[Federal Register Volume 64, Number 240 (Wednesday, December 15, 1999)]
[Proposed Rules]
[Pages 70124-70144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32287]
[[Page 70123]]
_______________________________________________________________________
Part II
Department of Agriculture
_______________________________________________________________________
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency
_______________________________________________________________________
7 CFR Parts 1980 and 3555
Reengineering of the Section 502 Guaranteed Rural Housing (GRH)
Program; Proposed Rule
Federal Register / Vol. 64, No. 240 / Wednesday, December 15, 1999 /
Proposed Rules
[[Page 70124]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency
7 CFR Parts 1980 and 3555
RIN 0575-AC18
Reengineering of the Section 502 Guaranteed Rural Housing (GRH)
Program
AGENCY: Rural Housing Service, Rural Business Cooperative Service, Farm
Service Agency, USDA.
ACTION: Proposed rule.
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SUMMARY: The Rural Housing Service proposes to streamline and
reengineer its regulations for the administration of its Guaranteed
Rural Housing (GRH) Program. This action is taken to reduce
regulations, improve customer service, and improve the Agency's ability
to achieve greater efficiency, flexibility, and effectiveness in
managing the program. The effect of this action is to provide better
service, reduce program vulnerability, and reduce Federal regulations.
DATES: Written or e-mail comments must be received on or before
February 14, 2000. The comment period for information collections under
the Paperwork Reduction Act of 1995 continues through February 14,
2000.
ADDRESSES: Submit written comments via the U.S. Postal Service, in
duplicate, to the Regulations and Paperwork Management Branch,
Attention: Tracy Gillin, Rural Development, U.S. Department of
Agriculture, Stop 0742, 1400 Independence Avenue, S.W., Washington, DC
20250-0742. Submit written comments via Federal Express Mail, in
duplicate, to the Regulations and Paperwork Management Branch,
Attention: Tracy Gillin, USDA--Rural Development, 3rd Floor, 300 E.
St., SW., Washington, DC 20546. Also, comments may be submitted via the
Internet by addressing them to comments@rus.usda.gov'' and must
contain the word ``GRH'' in the subject line. All comments will be
available for public inspection during regular work hours at the 300 E.
St., SW. address listed above.
FOR FURTHER INFORMATION CONTACT: Dean Daetwyler, Senior Loan
Specialist, Single Family Housing Guaranteed Loan Division, RHS, Stop
0784, Room 2250, South Agriculture Building, 1400 Independence Avenue,
S.W., Washington, DC 20250, telephone (202) 720-1480.
SUPPLEMENTARY INFORMATION:
Classification
This rule has been determined to be significant and was reviewed by
the Office of Management and Budget (OMB) under Executive Order 12866.
Executive Order 12988
This proposed rule has been reviewed under Executive Order 12988,
Civil Justice Reform. If this proposed rule is adopted: (1) Unless
otherwise specifically provided, 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 except as specifically
prescribed in the rule; (3) administrative proceedings of the Rural
Housing Service (RHS) and the National Appeals Division (7 CFR part 11)
must be exhausted before bringing suit.
The Agency is making regulatory improvements to a more seasoned
loan program and is eliminating unnecessary administrative matters from
the CFR. The Agency is also developing a customer and user friendly
handbook which will clarify the regulation and provide clear and
definitive guidance for program beneficiaries. These actions will not
only benefit the Agency, but also participating lenders, their agents,
and potential homeowners.
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, the
Agency 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 the Agency 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.
National Partnership for Reinventing Government
This regulatory action is being taken as part of the National
Partnership for Reinventing Government (NPR) to reduce and eliminate
unnecessary regulations and improve those that remain in force.
Currently, the administration of the GRH program is guided by a
regulation totaling 36 pages in the Code of Federal Regulations (CFR).
The Agency has committed itself to meet the true spirit and intent of
NPR and has undertaken a massive effort to completely reinvent and
reengineer its regulatory process. In the new rule, administrative
matters have been eliminated and remaining text has been completely
revised to be consistent, simple, and clear. The Agency will publish a
handbook to provide lenders, servicers, and field staff with the
administrative guidance needed to effectively and efficiently
administer the program. The handbook will not be published in the
Federal Register but will be available upon request to the public. The
Agency estimates the final rule will cover approximately 23 pages in
the CFR, for a 36 percent reduction in published material.
Environmental Impact Statement
This document has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' It is the determination of the
Agency that the proposed 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,
neither an Environmental Assessment nor an Environmental Impact
Statement is required.
Regulatory Flexibility Act
This proposed 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 number
of small entities. The Agency does not regulate small entities through
the GRH program. The lender makes the loan to the applicant and the
Agency guarantees the loan against potential loss providing the loan
meets certain conditions. Requirements of the lenders are consistent
with industry standards.
Programs Affected
This program is listed in the Catalog of Federal Domestic
Assistance under Number 10.410, Very-low to Moderate Income Housing
Loans (Section 502 Rural Housing Loans).
[[Page 70125]]
Intergovernmental Consultation
This program is not subject to the provisions of Executive Order
12372 which require intergovernmental consultation with State and local
officials. (See the Notice related to 7 CFR part 3015, subpart V, at 48
FR 29112, June 24, 1983; 49 FR 22675, May 31, 1984; 50 FR 14088, April
10, 1985).
Implementation Proposal
When the Agency publishes this proposed rule in final, it will
remove 7 CFR part 1980, subpart D, ``Rural Housing Loans,'' from the
CFR.
After the effective date of the final rule, the Single Family
Housing Guaranteed Rural Housing program will be guided by 7 CFR part
3555. All provisions of the regulation will be effective 30 days after
publication of the Final Rule except for the requirement for
Homeownership Education which will take effect 6 months after the
publication of the Final Rule.
The handbook will provide lenders, servicers, and field personnel
with the administrative guidance needed to effectively and efficiently
administer the program.
Background Information
On April 17, 1991, the Agency first published a final rule (56 FR
15748-81) implementing the Guaranteed Rural Housing program. The
program was authorized under the Cranston-Gonzalez National Affordable
Housing Act (Pub. L. 101-625).
After completing notice and comment rulemaking procedures, the
Agency published another final rule on May 22, 1995, incorporating
needed changes to encourage greater program participation, make the
program more user friendly, and improve the success of the program.
