will also apply to rental changes resulting from the Department of Housing and Urban Development's (HUD) Automatic Annual Adjustment Factors for units receiving section 8 assistance. Request for a rental or occupancy charge change will be based on a realistic projected budget for the interim year or the ensuing full year.

B. Rental or occupancy charge change policies.

1. Rental or occupancy charge rates in projects financed in whole or in part by an RRH, RCH, or LH loan may not be raised without FmHA or its successor agency under Public Law 103-354 written consent according to requirements in loan agreements, loan resolutions, and other instruments executed in connection with RRH, RCH, and LH loans.

2. Changes requiring only prior FmHA or its successor agency under Public Law 103-354 review are those which are beyond the borrowers' control to cover changes in taxes or utilities, and changes which do not result in an increase in the tenant's or member's total shelter cost.

3. Borrowers are encouraged to have the effective date of needed changes coincide with the start of their fiscal year or with the start of the season in the case of LH projects occupied on a seasonal basis.

4. Change requests normally should be made 60 to 90 days prior to the end of the borrower's fiscal year.

5. It is anticipated that rental or occupancy charge changes would not be necessary more frequently than once a year.

6. Changes in rental or occupancy charge rates will apply to all units in the project.

7. Projects with operating budgets that consistently generate a surplus of unrestricted cash greater than 10 percent of project yearly expense (exclusive of any qualifying refund of 2 percent initial operating capital contribution) should reduce their rental or occupancy charge rates.

8. Current tenant or member certifications on Form FmHA or its successor agency under Public Law 103-354 1944-8, “Tenant Certification,” or other form approved by FmHA or its successor agency under Public Law 103-354 must be on file in the Servicing Office.

C. All borrowers are encouraged to participate in the FmHA or its successor agency under Public Law 103-354 rental assistance (RA) program. However, unless the Administrator notifies State and Servicing Offices otherwise, all borrowers with projects meeting the eligibility requirements of paragraph II B of exhibit E of this subpart, except full profit borrowers, will be automatically treated as having applied for rental assistance, since section 530 of title V of the Housing Act of 1949, as amended, requires such consideration.

D. Borrowers must accept RA when it is available and it appears that a rental or occupancy charge change will cause any very low or low-income tenant to pay in excess of 30 percent of adjusted monthly income for shelter costs. If FmHA or its successor agency under Public Law 103-354 does not have RA appropriation available for this purpose, the borrower is encouraged to use other sources of governmental subsidies. The availability or unavailability of governmental subsidies will not preclude FmHA or its successor agency under Public Law 103-354 from processing a rental or occupancy charge change request. The borrower will retain the option of submitting an RA request at any time that it appears that any verylow- or low-income tenant cannot pay in excess of 30 percent of adjusted monthly income in shelter costs, even without a rent change action. In such cases, the borrower must apply for RA on Form FmHA or its successor agency under Public Law 103-354 1944-25, “Request for Rental Assistance,” unless such form is already on file at the FmHA or its successor agency under Public Law 103-354 Servicing Office.

E. Even though RA is not available, borrowers are encouraged to convert to Interest Credit Plan II to give tenants and members the most favorable rental rates possible.

IV. Borrower's Responsibility in Processing Rental or Occupancy Charge Change Requests Which Change Housing Costs to Tenants or Members

A. When an RRH, RCH, or LH borrower determines that a project rental or occupancy charge change is needed, the borrower must meet or consult with the Servicing Office staff, unless such requirement is waived by the Servicing Office, to review the following information before the “Notice to Tenants (members) of Proposed Rent (Occupancy Charge) and Utility Allowance Change,” exhibit C-1 of this subpart, is posted and delivered to the tenants or members:

1. Facts demonstrating the need and justification for a rental or occupancy charge change in accordance with paragraph III A of this EX.

2. A new operating budget for the borrower fiscal year showing:

a. Currently approved budget at old rents or occupancy charges.

b. Actual income and expenses to date.

c. Proposed budget at proposed new basic rents or occupancy charges.

d. Proposed budget at proposed new note rate rents or occupancy charges (when applicable).

