E7-1817. Direct Single Family Housing Loans and Grants

AGENCY:

Rural Housing Service, USDA.

ACTION:

Final rule.

SUMMARY:

Through this action, the Rural Housing Service (RHS) is adopting homeownership education requirements. The lack of homeownership education is a well-known barrier to successful homeownership for many families. The intended effect of this action is to assure that first time homeowners financed under the Section 502 Direct program are well prepared for homeownership by assuring that they receive homeownership education.

DATES:

This rule is effective on May 7, 2007.

FOR FURTHER INFORMATION CONTACT:

Janet L. Carter, Senior Loan Specialist, Rural Housing Service, Stop 0783, 1400 Independence Avenue, SW., Washington, DC 20250-0783, Telephone: [phone]; e-mail: [e-mail].

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be not significant and was not reviewed by the Office of Management and Budget (OMB) under Executive Order 12866.

Paperwork Reduction Act of 1995

In accordance with the Paperwork Reduction of 1995, the information collection requirements contained in this regulation have been approved by OMB under control number 0575-0172.

E-Government Act Compliance

The Agency is committed to complying with the E-Government Act, to promote the use of Internet and other information technologies to provided increased opportunities for citizen access to Government information and services, and for other purposes.

Civil Justice Reform

This rule has been reviewed under Executive Order 12988, Civil Justice Reform. In accordance with that Executive Order: (1) All State and local laws and regulations that are in conflict with this rule will be preempted; (2) no retroactive effect will be given to this rule; and (3) administrative proceedings in accordance with the regulations of the National Appeals Division of USDA at 7 CFR part 11 must be exhausted before bringing suit in court challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, 2 U.S.C. 1532, RHS generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, or tribal governments, in the aggregate, or to the private sector, of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of the UMRA generally requires RHS to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective or least burdensome alternative that achieves the objectives of the rule. This rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local and tribal Governments or the private sector. Therefore, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

Programs Affected

The programs affected by this proposed rule are 10.410, Low to Moderate Income Housing Loans and 10.417, Very Low-Income Housing Repair Loans and Grants.

Intergovernmental Consultation

For the reasons set forth in the final rule related Notice to 7 CFR part 3015, subpart V, these programs are not subject to Executive Order 12372 which requires intergovernmental consultation with State and local officials.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940, subpart G, “Environmental Program.” It is the determination of RHS that this action does not constitute a major Federal action significantly affecting the quality of the human environment, and in accordance with the National Environmental Policy Act of 1969, Public Law 91-190, an Environmental Impact Statement is not required.

Regulatory Flexibility Act

This rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has determined and certified by signature of this document that this rule will not have a significant economic impact on a substantial number of small entities. This rule imposes a new requirement on Agency applicants and borrowers; however, the new requirement of homeownership education will apply solely to the individual applicants and borrowers of Section 502 Direct Single Family Housing financing, not to small entities. There will be no significant information collection, or regulatory requirements imposed on small entities under this proposed rule.

Federalism

The policies contained in this rule do not have any substantial direct effect on States, on the relationship between the National government and the States, or on the distribution of power and responsibilities among the various levels of government. Nor does this rule impose a substantial direct compliance costs on State and local governments. Therefore, consultation with the States is not required.

Background

On March 6, 2006 the Agency published a proposed rule (71 FR 11167-9) with a 60 day comment period that would add homeowner education as a requirement for first time homebuyers that use Section 502 Direct loan funds to purchase a home. We received a total of 52 comments in response to the proposed rule. Overall the comments expressed support for the addition of the homeownership education requirement and generally agreed that homeowner education was necessary and beneficial. Many comments did have a recommendation or suggest a revision to the proposed rule. The comments are highlighted into significant issue areas and discussed below.

A. Homeowner Education as a Requirement Will Be a Barrier for Low-Income Families and Should Not Be Mandatory

The Agency received 5 comments stating that mandating homeowner education would create a barrier for families to access Section 502 loans for home purchase. The comments suggested the following as possible barriers for families:

• Availability of homeowner education classes;
• Perception of an additional requirement that could discourage applicants, realtors and sellers from participating in the program,
• The travel time, distance and cost to the applicant(s), and
• Lack of certified counselors in some areas.