Now that the program has been in effect for several years, the
Agency is able to better reflect on the effectiveness and efficiencies
of the GRH program and recognizes the need to focus on making the
program even more effective, streamline processes, reduce costs to the
taxpayer, and increase the level of customer service.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995, the Agency
will seek Office of Management and Budget (OMB) approval of reporting
and recordkeeping requirements contained in this regulation.
Guaranteed Rural Housing (GRH) loans are made by private lenders to
individuals and households for the purpose of acquiring or constructing
a single family residence in a rural area. Eligibility for this program
includes low and moderate income families or persons whose income does
not exceed 115 percent of the median income for the area, as determined
by the Secretary.
The information requested by the Agency includes borrower financial
information such as household income, assets and liabilities, and
monthly expenses. All information collected is vital for the Agency to
determine if borrowers qualify for and assure they receive all
assistance for which they are eligible. Information requested on
lenders is required to ensure that lenders are eligible to participate
in the GRH program. Lender requirements are in compliance with OMB
Circular A-129.
Estimate of Burden: Public reporting burden for this collection of
information is estimated to average 25 minutes per response.
Respondents: Individuals or households and Business or other non-
profit.
Estimated number of respondents: 44,830.
Estimated Number of Responses per Respondent: 5.68
Estimated Total Annual Burden on Respondents: 89,849 hours.
The GRH loan program has grown from a $100 million program in 1991
to its current funding level of $3 billion. Both the number of
borrowers served and the number of lenders participating have increased
since the program's inception. The reporting burden has increased
consistent with the growth of the program; however, the cost to the
consumer has been reduced by 6% since 1998 and dovetails an 11%
reduction in reporting burden from 1995.
Copies of this information collection can be obtained from Tracy
Gillin, Regulations and Paperwork Management Branch, Support Services
Division, Rural Development, at (202) 692-0039.
Comments are invited on: (a) Whether the proposed collection of
information is necessary for the proper performance of the functions of
the Agency, including whether the information will have practical
utility; (b) the accuracy of the Agency's estimate of the burden of the
proposed collection of information including the validity of the
methodology and assumptions used; (c) ways to enhance the quality,
utility, and clarity of the information to be collected; and (d) ways
to minimize the burden of collection of information on those who are to
respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology.
All responses with regard to paperwork burden will be summarized,
included in the request for OMB approval, and will be a matter of
public record. Please send written comments on the information
collection aspect of the rule to the Desk Officer for Agriculture,
Office of Information Regulatory Affairs, Office of Management and
Budget, Washington, DC 20503 and to Tracy Gillin, Regulations and
Paperwork Management Branch, U.S. Department of Agriculture, Rural
Development, STOP 0742, 1400 Independence Ave., SW, Washington, DC
20250-0742. A comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication of this rule.
Public Burden in the Handbook
The Agency is currently developing the proposed Handbook while
aggressively analyzing all existing burden imposed upon the public to
obtain and retain guaranteed single family housing program assistance.
The proposed Handbook will be available for public comment with
regard only to its information collection requirements on or about
March 1, 2000. The Agency will publish a Notice in the Federal
Register, with a 60 day comment period, when the Handbook is available
with its specific information collection requirements.
Summary of Enhancements To Improve Program Success
The major changes to enhance the Guaranteed Rural Housing Program
are discussed below in general order of appearance in the regulation,
not necessarily based on order of importance.
Subpart A--General
The definition section will be expanded to clarify terms used in
the regulation. The definition of ``qualified alien'' will be revised
in accordance with the definition provided in section 431 of the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996
(PRWORA), Pub. L. 104-193. Section 402 of PRWORA provides that an alien
who is not a ``qualified alien'' is not eligible for Federal public
benefit. Section 401 of Act, in part, provides an exception for non-
qualified aliens who were receiving assistance at the time of enactment
under any program under title V of the Housing Act of 1949. The Agency
has determined that guaranteed single family housing loans are a
Federal benefit generally unavailable to non-qualified aliens. If a
non-qualified alien had received a guaranteed single
[[Page 70126]]
family housing loan prior to the enactment of the Act, however, the
Agency would continue to honor the guarantee and service the loan in
accordance with the proposed rule. The Act also precludes qualified
aliens from ``federal means tested public benefits'' for five years
after they become qualified aliens. The Agency, however, considers the
guaranteed single family housing loan program to be a discretionary,
rather than a mandatory, assistance program that does not constitute a
``federal means-tested public benefit'' subject to this further
restriction.
The definition of ``Veteran's preference'' has been updated to
include Persian War era veterans in accordance with section 101 of
title 38, as amended by the Persian Gulf War Veterans' Benefits Act of
1991, Pub. L. 102-25.
Most existing definitions have minor editorial revisions, but are
not substantially revised.
Subpart B--Lender Participation
The section on lender participation was modified to provide
additional guidance on how to become an approved Agency lender. The
proposed regulation clarifies that a lender approved as a supervised or
nonsupervised mortgagee by the United States Department of Housing and
Urban Development (HUD), must also have direct endorsement authority
from HUD for the submission of applications for Federal Mortgage
Insurance to be eligible as an Agency approved lender.
The proposed regulation further clarifies that a lender approved as
a supervised or nonsupervised mortgagee by the United States Department
of Veterans Affairs (VA), must also be authorized to close loans on an
Automatic Basis, as prescribed by VA, to be eligible as an Agency
approved lender. These VA lenders have staff underwriters and have
proven that they are capable of approving and closing loans per
required guidelines. The application process for all lenders will be
streamlined, and the Agency and its customers will realize improved
loan quality.
Lenders who do not meet the requirements to become an approved
Agency lender under the proposed regulation, may still be able to
participate as a broker or correspondent mortgagee by processing loans
through an Agency-approved lender. These lenders must submit loans
through an approved Agency lender who will be responsible for
underwriting the loan and ensuring program requirements are met. The
guarantee will be issued in the name of the approved lender.
The Agency proposes to include other Federally supervised lenders,
including those who are members of the Federal Reserve System, and
those supervised by the Federal Deposit Insurance Corporation (FDIC),
National Credit Union Administration (NCUA), or Office of the Thrift
Supervision, as eligible lenders. These lenders will be required to
provide documentation of their ability to process, underwrite and
service single family loans to become an approved Agency lender. The
Agency will assume that lenders approved under other Federal programs
have the ability to originate and service single family housing loans.