3. An application for RA is considered to have been automatically filed with the Agency. However, the borrower may submit an application for RA at any time on Form FmHA or its successor agency under Public Law 103-354 1944-25, if the borrower's project is an eligible project and the proposed change will cause any very low- and low-income tenants or members to pay in excess of 30 percent of adjusted monthly income for shelter costs.

4. A new energy audit, if one is due, or a listing of deferred improvements identified in a previous energy audit that were performed within the past 5-year period according to the requirements of exhibit D of this subpart.

5. Information on actual utility costs for representative units in the project and, whenever any utility allowance was approved over 12 months ago, an updated exhibit A-6 of subpart E of part 1944 of this chapter when tenants or members pay their own utilities.

6. Any other information the borrower believes necessary to justify the proposed shelter cost change.

B. Required actions and timeframes for shelter cost changes. Requests for shelter cost changes (i.e. changes to the rent and/or utility allowance) may be submitted at any time, however, the Agency encourages such requests to be submitted within the last quarter of the calendar year in conjunction with the annual budget review.

1. Agency action.

a. The Agency must act on any shelter cost change request and take one of the following actions within 25 days of its receipt:

(1) Review the request package and if it is incomplete, return it to the borrower/manager, advising what additional information is needed, or

(2) Request a meeting with the borrower/manager and state the proposed meeting date. The request should inform the borrower/manager of the purpose of the meeting. When a meeting is held, the Servicing Official will either:

(i) Approve posting of the proposed rental or occupancy charge change and advise the borrower in writing to post the notice, or

(ii) If the proposed change as submitted is not acceptable, the Servicing Official and the borrower/manager will arrive at a mutually acceptable change, and the Servicing Official will authorize in writing, posting of the agreed to revised figure, OR

(iii) Reject posting of the proposed change, advise the borrower in writing to not post the notice and advise the borrower of their appeal or review rights in accordance with subpart B of part 1900 of this chapter.

(3) If the borrower/manager does not attend the proposed meeting or other mutually agreed date, the change request will be considered withdrawn and returned to the borrower/manager, or

(4) The Servicing Official may waive the meeting requirement and authorize the posting subject to any minor changes or other requirements listed, if any, or

(5) Allowing posting of the request by not taking action on the request (de facto posting approval).

b. Once a rental or occupancy charge change has been permitted to be posted, the only decision that can be made is to “approve” or “reject,” which would be based on material concerns in comments of the tenants or members. When the request is rejected, the borrower will be advised of any appeal or review rights in accordance with subpart B of part 1900 of this chapter.

2. Borrower action. When approval to post notice is given by FmHA or its successor agency under Public Law 103-354, the borrower is required to:

a. Notify tenants or members.

(1) Tenants or members must be notified in writing at least 60 days before the anticipated effective date of change using exhibit C-1 of this subpart. The written notice may be delivered by mail or by other means. In addition, the borrower must post at least one notice in a visible place at the project site.

(2) Tenant or member comment period. Tenants or members will be informed of their right to submit comments to the Servicing Office during the 20-day period following the date of the notice. Tenants or members will also be informed of their rights to inspect and copy records on file with the Agency, which are related to the request, throughout the 20-day period.

b. Notify the Agency. The Agency must be given a copy of the written and dated notification which was mailed or delivered to the tenants or members.

3. Implementation timeframes. Shelter cost changes cannot be implemented until such time as the tenants or members are informed of the changed rates. When increases are involved, tenants or members must be informed at least 30 days in advance of their effectiveness or such longer time as State law may prescribe. Tenants or members receiving notice of a shelter cost increase via the use of exhibit C-1 of this subpart will already have been “informed at least 30 days in advance” and need not receive a second notice provided the final approval action (i.e., See exhibit C-2 of this subpart) does not change the shelter cost rate established in exhibit C-1.