The Agency does not believe that these are insurmountable barriers. In fact, based on the overall comments received, the Agency has determined that the general consensus is that making homeowner education a requirement results in greater benefit to the borrowers than any perceived detrimental effect to the home buying process. While the agency has established some preferences under § 3550.11 for formats in training based on their effectiveness, adequate flexibility has been included to address the possible barriers raised.

In addition, although the Agency does not expect the exception provision to be liberally used, it will be available. The State Director may grant an exception to borrowers on a case-by-case basis where the applicant documents a special need, such as a disability, that would impede completing the homeownership course, or where homeownership education is not reasonably available in the local area as further discussed below. Therefore, these comments have not been adopted.

B. Waiver of Homeowner Education by State Directors Should Not Be Routinely Exercised—RD Should Use Its Resources To Have Homeowner Education Services Delivered in Underserved Areas

The Agency received 9 comments indicating that the waiver provision should not be routinely exercised, and 3 comments indicating the waiver provision was needed but that flexibility should be built into the rule in exercising the waiver. The State/Local RD office will do an area by area assessment of the availability of homeowner education in the following forms, before requesting an exception for an individual from the State Director: Classroom, one-on-one counseling, interactive video conference, interactive home-study, interactive telephone counseling, and on-line counseling. Exception requests will be reviewed and granted on an individual case-by-case basis. The State Director will consider whether access to such homeownership counseling is “reasonably available” before granting an exception to the homeowner education requirement to an individual. Factors that will be taken into consideration regarding availability of homeowner education to borrowers in areas served by field offices include, but are not limited to: Distance, travel time, geographic obstacles and cost. The intent of the exception provision is to ensure that the homeowner education requirement is not a barrier to an applicant in securing a loan; however, it is not the intent of the Agency to have liberal use of the exception provision. The exception provision is intended to be used only in those rare instances where it is demonstrated that a borrower would not be able to access any form of homeowner education without undue hardship[m1].

C. Readily Available Counseling Should Be Defined

The Agency received 1 comment stating that readily available counseling should be defined in the rule. Informal investigation indicated that in some states applicants traveled up to one hour to attend a homeowner education class, after work and on the weekends, if necessary. Other comments were received that indicated an applicant would have to travel to another county to receive counseling. Distances vary from state to state and the willingness of an applicant to attend a class will vary. Given the many differences from state to state, what is “ readily available” in this rule is better addressed by the State Director during the assessment of available homeowner education resources in the respective States. Factors that will be taken into consideration regarding availability of homeowner education to borrowers in areas served by field offices include, but are not limited to: distance, travel time, geographic obstacles and cost.

D. Lack of funds to pay for homeownership education training/who will pay for the homeowner education if the borrower cannot afford it?

The Agency received 7 comments regarding sources of funds to pay for homeowner education on behalf of very-low and low-income borrowers. Some commenters believe that the Agency should assist in paying for the required homeowner education. This issue will be addressed, in part, by the RD State Offices when they assess the availability of homeowner education throughout their respective states and compile, an annually updated resource list of certified organizations and trainers that provide homeowner education. Where there is a fee charged to the borrower for homeowner education, the States will also assess sources of funding for the borrower to pay for their homeowner education, for example, organizations that provide free homeowner education will be identified, and borrowers will be referred to the free training first in all states. The Agency research revealed that many organizations charge only a nominal fee to cover the cost of materials for homeowner education. If qualified, these providers will be identified, and borrowers will be referred to these classes if free classes are unavailable. In addition, the borrower will have the option of financing reasonable costs of the training, as determined by the State Director, by including the amount in the loan amount at loan closing. Inclusion of such costs will not substantially increase the monthly Section 502 borrower loan payments.

The Agency believes that the overall benefit of homeownership education outweighs the burdens involved. The cost of homeowner education will be another allowed expense that can be added to the cost of home purchase, if requested.

E. What is a reasonable fee to charge? Who decides?

The Agency received 10 comments regarding reasonable fees to charge for homeowner education and suggesting that the Agency to set parameters for homeownership education fees as a guideline for the RD State Directors. RD does not believe it is appropriate to set or regulate the appropriate fee for providers. This should be determined based on local market conditions. Based on the comments received, the Agency will allow the State Directors to determine what is a reasonable fee to be charged for homeowner education based on the results of statewide assessments within their respective states. The Agency anticipates fees charged to borrowers based on the comments received to range from free to $400.