Reporting requirements by lenders and their agents have been moved
to the program participation section of the proposed regulation. This
section was streamlined and contains only policy dealing with reporting
to the Agency by lenders and their agents.
The Agency further proposes to require approved lenders to maintain
a fidelity and omissions policy, listing the Agency as the loss payee,
with a copy provided to the Agency. This will protect the Agency
against the potential for fraud and mistakes made by the lender.
The Agency is also considering requiring in the final rule that
approved lenders have computer systems that comply with year 2000
technology. The Agency is specifically interested in comments on such
an eligibility requirement, the potential vulnerability to the
servicing of a guaranteed portfolio with systems that are not year 2000
compliant, the potential vulnerability to the Agency, and the
requirement's impact on lenders participation in the program.
Subpart C--Loan Requirements
Interest Rate
Agency regulations currently include a maximum interest rate which
a lender can charge GRH customers. The maximum rate authorized is the
greater of the rate for loans guaranteed by VA or the current Fannie
Mae rate, described as the Fannie Mae 90-day Actual/Actual yield for a
30 year fixed rate conventional mortgage loan plus 60 basis points.
Lenders generally utilize the VA rate as it is higher than the
Fannie Mae rate and allows a lender to adequately price the product.
Lenders who do not offer loans guaranteed by VA generally do not
participate in the GRH program since 60 basis points over the Fannie
Mae rate does not adequately price this mortgage product. The Agency
continues to receive comments that the current regulatory standards are
not feasible. Participating lenders contend that the mortgage market is
so competitive, that the customer receives a more favorable interest
rate than that established in our regulations making the limit
unnecessary. In addition, the process is burdensome to lenders and the
Agency to verify the Fannie Mae rate each time a loan is presented for
guarantee. The Agency agrees that competitive forces in the marketplace
help ensure that our customers receive the best interest rate. However,
the Agency is concerned that in very rural markets, where there is not
sufficient competition, that rural families may be subjected to higher
interest rates than if no maximum were prescribed in GRH regulations.
Section 502(h)(6) of the Housing Act of 1949, as amended, requires
the interest rate for guaranteed loans to be fixed over the term of the
loan and not exceed the rate for loans guaranteed under 38 U.S.C.
chapter 37 (Housing and Small Business Loans) or comparable loans in
the area that are not guaranteed. At this time, the interest rate for
loans made under 38 U.S.C. chapter 37 is a negotiated rate of interest
with no maximum limitation. The rate is negotiated between the lender
and borrower. In most areas, competition in the mortgage industry
ensures that loan customers receive the lowest possible interest rate.
However, in rural areas where there is little or no competition, and no
comparable loans in the area which are not guaranteed, the Agency
believes that an interest rate cap is necessary to ensure that our
customers are not charged an excessive rate of interest. Therefore, the
Agency is proposing to continue with a maximum interest rate for the
GRH program. The rate cap will be set so as not to impact or impede
upon lender participation in areas where competition exists; however,
will ensure that customers in other areas are not subject to higher
rates than should be offered for this mortgage product. The maximum
allowable interest rate will be based upon current market factors and
established with sufficient flexibility so that lenders can adequately
price this mortgage product. The Agency intends to publish the rate by
notice in the Federal Register. This will provide the Agency with
flexibility to change the rate quickly if an adjustment were necessary
to react to changes in market conditions. If the rate were included in
the rule, it would take approximately a year to make any revisions to
the rate. This timeframe could have an adverse affect on the delivery
of GRH assistance. For example, if a higher rate were
[[Page 70127]]
necessary, lenders would not offer this mortgage product and
homeownership opportunities for many rural families would be halted
until the Agency could promulgate another rule. Conversely, if the
market becomes so competitive that a lower rate were appropriate, rural
families in many remote rural areas without adequate market competition
could be faced with higher than necessary interest rates. At this time,
if the Agency were to establish a maximum GRH interest rate, it would
be no more than 125 basis points over the Fannie Mae 90-day Actual/
Actual yield requirements, rounded to the nearest eighth of a percent.
The Agency is particularly interested in comments regarding this
section. The Agency recognizes in order to attract and maintain lenders
who will provide homeownership opportunities for low-and moderate
income families in rural America, flexibility and simplicity is needed.
However, the Agency still has a responsibility to ensure that its
customers are treated equitably and not subject to interest rates that
are excessive because market competition does not exist. The lowest
possible interest rate helps to ensure the success of the homeowner and
reduces risks to both the Agency and Lender. We believe the proposed
language meets these objectives and we encourage suggestions or
alternative methods to meet these goals.
Interest Assistance
The proposed regulation more clearly defines the eligibility
criteria for existing borrowers with subsidized guaranteed loans
approved between April 17, 1991, and September 30, 1991. The Agency
proposes no change from the current regulation which provides that a
customer should contact their lender when they have had a $100 monthly
increase in household income. The Agency has considered changing this
policy to a 10% increase in household income similar to our direct loan
program. However, lenders and loan servicers have stated that since so
few interest assistance accounts exist such a minor change would be
more confusing than beneficial. The Agency is particularly interested
in comments regarding this section and whether the current policy
should be continued or a ``10% change'' policy would benefit lenders
and homeowners. A chart is included in the regulation to be used to
determine the amount of interest assistance paid by the Government and
the amount of the borrower's payment. The chart, which is currently
Exhibit D of the existing regulation, was expanded by adding floor rate
percentages for borrowers whose income is between 80% and 115% of the
median income.
The Agency currently pays a fee to the lender for processing an
Interest Assistance Agreement renewal. The amount of the fee will be
included in the handbook and the Agency's annual funding notice
published in the Federal Register so that the Agency can make changes
to the fee so as to keep up with costs in accordance with industry
market factors.
Recapture
Recapture is defined as the amount of interest assistance to be
repaid the Agency when the borrower transfers title or ceases to occupy
the property. The Agency currently refers to recapture as ``Equity
Sharing'' but will change the term to ``Recapture'' in the proposed
regulation. The recapture formula has been changed to limit recapture
to 50 percent of value appreciation or the amount of payment assistance
received, whichever is less. Currently, the Agency can recapture the
entire amount of subsidy granted to a borrower up to the value of the
property. By changing the recapture formula, the Agency will be able to
recognize improvements the customer made to the property, thereby
providing the customer with incentive to maintain and improve their
home without losing all of their equity.