V. Determination by FmHA or its successor agency under Public Law 103-354

A. Actions by servicing official. The Servicing Official will not consider a rental or occupancy charge change application complete and acceptable until the borrower has complied with all terms listed in paragraph IV of this exhibit. When the application and all attachments for the proposed change have been received (including the tenant or member comments when notification is required), the Agency will:

1. Review all the material submitted.

2. Review a copy of the borrower's latest Form FmHA or its successor agency under Public Law 103-354 1944-29, “Project Worksheet for Interest Credit and Rental Assistance.”

3. Determine if RA is available for an eligible project on behalf of the low-income tenants or members. If RA is available, and it is apparent from record sources that at least one tenant is eligible for RA, the Servicing Office staff must require the borrower to apply for RA if an application for RA using Form FmHA or its successor agency under Public Law 103-354 1944.25 is not already on file at the Servicing Office.

4. When the change is requested for energy saving improvements identified in an energy audit, the Servicing Official shall determine the cost effectiveness and financial impact of the proposed improvements from information contained in the energy audit. The Servicing Official's determination will be made according to paragraph VI of exhibit D of this subpart.

5. When State Office approval is required, the Servicing Office will submit to the State Director (see Guide Letter 1930-3 for outlining the change request package being submitted):

a. Appropriate recommendations on the request,

b. An indication of the number of tenants or members who will need RA as a result of the rent changes,

c. All the material received from the borrower, including tenant or member comments or objections at the end of the 20-day comment period, and

d. A short narrative describing the general tone and material content of tenant or member comments and concerns.

6. When a member of the Servicing Office staff is the approval official, the documentation required by paragraph V A 5 of this exhibit, will be attached to the rent change request.

7. When the borrower has requested RA, complete Form FmHA or its successor agency under Public Law 103-354 1944-25 and forward it to the State Director.

B. Actions by the approval official. When the application, attachments, and comments are received, the approval official will review the material to determine if the change is justified and act on the request within 25 days. The borrower will be notified by the Approval Official of the determination within 45 days from the date the “Notice to Tenants (Members) of Proposed Rent (Occupancy Charge) and Utility Allowance Change” (Exhibit C-1 of this subpart) is posted, otherwise the request will be considered approved.

1. Approval actions.

a. When a change is approved, the Approval Official will notify the borrower by using exhibit C-2 of this subpart. The notice letter (Exhibit C-2 of this subpart) will be prepared using the required and/or optional paragraphs as applicable. The reasons for the approved rent change should be concise. The notice letter will be mailed or hand delivered to each tenant or member and posted in a conspicuous places(s).

b. When the borrower's project is operated on a profit basis and the purpose of the rental change is for: justified operating and maintenance expense; funding the reserve account; other project expenses; and providing or maintaining a profit, the change may be allowed as long as eligible tenants can afford the new rental rate.

2. Disapproval actions. When the Servicing Official determines an application for a proposed rental or occupancy charge change is not justified on the basis of the information submitted, the Servicing Official will notify the borrower in writing of the reason(s) why the change is not approved. The borrower will be advised of their appeal rights in accordance with subpart B of part 1900 of this chapter. Rental or occupancy charge changes may not be approved when any of the following circumstances exist:

a. The borrower is able but unwilling: To comply with applicable tenant eligibility requirements; the audit and reporting requirements of this subpart; or, the conditions set forth in the borrower's loan agreement or resolution, interest credit and/or rental assistance agreement, promissory note, or mortgage.

b. The budget for the project reflects sufficient income at the present rental or occupancy charge structure to meet operation and maintenance expenses which are appropriate and reasonable in amount, meet the FmHA or its successor agency under Public Law 103-354 debt service requirements, meet the required reserve account deposit, and provide a return to the borrower, when appropriate.

c. The borrower's project is operated on a profit basis and the proposed rental change is for purposes other than meeting operation and maintenance expenses and debt service (i.e., the purpose is to allow excessive profits and the proposed rental change will result in rental rates in excess of what eligible tenants can afford).e State Director is able to provide RA to the project and the borrower's project is operated on a nonprofit basis, or a limited profit basis (as defined in § 1944.205 of subpart E of part 1944 of this chapter); but the borrower has not applied for RA within the most recent period of 180 days prior to the rental change request or otherwise already has an application for RA on file at the Servicing Office on Form FmHA or its successor agency under Public Law 103-354 1944-25.