F. Homeowner Education Training Fees Should Be Allowed to the Homebuyer in Excess of the Appraised Amount of the House

The Agency received 3 comments indicating that the fee for homeowner education counseling should be allowed in the loan amount in excess of the appraised value of the house. In response, the Agency will allow reasonable homeowner education fees to be added to the loan amount in excess of the appraised value of the house and area loan limits under § 3550.63 in cases where the borrower requests to pay for the cost of the homeowner education by adding it to the loan amount. The Agency anticipates that such amounts will be insignificant portions of the loan.

G. Should RD staff deliver the homeowner education?

The Agency received 4 comments stating that RD staff should deliver the homeowner education training. Staff capacity and, qualification to deliver training vary from state to state. State Directors have the flexibility within their States to determine the feasibility of offering this training using staff resources given other program demands. RD staff would have to be trained and certified to provide homeowner education as required under this rule.

H. Certification of Counselors: Should Include Certification From State Housing Finance Authorities or Other State Level Certification and Should Include Certification of Training That Is Culturally Appropriate for Native American Communities

The Agency received 18 comments stating that certification of housing counselors should be allowed on the state-level, either by the State Housing Financing Agencies or other state-level certification processes, 4 comments stating the certification should model the HUD standard or one of the national organizations referenced in the proposed rule, and 1 commenting regarding certification of culturally appropriate training for Native American communities, especially Native Americans that reside on rural reservations. The Agency agrees that state-level certification and certification of culturally appropriate training for Native Americans should be included. It is addressed in the final rule by § 3550.11 permitting state-level certification by the State Housing Finance Agency or other state-level certification approved by the State Director, and certification by the National American Indian Housing Council, provided the required topics are included in their curriculum. The State Director will confirm that the housing counseling agencies that are not certified by a national agency identified in the final rule are certified by an approved state agency during the RD State Office assessment of available certified housing counseling agencies in their respective states.

I. What process should applicants undergo to receive a certificate of completion?

The Agency received 4 comments regarding the requirement for the borrower to have a certificate of completion or letter of completion from the housing counseling provider to document that the course was successfully completed. The main concern of these comments was that there should not be a testing component in order for the provider to issue a letter or certificate of completion to the participants. Since the language in the proposed rule lets the provider determine successful completion of their course, the Agency has determined that there is sufficient flexibility for each provider to make an appropriate individual assessment and; therefore, the language will remain the same in the final rule.

J. At what point during the home purchase process should the Homeowner Education be required?

The Agency received 8 comments regarding when during the home purchase process should the borrower complete homeowner education. Homeowner education must be completed by the borrower prior to closing their loan. When the borrowers receive their certificate of eligibility for a loan they will be advised that by accepting the certificate of eligibility they agree to submit documentation of homeowner education completion before loan closing and that they understand that it is a condition of loan closing. Language to this effect will be added to the Agency's certificate of eligibility document. At that time, the Agency will provide referrals to certified housing counselors to the borrower and discuss with the borrower where and when they will complete the homeowner education class.

Generally, the comments stated that the earlier in the process the homeownership education is taken the greater it would benefit the borrower. It would be ideal if the borrowers would complete an homeowner education course before submitting a loan application and certainly before signing a purchase and sale agreement; however, realistically, as some comments indicated this may not be practicable in all cases. Many borrowers are unlikely to incur the expense of taking a homeowner education course if they have no confidence that they will be approved for a loan to buy a house. In recognition of these realities, the Agency also will offer some flexibility to providers in tailoring the curriculum to the attendee. For example, when the attendee has already located a dwelling to purchase, they need not be required to take that portion of the training dealing with shopping for a home. The provider could determine that the applicant already has satisfactory knowledge in this area.

K. Will the requirement be the same for Self-Help families who apply for Section 502 Direct loans?

The Agency received 2 comments regarding whether Self-Help families would have to comply with the homeowner education requirement. If the Self-Help families are applying for Section 502 loans, then this rule requiring homeowner education as set forth would apply.