The circumstances when borrowers are required to repay payment
assistance have been clarified, including situations involving an
assumption of a guaranteed loan.
Application for and Issuance of the Loan Note Guarantee
The Agency has changed the guarantee fee charged to the Lender from
1 percent of 90 percent of the principal amount advanced (.9 percent of
the loan amount) to 1 percent of the full amount of the loan (1 percent
of the loan amount). This change will improve consistency with industry
standards and will assist the Agency in lowering the subsidy cost of
the program.
Subpart D--Underwriting the Applicant
Eligible Applicant
Current Agency regulations preclude the eligibility of current
homeowners for the GRH program unless their current home is deficient.
This policy was adopted when the GRH program was first authorized and
funds were limited. The policy has precluded many rural families from
relocating or upgrading their current housing. The Agency is now
proposing to eliminate the requirement that the applicant's current
home must be deficient to qualify for a GRH loan. This will expand the
eligibility of current homeowners and allow these potential customers
to sell their current home and upgrade their housing. These existing
homes will then provide homeownership opportunities for many other
rural families, especially those in areas where housing is limited.
Since the Agency does not communicate directly with many of the
potential program customers, the Agency is interested in knowing if the
proposed change in regulations will have a positive impact on rural
homeownership. As such, the Agency is particularly interested in
receiving comments on this issue.
Credit Qualifications
Credit qualifications will be revised to improve clarity and
further define what constitutes an unacceptable credit history. This
action will make the GRH program more consistent with the direct
program and with industry standards.
Incidents of more than one payment being 30 days or more
late within the last 12 months has been changed to incidents of 3 or
more payments late within the last 12 months.
Incidents of rent payments being paid 30 days or more late
within the last three years has been changed to incidents of rent
payments being paid 30 days or more late within the last two years.
Incidents where a foreclosure has been completed within
the last 36 months has been adopted as an indicator of unacceptable
credit. Previously, foreclosures had been listed as a category not to
be considered as unacceptable credit, provided that the foreclosure was
completed 12 months before the date of an application. The timeframe
acceptable to the Agency for prior foreclosure incidents was increased
from 12 months to 36 months due to risk associated with applicants with
this type of credit history.
The Agency has revised the section dealing with collection
accounts by adding that if the collection account was paid in full
within the last six months, it is considered an indicator of
unacceptable credit. The purpose of this change is to discourage
applicants from paying off collection accounts at the time of
application only in order to qualify for Agency assistance.
For non-Agency debts written off within the last 36
months, the Agency added the language ``unless the account was paid in
full at least 12 months ago.'' The purpose of this change was to
discourage applicants paying in full debts previously written off only
in order to qualify for Agency assistance.
[[Page 70128]]
The provision, under the current regulation, stating that ``No
History'' of credit transactions is an acceptable credit history, has
been deleted from the proposed regulation. The Agency feels that a lack
of credit history should not automatically be considered acceptable
credit. A recent study indicated that the highest delinquency rate in
the first year of homeownership was attributed to customers who had no
credit history prior to obtaining an Agency loan. This was particularly
evident in customers who had resided with family prior to obtaining a
mortgage loan and had no credit experience on their own. Based upon
this study, the Agency does not believe that a lender evaluating an
application from a family who has no experience in paying financial
obligations can document that the customer has the capacity to repay
the proposed loan. The handbook will clarify that ``no credit history''
on a credit report will not automatically be a reason to deny a loan
since many creditors, such as landlords, utility companies, small
department stores, and doctors, do not report to credit repositories.
Detailed guidance concerning the evaluation of credit will be given to
lenders in the handbook. The Agency feels that changes to the credit
requirements and guidelines will assist lenders in evaluating
applicants, help to ensure the success of the customer, and reduce
risks to the Agency.
The provision to allow a lender to consider mitigating
circumstances to establish a borrower's intent for good credit will be
amended to be more consistent with the direct single family housing
loan program and the private mortgage industry. Such flexibility will
be added to cover the situation where a loan will significantly reduce
the applicant's shelter costs and enhance debt repayment ability. The
Agency hopes to benefit otherwise eligible applicants who have adverse
credit due to high current shelter costs. The provision also will
specify that mitigating circumstances will not be considered to provide
loan assistance when the applicant is delinquent on a Federal debt or
other Government outstanding judgment against the applicant in a
Federal court, other than the United States Tax Court. These exceptions
are based on statutory prohibitions in 31 U.S.C. 3720B and 28 U.S.C.
3201(e), respectively. The current provision for consideration of an
applicant's justifiable dispute concerning goods or services as a
mitigating circumstance also will be deleted as unnecessary. The broad
mitigating factor for circumstances of a temporary nature would cover
this situation. The Agency is particularly interested in receiving
comments on this issue, especially as to the parameters of when adverse
credit may be mitigated.
Homeownership Education
The Agency is adopting a mandatory homeownership education
requirement for first time homebuyers who have not previously owned a
home, as authorized by 502(e)(4) of title V of the Housing Act of 1949.
This will ensure that first-time homebuyers are adequately prepared for
the obligations of homeownership. The Agency feels that this
requirement will assist customers in understanding the responsibilities
and demands of homeownership.
The Agency strongly believes that homeownership education is
necessary for all first time homeowners. This is consistent with the
direction of the lending industry and helps ensure the success of the
homeowner and program while having the added benefit of minimizing
losses to the Government and lender. However, the Agency recognizes the
impact of this requirement upon the lending community and recognizes
that in some cases, there may be a cost for this service and that the
cost will generally be paid by the potential homeowner. The cost of
homeownership education is an eligible loan purpose and can be included
in the loan provided the appraised value of the property supports the
inclusion of this fee. Alternatively, the cost may be paid directly by
the applicant.
The Agency intends to establish minimum parameters for
homeownership education in accordance with the standards currently
being developed by the American Homeowner Education and Counseling
Institute. The Agency believes there are two methods to ensure that
homeownership education is provided. One method would be for the lender
to maintain a list of acceptable providers of homeownership education
and provide such list to potential clients. The lender would be
responsible for ensuring that the providers met Agency requirements. A
certification from the service provider would be required before the
loan could be approved. An alternative method would be for the lender
to provide the service, and if any costs are involved, each applicant
would be charged the same fee. The Agency is particularly interested in
comments on the parameters of an acceptable homeownership education
program, whether one or both options should be offered to lenders,
alternative methods, and potential costs of such service. This rule
will be amended to incorporate the standards as established.