VI. Unauthorized Rental or Occupancy Charge Changes

When a borrower implements a change that does not meet the requirements of this exhibit, the borrower will be notified in writing that: the change has not been authorized; and the rates must be rolled back to the last FmHA or its successor agency under Public Law 103-354 authorized level. Tenants or members affected by the unauthorized change will be given a rebate or credit for the unauthorized amounts retroactive to the date of the unauthorized change. Those borrowers that fail to comply the provisions of this paragraph will be handled according to § 1965.85(d) of subpart B of part 1965 of this chapter or paragraph X of this exhibit.

VII. Annual Adjustment Factors for Section 8 Units

A. HUD allowance of change.

1. If the Servicing Official disapproves a rental rate change, or approves a lesser amount than permitted by HUD, as a result of HUD's annual adjustment factors for units receiving Section 8 assistance, the Servicing Official must require the borrower to deposit any excess funds, the difference between the FmHA or its successor agency under Public Law 103-354 approved note rate rent and the higher HUD authorized rental rate, into the reserve account.

2. If this results in an accumulation of funds in the reserve account behind the sum shown in the loan agreement or loan resolution, the interest credit reduction on a Section 8/515 project should be adjusted or canceled through field office terminals.

3. This adjustment or cancellation can be done without borrower consent for projects with interest credit agreements dated on or after October 27, 1980. For projects with interest credit agreements dated before October 27, 1980, this cancellation or reduction of interest credit may occur only with the borrower's written consent.

4. When interest credit cannot be canceled or reduced, the Agency will collect overage. Overage, for each tenant, in this instance is the difference between the FmHA or its successor agency under Public Law 103-354 interest credit reduced rate rent and the lesser of the FmHA or its successor agency under Public Law 103-354 note rate rent or the HUD contract rent. The total overage collected should not exceed an amount equal to the interest credit authorized by the interest credit agreement for the period of time covered by the loan payment installment.

5. Even though interest credit is canceled or nullified by collecting overage, the borrower will still be required to operate on a limited profit basis.

B. HUD disallowance of change. If HUD will not allow an annual adjustment of rents, and the project operating budget justifies need for rent(s) greater than HUD's contract rent(s), the State Director only may authorize conversion from a plan of 1 or 2 percent interest reduction (Interest Credit Plan II) to a plan of debt amortization at 1 percent interest plus overage up to the HUD contract rent(s) level by meeting the requirements of paragraph IV A2e of exhibit B of this subpart.

C. Reviewing budgets where HUD subsidies are involved. FmHA or its successor agency under Public Law 103-354 has the responsibility to review and approve project budgets based on need to meet the cash flow and expense requirements without regard to HUD's automatic annual adjustment. Since HUD and FmHA or its successor agency under Public Law 103-354 approved rent rates frequently differ, it may be necessary to have a 3 column budget in projects with Section 8 Housing Assistance Program (HAP) agreements. (Refer to the examples shown in paragraph VIID of this exhibit).

1. When HUD contract rent and the 1 or 2 percent reduced rate are the same. In a project where 100 percent of the units receive Section 8 (100 percent Section 8 projects), and the HUD contract rent rate and the 1 or 2 percent reduced rate are the same, only the HUD contract rent rate column on the budget is needed.

2. When HUD contract rent falls between the 1 or 2 percent reduced rate and the FmHA or its successor agency under Public Law 103-354 note rate. In a 100 percent Section 8 project where the HUD contract rental rate falls between the 1 or 2 percent reduced rate rent and the note rate rent, a 3 column budget showing the 1 or 2 percent reduced rate rent, the HUD contract rental rate, and FmHA or its successor agency under Public Law 103-354 note rate rent is needed.