L. Suggestions for Adding Educational Components to Homeowner Education Course

The Agency received 8 comments regarding additional topics that should be included in the required homeowner education. The Agency recognizes the value of these additional topics, therefore, the final rule will add them as recommended: Budgeting—Pre-& Post-Purchase; Credit Counseling; Lender Differences—especially predatory lending; and Post-Occupancy Education to include delinquency and foreclosure prevention.

List of Subjects in 7 CFR Part 3550

• Administrative practice and procedure
• Conflict of interests
• Environmental impact statements
• Equal credit opportunity
• Fair housing
• Accounting
• Housing
• Loan programs—Housing and community development
• Low and moderate income housing
• Manufactured homes
• Reporting and recordkeeping requirements
• Rural areas
• Subsidies

For the reasons stated in the preamble, chapter XXXV, Title 7 of the Code of Federal Regulations, is amended as follows:

PART 3550—DIRECT SINGLE FAMILY HOUSING LOANS AND GRANTS

1. The authority citation for part 3550 continues to read as follows:

Authority: 5 U.S.C. 301; 42 U.S.C. 1480.

Subpart A—General

2. Section 3550.11 is added to read as follows:

§ 3550.11

State Director assessment of homeowner education.

(a) State Director's will make an assessment of the availability of certified homeowner education in their respective states and maintain an annually updated listing of providers and their reasonable costs.

(b) The order of preference for homeowner education formats is as follows:

(1) Classroom; one-on-one counseling; or interactive video conference.

(2) If none of the formats in paragraph (b)(1) of this section is reasonably available; as determined under § 3550.53(i), then the applicant may use interactive home-study or interactive telephone counseling of at least four hours duration.

(3) If none of the formats in paragraphs (b)(1) and (b)(2) of this section is reasonably available as determined under § 3550.53(i), then the applicant may use on-line counseling to meet the homeownership education requirement.

(c) Homeownership education must include a letter or certificate of completion and be provided by homeownership education counselors that are certified by any of the following:

(1) The Department of Housing and Urban Development (HUD);

(2) NeighborWorks America (NWA);

(3) The National Federation of Housing Counselors (NFHC);

(4) National American Indian Housing Council (NAIHC); or

(5) The State Housing Finance Agency or other qualified organization approved by the State Director.

(d) The provider will issue a letter or certificate of completion to document that the borrower has satisfactory knowledge of these minimum topics:

(1) Preparing for homeownership (evaluate readiness to go from rental to homeownership),

(2) Budgeting (pre and post-purchase),

(3) Credit counseling,

(4) Shopping for a home,

(5) Lender differences (predatory lending),

(6) Obtaining a mortgage (mortgage process, different types of mortgages),

(7) Loan closing (closing process, documentation, closing costs),

(8) Post-occupancy counseling (delinquency and foreclosure prevention),

(9) Life as a homeowner (homeowner warranties, maintenance and repairs),

(e) The provider may tailor the homeownership education training to the needs of the borrower to ensure satisfactory knowledge of the topics listed in paragraph (d) of this section.

Subpart B—Section 502 Origination

3. Section 3550.52 (d)(10) is added to read as follows:

§ 3550.52

Loan purposes.

* * * * *

(d) * * *

(10) Reasonable fees for homeownership education as determined by the State Director under § 3550.11 of this subpart. Such fees may be added to the loan amount in excess of the area loan limit and appraised value of the house.

* * * * *

4. Section 3550.53(i) is added to read as follows:

§ 3550.53

Eligibility requirements.

* * * * *

(i) Homeownership education. Applicants who are first-time homebuyers must agree to provide documentation, in the form of a completion certificate or letter from the provider, that a homeownership education course from a certified provider under § 3550.11 has been successfully completed as defined by the provider prior to loan closing. Requests for exceptions to the homeowner education requirement will be reviewed and granted on an individual case-by-case basis. The State Director may grant an exception the homeownership education requirement for individuals in geographic areas within the State where the State Director verifies that certified homeownership education is not reasonably available in the local area in any of the formats listed in § 3550.11(b). Whether such homeownership education is reasonably available will be determined based on factors including, but not limited to: Distance, travel time, geographic obstacles, and cost. On a case-by-case basis, the State Director also may grant an exception, provided the applicant borrower documents a special need, such as a disability, that would unduly impede completing a homeownership course in a reasonably available format.

Dated: January 5, 2007.

Russell T. Davis,

Administrator, Rural Housing Service.