Net Family Assets
A definition has been added for net family assets. Clarification as
to which assets must be included in the calculation of annual income as
well as assets which are not included in the calculation are included
in the proposed regulation. The requirements of the Agency are
consistent with the requirement of the U.S. Department of Housing and
Urban Development in accordance with 24 CFR 5.603.
Subpart E--Underwriting the Property
Ownership Requirements
The Agency proposes to increase the unexpired term on a secured
leasehold interest from 40 years to 45 years before a guarantee will be
considered. In the event of a foreclosure, leasehold interests must
also be fully marketable in the area. The requirement for a lease to
have an unexpired term of one and one-half times the term of the
mortgage is considered to be industry standard, so that, in the event
of a foreclosure, the loan will be fully marketable. This requirement
helps to protect the lender as well as the Government. Should the term
of the lease be less than the term of a 30 year mortgage, the value of
the property would not be fully marketable and the value of the
property would be decreased, thereby increasing the potential amount of
a loss. Certain exceptions are provided on properties located on
American Indian restricted lands due to the unique nature of securing
loans in these areas.
Special Requirements for Condominiums
As the Agency does not approve subdivisions and condominiums, the
proposed regulation stipulates that condominiums must be in a project
approved or accepted by HUD, VA, Fannie Mae, or the Federal Home Loan
Mortgage Corporation (Freddie Mac).
Special Requirements for Community Trust Lands
Language has been added to the proposed regulation outlining the
requirements for guaranteed loans for dwellings on land owned by a
community land trust. The Agency may guarantee a loan in these areas
provided that any restrictions imposed by the community land trust are
first reviewed and accepted by the Agency and that the requirements
imposed by the community land trust automatically terminate upon
foreclosure or
[[Page 70129]]
acceptance by the lender of a deed in lieu of foreclosure case. The
Agency is concerned about possible discriminating language in community
land trust restrictions. Current regulations do not address community
land trusts.
Special Requirements for Planned Unit Developments
Clarification on loans for dwellings in Planned Unit Developments
(PUD) have been added to the regulation. Such loans may be guaranteed
if PUD meets all of the Agency's requirements and those of HUD, VA,
Fannie Mae, or Freddie Mac. This issue is not addressed in the current
regulation.
Special Requirements for Manufactured Homes
The Agency added a provision requiring the dealer-contractor to
provide a warranty in accordance with 7 CFR part 1924, subpart A,
identifying the unit by serial number. The dealer-contractor is also
required to certify that the unit has not sustained any hidden damage
during transportation and that the permanent foundation complies with
plans and specifications. If the unit was manufactured in separate
sections, the dealer-contractor must certify that the sections were
properly joined and sealed per manufacturer's specifications. The
dealer-contractor must also provide the applicant with a copy of all
manufacturer's warranties. These provisions are similar to those in the
direct 502 program and were added to protect the financial interests of
the applicant, the lender, and the Government and to ensure that the
dwelling is of acceptable quality.
To maintain consistency with the direct 502 program, the Agency
will continue to finance only new manufactured homes that meet or
exceed Agency thermal standards. The Agency has received comments
regarding consideration of financing existing manufactured housing
stock, not originally financed with an Agency loan. However, the Agency
believes that cost to retrofit an existing manufactured home so it can
meet Agency thermal standards is cost prohibitive and not in the best
interest of the customer. The Agency is also concerned about other
lender's experiences with higher losses on existing manufactured homes.
Additionally, according to HUD research, as published in the ``Ninth
Report to Congress on the Manufactured Housing Program,'' manufactured
homes over a 10 year exposure period are 5 times more likely to suffer
structural failure as compared to a conventionally built home. HUD is
expected to begin a review of the manufactured construction code this
year. After HUD completes this process and the Agency reviews its
findings, the Agency will re-consider financing existing manufactured
housing.
Subpart F--Regular Servicing
Servicing Responsibilities
The section on servicing has been expanded to include lender
responsibilities. Language was added to allow the Agency to require a
lender to transfer its loan servicing activities to another approved
lender if the servicing lender fails to provide acceptable servicing.
Required Servicing Actions
The Agency wants to provide flexibility to lenders that do not have
the capacity to escrow taxes and insurance. The Agency will allow these
lenders the opportunity to submit a plan to the Agency for approval to
ensure that the customer pays tax and insurance obligations. The
lender, however, must accept ultimate responsibility for the payment of
taxes and insurance which come due prior to liquidation of an account.
This provision is intended to help expand the program into more rural
areas with smaller lenders without escrow capabilities, while still
protecting the borrower's interest.
A section on insurance has also been added and encompasses both the
requirements for homeowners insurance and flood insurance on properties
located in Special Flood Hazard Areas. This consolidated section on
insurance eliminates the need for the current section of the regulation
devoted to flood or mudslide hazard areas.
The Agency has added the requirement that the lender must notify a
credit repository of each new guaranteed loan and must report to the
credit repository all accounts that become more than 30 calendar days
past due. This is consistent with industry standards. The current
regulation only requires a lender to report a loan to a credit
repository when payments become three payments delinquent and it does
not require a lender to report new guaranteed loans.
Borrower Actions Requiring Lender Approval
Language has been added to allow a lender to consent to a lease of
mineral rights as long as the security property remains suitable for a
residence, the Government's interest will not be adversely affected,
and Agency environmental requirements are met.
Additionally, the Agency proposes to allow a lender to consent to
certain transactions affecting the security property such as the sale
or exchange of a portion of the security property, granting of a right-
of-way across the property, or granting a partial release of the
security property provided the transaction meets certain conditions to
protect the lender and the Government's interests.
Under the current regulation, mineral leases and partial releases
were not addressed. Under the proposed regulation, guidance is provided
on allowing mineral leases and partial releases. This will give the
lender more flexibility in servicing it's guaranteed portfolio, while
still protecting the Government's interest.
Transfer and Assumptions
The Agency has reorganized and clarified this section. A section on
transfers, without triggering the due-on-sale clause, has been added to
allow the transfer of property to a spouse or children not resulting
from the death of a borrower, transfer to a relative, joint tenant,
tenants by the entirety resulting from the death of a borrower, or
transfer to an ex-spouse resulting from a divorce decree, legal
separation agreement, or property settlement agreement. The addition of
this section is in accordance with Sec. 341 of the Garn-St Germain
Depository Institutions Act of 1982 (Pub. L. 97-320).