3. When HUD contract rate exceeds the FmHA or its successor agency under Public Law 103-354 note rate. In a 100 percent Section 8 project without interest credit and where the HUD contract rental rate exceeds the note rate rent, the budget should show 2 columns reflecting each rent rate. The difference between the two rent rates is considered excess funds and is to be deposited in the reserve account.

4. When part of units are covered by Section 8 HAP contract. In a project where only part of the units are under a Section 8 HAP contract, a 3 column budget of basic rental rate, HUD contact rental rate, and note rate rent is needed. The HUD contract rental rate may fall between the basic and note rate, or it may be higher than the note rate rent.

D. Overage payments and excess income from an interest credit agreement:

1. Overage is the amount by which total rental payments paid or to be paid by the tenants or members exceed the total basic monthly rental rate. In 100 percent Section 8/515 projects, and Plan II projects, where the HUD contract rental rate exceeds the approved 1 or 2 percent (or greater percentage in the case of Plan II) reduced rental rate, the FmHA or its successor agency under Public Law 103-354 approved rate is the required “basic” monthly rental rate. Whenever FmHA or its successor agency under Public Law 103-354 approves a note rate rent change for a lesser amount than the change permitted by HUD, the FmHA or its successor agency under Public Law 103-354 Servicing Official must require the borrower to deposit any excess funds into the reserve account.

2. Any Section 8 subsidy funds paid by HUD are paid on behalf of the tenant or member, and therefore, any Section 8 payments are not considered as excess funds until after any benefits provided by the interest credit agreement are recovered. Therefore, the following applies:

a. Projects on an Interest Credit plan coded 7 or 8 on Form FmHA or its successor agency under Public Law 103-354 1944-7. See figure 1 of paragraph VIID 2 a (3) of this exhibit.

(1) When HUD rate is equal to or less than FmHA or its successor agency under Public Law 103-354 note rate. In 100 percent Section 8/515 projects when the HUD contract rental rate is more than the 1 or 2 percent reduced rate and is either equal to or less than the FmHA or its successor agency under Public Law 103-354 note rate rent, overage will be paid to FmHA or its successor agency under Public Law 103-354 in an amount equal to the difference between the HUD contract rental rate and the 1 or 2 percent reduced rate.

(2) When HUD rate is greater than FmHA or its successor agency under Public Law 103-354 note rate. In 100 percent Section 8/515 projects when the HUD contract rental rate is greater than the FmHA or its successor agency under Public Law 103-354 note rate rent, overage will be paid to FmHA or its successor agency under Public Law 103-354 as in D 1 of this paragraph, and the amount equal to the difference between the HUD contract rental rate and the FmHA or its successor agency under Public Law 103-354 note rate rent will be deposited in the reserve account as excess income. In 100 percent Section 8/515 projects, when the HUD contract rental rate exceeds the note rate rent the borrower/manager needs to use FmHA or its successor agency under Public Law 103-354 Form 1944-29, part I, items 23 through 29, to document the required deposit in the reserve account.

(3) Figure 1. Projects with 100 percent of units assisted by HUD Section 8.

Example 1EC05SE91.004 Note:

If the HUD contract rent and FmHA or its successor agency under Public Law 103-354 1 or 2 percent reduced rent are the same, then the first budget column would not apply.

Example 2EC05SE91.005

bProjects on Interest Credit Plan II and receiving Section 8 Assistance. See figure 2 of paragraph VII D 2 b (3) of this exhibit.

(1) Calculating overage. In Section 8/515 projects the overage will be the difference between basic rental rate and the note rate rent including the income from HUD. The overage will be reported as type 3.

(2) Depositing excess income in the reserve account. In the cases where the HUD contract rental rate exceeds the note rate rent, the difference is excess income and will be deposited in the reserve account. The borrower/manager should use FmHA or its successor agency under Public Law 103-354 Form 1944-29, part I, item 23 through 29, to document the required deposit in the reserve account.