Subpart G--Servicing Accounts With Repayment Problems
A section was added to the proposed regulation to clarify that
lenders may enter into a forbearance agreement provided it includes a
reasonable plan for bringing the account current.
The Agency eliminated the requirement for a lender to obtain prior
Agency approval for protective advances. The Agency feels that lenders
need the ability to immediately procure certain services to protect
their interests as well as the interest of the Government. The time it
takes a lender to obtain Agency approval for protective advances can
increase exposure and could result in a higher cost to the Agency in
the event of a loss. However, protective advances are to be used only
to pay for emergency expenses necessary to protect the security
property. Lenders will be allowed to provide a protective advance only
to pay for emergency repairs needed to protect the security property
only if the borrower is unable to secure an additional loan to pay
these costs or if the borrower has abandoned the property.
Additionally, a lender may advance funds to pay real estate taxes,
local assessments, and hazard or flood
[[Page 70130]]
insurance premiums that are past due in order to protect the lender's
interest. Only acceptable protective advances will be eligible for loss
claim reimbursement. Specific guidance will be provided in the handbook
to assist lenders in determining an acceptable protective advance.
Liquidation
A section on bankruptcy was added to inform lenders of the Agency's
expectations in reasonably servicing an account in bankruptcy. The
expectations of the Agency include: (a) The suspension of collection
and foreclosure actions in accordance with the requirements of the
Bankruptcy Code; and (b) when possible in a Chapter 7 bankruptcy, a
reaffirmation agreement signed by the borrower and approved by the
bankruptcy court prior to discharge, if the lender decides to continue
with the borrower. Additionally, the lender may accept conveyance of
the security property by the trustee in the bankruptcy if the
bankruptcy court has approved the transaction and the lender will
acquire title free and clear of all liens and encumbrances except the
lender's liens.
The voluntary liquidation section has been enhanced to clarify that
a lender may accept a request from a borrower to voluntarily liquidate
the security property by way of refinancing or sale providing the price
reflects at least the property's value as determined by a current
market appraisal. The lender may also accept a deed in lieu of
foreclosure unless the anticipated costs for selling the property,
including any costs required to make the property salable, exceed the
property's appraised value.
To ensure the Agency is in compliance with the Debt Collection Act
and the Department of Treasury and Office of Management and Budget
Circulars, a section was added to the proposed regulation to require
the lender to report to the IRS and credit reporting agencies any debt
that is settled through liquidation.
Subpart H--Collecting on the Guarantee
The section of the current regulation addressing loss payments has
been broken down into several parts in order to clarify the Agency's
policy on collection on the guarantee.
The Agency will no longer require lenders to submit a property
disposition plan for approval prior to disposing of Real Estate Owned
(REO) properties. However, the Agency will provide specific guidance in
the handbook for disposition of REO property, sales price
determinations, and price reductions. By providing clear guidance to
lenders for REO property disposition, the Agency feels that the
efficiency and timeliness of the loss claim process will be enhanced,
which in turn will reduce loss claim costs. This will also reduce
unnecessary paperwork burden on the public. The Agency will monitor
lender REO property disposition performance during servicing reviews.
The Agency has added a section on net recovery value. The section
explains the difference between actual net recovery value and
anticipated net recovery value. The difference between these two
concepts is important to the lender in filing a claim for a loss under
the terms of the guarantee. If the property has been sold at
foreclosure or out of the lender's inventory, actual net recovery value
is determined. However, if the property remains in the lender's
inventory, the anticipated net recovery value is used in the loss claim
calculation.
Current regulations allow a lender up to 6 months from the date
they acquired the property to sell the property from inventory. The
date acquired is considered the date of the foreclosure sale and does
not take into account any applicable redemption period. If the property
remains unsold after 6 months from the date of the foreclosure, a
lender is required to submit a loss claim based on a liquidation
appraisal. The change to this requirement will allow a lender 90 days
to market the property after any required redemption period. Redemption
periods vary from State to State and on average are approximately 6
months in length. This change will allow lenders in all States equal
time to dispose of REO property, as some States have laws which provide
a redemption period to allow a homeowner to redeem their property after
a foreclosure sale.
If the property is located on Native American Indian trust or
restricted land, the lender must notify the Agency if the property has
not sold within 12 months of the foreclosure sale or from the end of
any applicable redemption period, whichever is later. This extended
time frame allows the lender extra flexibility to dispose of the REO
due to restriction, which must be addressed when such properties are
acquired.
List of Subjects
7 CFR Part 1980
Home improvement, Loan Programs-Housing and community development,
Mortgage insurance, Mortgages, Rural areas.
7 CFR Part 3555
Administrative practice and procedure, Conflict of interests,
Credit, Environmental impact statements, Equal credit opportunity, Fair
Housing, Flood insurance, Home improvement, Housing, Loan programs-
Housing and community development, Low and moderate income housing,
Manufactured homes, Mortgage insurance, Mortgages, Rural areas,
Subsidies.
For the reasons set forth in the preamble, Chapters XVIII and XXXV,
title 7, Code of Federal Regulations are proposed to be amended as
follows:
CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT
OF AGRICULTURE
PART 1980--GENERAL
1. The authority citation for part 1980 continues to read as
follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
Subpart D--[Removed and Reserved]
2. Subpart D of part 1980 is removed and reserved.
CHAPTER XXXV--RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE
3. Part 3555, consisting of subparts A through H, is added to read
as follows:
PART 3555--GUARANTEED RURAL HOUSING LOAN PROGRAM
Subpart A--General
Sec.
3555.1 Applicability.
3555.2 Purpose.
3555.3 Civil Rights.
3555.4 Mediation and appeals.
3555.5 Environmental requirements.
3555.6 State and local law.
3555.7 Exception authority.
3555.8 Conflict of interest.
3555.9 Enforcement.
3555.10 Definitions.
3555.11-3555.50 [Reserved]
Subpart B--Lender Participation
3555.51 Lender eligibility.
3555.52 Lender approval.
3555.53 Contracting for loan origination.
3555.54 Sale of loans to approved lenders.
3555.55-3555.100 [Reserved]
Subpart C--Loan Requirements
3555.101 Loan purposes.
3555.102 Loan restrictions.
3555.103 Maximum loan amount.
3555.104 Loan terms.
3555.105 Interest assistance.
3555.106 Recapture.
3555.107 Application for and issuance of the loan guarantee.
3555.108-3555.150 [Reserved]
[[Page 70131]]
Subpart D--Underwriting the Applicant
3555.151 Eligibility requirements.
3555.152 Calculation of income and assets.
3555.153-3555.200 [Reserved]
Subpart E--Underwriting the Property
3555.201 Site requirements.
3555.202 Dwelling requirements.
3555.203 Ownership requirements.
3555.204 Security requirements.
3555.205 Special requirements for condominiums.
3555.206 Special requirements for community land trusts.
3555.207 Special requirements for Planned Unit Developments.
3555.208 Special requirements for manufactured homes.
3555.209-3555.250 [Reserved]
Subpart F--Regular Servicing
3555.251 Servicing responsibility.
3555.252 Required servicing actions.
3555.253 Late payment charges.
3555.254 Final payments.
3555.255 Borrower actions requiring lender approval.
3555.256 Transfer and assumptions.
3555.257 Unauthorized assistance.
3555.258-3555.300 [Reserved]
Subpart G--Servicing Accounts With Repayment Problems
3555.301 General policy.
3555.302 Forbearance.
3555.303 Protective advances.
3555.304 Reamortization.
3555.305 Liquidation.
3555.306-3555.350 [Reserved]
Subpart H--Collecting on the Guarantee
3555.351 Loan guarantee limits.
3555.352 Loss covered by the guarantee.
3555.353 Net recovery value.
3555.354 Loss claim procedures.
3555.355 Reducing or denying the claim.
3555.356 Future recovery.
3555.357-3555.400 [Reserved]
Authority: 5 U.S.C. 301; 42 U.S.C. 1471 et seq.
Subpart A--General
Sec. 3555.1 Applicability.
This part sets forth policies for the Guaranteed Rural Housing Loan
Program operated by the Rural Housing Service. It addresses the
requirements of section 502(h) of the Housing Act of 1949, as amended,
and includes policies regarding originating, servicing, holding and
liquidating guaranteed loans. Any provision regarding the expenditure
of funds under this part is contingent upon the availability of funds.
Sec. 3555.2 Purpose.
The purpose of the guaranteed rural housing loan program is to
provide low- and moderate-income persons who will live in rural areas
with an opportunity to own adequate but modest, decent, safe, and
sanitary dwellings and related facilities. The program offers persons
who do not currently own adequate housing the opportunity to acquire,
build, rehabilitate, improve, or relocate dwellings in rural areas. The
program provides guarantees only for qualified loans that a lender
would not make without a guarantee.
Sec. 3555.3 Civil rights.
The Agency, lenders, and their agents must administer the program
fairly, and in accordance with both the letter and the spirit of all
equal opportunity, equal credit opportunity and fair housing
legislation, and applicable executive orders. Loan guarantees,
services, and benefits provided under this part shall not be denied to
any person based on race, color, national origin, sex, religion,
marital status, familial status, age (provided the applicant has the
capacity to enter into a binding contract), handicap, receipt of income
from public assistance, sexual orientation, or because the applicant
has, in good faith, exercised any right under the Consumer Credit
Protection Act (15 U.S.C. 1601 et seq.). All activities under this part
shall be accomplished in accordance with the Fair Housing Act (42
U.S.C. 3601-3620), and Executive Order 11063 as amended by Executive
Order 12259, as applicable. The Agency's civil rights compliance
requirements are provided in 7 CFR 1901, subpart E.
Sec. 3555.4 Mediation and appeals.
Whenever the Agency makes a decision that will adversely affect a
participant, the participant may proceed with alternative dispute
resolution including mediation and a USDA National Appeals Division
hearing in accordance with part 11 of this title. The participant also
may request an informal review of the situation with the decision
maker. Except when the adverse decision applies to a loss claim, the
applicant or borrower and the lender must participate jointly in the
appeal process. Decisions made by the lender cannot be appealed unless
concurrence by the Agency was required by this subpart and obtained by
the lender.
Sec. 3555.5 Environmental requirements.
(a) Policy. The Agency will consider environmental quality as equal
with economic, social, and other relevant factors in program
development and decision-making processes. The Agency will take into
account potential environmental impacts of proposed projects by working
with applicants, other Federal agencies, American Indian tribes, State
and local governments, and interested citizens and organizations in
order to formulate actions that advance the program's goals in a manner
that will protect, enhance, and restore environmental quality.
(b) Regulatory references. Loan processing and servicing actions
under this part will be completed in accordance with the requirements
of part 1940, subpart G of this title, which addresses environmental
requirements; part 1924, subpart A of this title, which addresses lead-
based paint requirements; and part 1806, subpart B of this title, which
addresses flood insurance.
(c) Agency responsibilities. Responsibility for compliance with the
National Environmental Policy Act and with the Agency's environmental
regulations rests with the Agency, not the guaranteed lender.
(d) Lender and applicant responsibilities. (1) On an as needed
basis, lenders and applicants will assist the Agency in obtaining such
information as the Agency needs to complete its environmental review
and to cooperate in the resolution of environmental problems.
(2) Lenders will become familiar with Agency environmental
requirements, so they can advise applicants and reduce the probability
of unacceptable applications being submitted to the Agency.
(3) The applicant must obtain flood insurance offered under the
National Flood Insurance Act of 1968 if the dwelling is located in an
area identified by FEMA as having special flood hazards.
(4) The lender must determine whether the dwelling is located in a
special flood hazard area, and if so, ensure that the borrower
maintains acceptable flood insurance throughout the term of the loan.
Sec. 3555.6 State and local law.
Lenders will comply with applicable State and local laws and
regulations, including the laws of American Indian tribes. Supplemental
guidance will be issued in the case of any conflict with or significant
differences from provisions of this part.
Sec. 3555.7 Exception authority.
The Administrator of the Agency, or a designee, may make an
exception to any requirement or provision of this part or to address
any omissions in this part, when the Administrator determines that
application of the requirement or provision, or failure to take action
in the case of an omission, would adversely affect the Government's
interest.
Sec. 3555.8 Conflict of interest.
(a) Applicant or borrower responsibility. The applicant or
[[Page 70132]]
borrower must disclose to the lender any prohibited relationship or
association with any Rural Development employee, and the lender must
disclose that information to the Agency.