(3) Figure 2. Projects with some HUD Section 8/515 units.

Example 1EC05SE91.006 Example 2EC05SE91.007

VIIIRental or Occupancy Charge Control Preemption Policy. In order to carry out the provisions of this subpart and to protect a housing source in rural areas for very low-, low- and moderate income families; the financial obligation of borrowers; and the financial interest of the government in such housing, the entire field of rental or occupancy charge control that may be exercised by any local rental control board or other authority pursuant to State and local law, as it affects housing covered by this subpart, is hereby preempted.

IXSpecial Servicing Market Rate Rent (SMR) Change: When a Plan II or Plan II RA RRH project is experiencing serve vacancies due to poor local market conditions, an SMR change may be implemented to attract and keep tenants who could pay more than basic rent as part of a workout plan according to the provisions of exhibit F of subpart B of part 1965 of this chapter. An SMR addresses the situation where some existing and prospective tenants are not willing to pay 30 percent of adjusted income or note rate rent because the rental rates would exceed those of other rental properties in the community. This action may only be taken after supervisory efforts by FmHA or its successor agency under Public Law 103-354 and management efforts by the borrower have not produced an acceptable level of occupancy. For the purposes of this paragraph, market area and community are used as defined in paragraph I of exhibit A-8 of subpart E of part 1944 of this chapter.

AEligibility for SMR. Based on borrower documentation and FmHA or its successor agency under Public Law 103-354 servicing records, the Servicing Official will prepare a written recommendation for borrower eligibility for an SMR.

1Based on borrower documentation and Servicing Office verification:

aOver the most recent 6-month period, the monthly vacancy rate has averaged at least 15 percent or the project shows financial losses considering the following:

(1) Each month was at least 12 percent vacant, and

(2) When RA is not available, units subsidized by funds of the project/owner will be considered vacant for SMR calculations, or

(3) The project submits financial records that show a 15 percent loss of rents available below basic rent not including project provided subsidies, and provided

(4) The loss of rents available is not a result of management's failure to effectively market the units.

bComparable market rental rates in the community are lower than the previously approved FmHA or its successor agency under Public Law 103-354 note rate rents. Exhibit A-2 of subpart E of part 1944 of this chapter can be used to document comparable market rents.

cThe borrower has aggressively marketed the project including the following actions:

(1) Significant outreach efforts in the community, including (but not limited to) contacts listed in the Affirmative Fair Housing Marketing Plan.

(2) The borrower had obtained approval from FmHA or its successor agency under Public Law 103-354 for a servicing workout plan, exclusive of SMR features, at least 3 months earlier.

dThe borrower complies with FmHA or its successor agency under Public Law 103-354 regulations and encourages occupancy through good maintenance and positive relations with tenants.

eThe borrower has provided a signed statement agreeing to forego, without provision to recoup, the return on initial investment while operating with an SMR.

fThe borrower has submitted a project budget on Form FmHA or its successor agency under Public Law 103-354 1930-7, “Multiple Family Housing Project Budget,” with only minimally sufficient operation and maintenance expenses. The project budget should continue to fund other cash expenditures such as FmHA or its successor agency under Public Law 103-354 payments and the reserve account, except for the return on initial investment which the borrower has agreed to forego according to paragraph IX A 1 e of this exhibit.

2Based on Servicing Office servicing actions and documentation:

aThe project has been operational for at least 24 months. The National Office may make exceptions to this requirement on a case-by-case basis for extreme hardship.

bNo more than 10 percent of budgeted expenses are reflected in unrestricted cash on hand, and reserve account balances do not exceed the required accumulation-to-date minus authorized withdrawals.

cThe Servicing Official has reviewed and discussed with the borrower the feasibility of using borrower contributed funds, including advances, in accordance with paragraph XII C of exhibit B of this subpart.

dThe Servicing Official has reviewed and approved a project budget with only minimally sufficient operation and maintenance expenses and other expenses as specified in paragraph IX A 1 f of this exhibit.

eThe Servicing Official has reviewed any market studies or surveys received from MFH loan applicants for the market area and considered any information that may conflict with the request for an SMR.

BApproval of SMR.

1The State Director may approve the use of an SMR when the conditions listed in paragraph IX A of this exhibit are met.

2While a request for an SMR is pending or an SMR is in effect, requests to develop new FmHA or its successor agency under Public Law 103-354 units in the area will be handled in accordance with § 1944.213(f) of subpart E of part 1944 of this chapter.

CImplementing an SMR.

1After the use of an SMR has been approved by the State Director, the Servicing Official will establish an SMR for the project with the borrower.

aThe SMR will be obtained by adjusting the “FmHA or its successor agency under Public Law 103-354 Debt Payment” item in the “Proposed Budget” column of Form FmHA or its successor agency under Public Law 103-354 1930-7, to reflect a payment to FmHA or its successor agency under Public Law 103-354 amortized at an interest rate which is less than the full note rate on the borrower's promissory note. The interest rate chosen may never be less than 2 percent.

bThe interest rate of the SMR budget will be set at a level that will make project SMR rental rates comparable with community rental rates. This rate will remain constant except as provided in paragraph 4 D of this exhibit.

2The initial change to SMR rents or a decrease in SMR rents will be accomplished in accordance with the following:

aThe borrower will submit to the Servicing Official, the items listed in paragraph IV A 1, 2, 4, 5, and 6 of this exhibit.

bThe Servicing Official shall review the budget and supporting documentation, and when found to be acceptable, notify the borrower in writing that the budget is approved. A copy of the approved budget will be forwarded to the State Director.

cIn addition to any State requirements, the borrower notifies each tenant or member of the new rates and/or utility allowance and:

(1) Include in the notice an explanation of the changes and events which necessitated the change. Also, the explanation must specify any adverse and/or positive effect the change may have on the tenants or members.

(2) Mail a copy of the notice to the tenant or member at least 30 days prior to the effective date of the change.

(3) Offer the tenants or members an opportunity to meet with management to discuss the change and review any material contributing to the change.

(4) Inform the tenants or members of their right to request a review of the rate change approval decision within 45 days of the date of the notice by writing to the next higher FmHA or its successor agency under Public Law 103-354 approval official. Until the request is resolved, the tenants or members are required to pay the changed amount of rent as indicated in the notice of approval.

3When an SMR is implemented in a Plan II section 8/515 Project, use lines 23 through 29 of Form FmHA or its successor agency under Public Law 103-354 1944-29 to report any additional payments to the reserve account required when HUD contract rents exceed SMR rental rates.

DChanging an SMR.

1An SMR may be increased or decreased whenever the local market conditions warrant, but must be reviewed at least annually.

aIf the local market conditions that caused the need for the SMR have not been resolved and corrected, document same and update the monitoring timeframes and proceed no further. However,

bIf the local market conditions have changed and change in the SMR is warranted, the requirements listed in paragraphs IX D 2, 3, and 4 of this exhibit apply.

2An SMR must have the SMR rate rent increased by a minimum of 10 percent per year (or a higher amount if mutually agreed to by the borrower and FmHA or its successor agency under Public Law 103-354) when the:

aVacancy rate drops to 10 percent or below for 6 consecutive months, or

bThe borrower does not continue to satisfy the conditions of paragraphs IX A 1 c (1) and (2), d, e, or f of this exhibit.

3An SMR is completely terminated when the note rate rent is regained.

4An increase in an SMR will be accomplished in accordance with paragraph IV of this exhibit.

EDisapproval of SMR. When the approval official determines a request for an SMR is not justified on the basis of the information submitted, the approval official will notify the borrower in writing of the reason(s) why the SMR is not approved. The borrower will be advised of their appeal rights in accordance with subpart B of part 1900 of this chapter.

XSpecial Problem Cases. Problem cases which cannot be handled under this subpart should be submitted to the National Office for review with the State Director's recommended plan of action.