(b) Lender responsibility. The lender must disclose to the Agency
any prohibited relationship or association it, or any of its employees,
has with any Rural Development employee.
(c) Prohibited relationships and associations. Prohibited
relationships and associations include the following:
(1) Immediate family members, including parents and children,
whether related by blood or marriage, and any household residents;
(2) Close relatives, including grandmother, grandfather, aunt,
uncle, sister, brother, niece, nephew, granddaughter, grandson, or
first cousin, whether related by blood or marriage;
(3) Immediate working relationships, including coworkers in the
same office, subordinates, and immediate supervisors; and
(4) Close business associations, including business partnerships,
joint ventures, or closely-held corporations.
(d) Result of disclosure. Disclosure of prohibited relationships
and associations under this section will not result in applicant,
borrower or lender ineligibility. Disclosures may result in
reassignment of Rural Development employees with regard to the loan
guarantee in question so that no prohibited relationships or
associations exist between the Rural Development employees responsible
for loan guarantee transactions and lenders, borrowers, or applicants.
Sec. 3555.9 Enforcement.
The Agency will take such actions as are appropriate and necessary
to enforce the provisions of these regulations. Such actions will
include, but not be limited to, reduction of the loss claim payment;
termination of the guarantee agreement or any loan servicing agreement;
suspension and debarment of participation in this or other Agency
programs; and any other appropriate administrative, civil, or criminal
actions.
Sec. 3555.10 Definitions.
The definitions in this section apply to this part.
Acceleration. Demand for immediate repayment of the entire balance
of a debt if the covenants in the promissory note, assumption
agreement, or security instruments are breached.
Adjusted income. Income from all household members, which is used
to determine whether an applicant is income-eligible for a guaranteed
loan, or interest assistance, if applicable. Adjusted income provides
for deductions to account for varying household circumstances and
expenses. See Sec. 3555.152 for a complete description of adjusted
income.
Agency. The Rural Housing Service of the U.S. Department of
Agriculture, or its successor agency, formerly the Rural Housing and
Community Development Service, a successor agency to the Farmers Home
Administration.
Agency employee. Any employee of the Rural Housing Service, or any
employee of the Rural Development mission area who carries out section
502 guaranteed loan program functions.
Alien. See ``Qualified alien.''
American Indian Restricted Land. Land or any interest in land which
is held by an individual American Indian or tribe, including any band,
rancheria, colony, pueblo, group, community or nation of Indians or
Alaska Natives, and is subject to Federal restrictions against
alienation or encumbrance.
Amortized payment. Equal monthly payments under a fully amortized
mortgage loan that provides for the scheduled payment of interest and
principal over the term of the loan.
Annual income. The income of all household members from all sources
except those listed in Sec. 3555.152(b).
Applicant. An individual applying to a lender for a guaranteed
loan.
Area Median Income. The median income in a specific locality;
typically a County or Metropolitan Statistical Area (MSA) as determined
by the Department of Housing and Urban Development
Assumption. The procedure whereby title to a security property is
transferred to an eligible transferee who agrees to assume the
obligations of the loan; however, the transferor remains liable.
Borrower. An individual who has received a loan guaranteed under
the guaranteed rural housing loan program.
Community land trust. A private nonprofit community housing
development organization that is established to acquire parcels of
land, held in perpetuity, primarily for conveyance under long-term
ground leases.
Conditional commitment. The Agency's agreement that a proposed loan
will be guaranteed if all conditions and requirements established by
the Agency are met.
Condominium. A form of fee ownership of whole units or separate
portions of multi-unit buildings under the laws of the State where the
property is located which provides the mechanics and facilities for
formal filing and recording of a divided interest in real property,
where the division is vertical as well as horizontal. Fee ownership of
the units in a multi-unit property and joint ownership of the common
areas.
Dealer-contractor. A person, firm, partnership, or corporation
capable of providing complete services for selling, servicing and
developing sites for manufactured homes.
Debarment. An action taken under part 3017 of this title or title
48 of the Code of Federal Regulations to exclude a person or entity
from participating in Federal programs.
Deficient housing. A dwelling that lacks complete plumbing; lacks
adequate heating; is dilapidated or structurally unsound; has an
overcrowding situation that will be corrected with loan funds; or that
is otherwise uninhabitable, unsafe, or poses a health or environmental
threat to the occupant or others.
Disability, person with. See ``Person with a disability.''
Dwelling. A house, manufactured home, or condominium unit, and
related facilities, such as a garage or storage shed.
Elderly family. An elderly family consists of one of the following:
(1) A person who is the head, spouse, or sole member of a household
and who is 62 years of age or older, or who is disabled, and is an
applicant or borrower;
(2) Two or more persons who are living together, at least one of
whom is age 62 or older, or disabled, and who is an applicant or
borrower; or
(3) Where the deceased borrower or spouse in a household was at
least 62 years old or disabled, the surviving household member shall
continue to be classified as an elderly household for the purpose of
determining adjusted income, even though the surviving members may not
meet the definition of an elderly household on their own, provided:
(i) They occupied the dwelling with the deceased household member
at the time of the death;
(ii) If one of the surviving household members is the spouse of the
deceased household member, the surviving household shall be classified
as an elderly family only until the remarriage or death of the
surviving spouse; and
(iii) At the time of the death of the deceased household member,
the dwelling was financed with a guaranteed Rural Housing loan.
Escrow account. An account to which the borrower contributes
monthly payments to cover the anticipated costs of real estate taxes,
hazard and flood insurance premiums, and other related costs.
[[Page 70133]]
Existing dwelling. A dwelling that is more than one year old, or
less than one year old and covered by an approved ten-year warranty.
False information. For the purpose of this part only, information
that the borrower or lender knew or should have known was incorrect and
that was provided or omitted for the purpose of obtaining assistance.
FEMA. The United States Federal Emergency Management Agency.
FHA. The Federal Housing Administration of the United States
Department of Housing and Urban Development.
First-time homebuyer. Individuals who meet any one of the following
three criteria are considered first-time homebuyers.
(1) An individual who has had no ownership interest in a principal
residence during the three-year period ending on the date of loan
closing.
(2) An individual who is a displaced homemaker and who, except for
owning a home with a spouse, has had no ownership interest in a
principal residence during the three-year period ending on the date of
loan closing. Displaced homemakers include any individual who is:
(i) An adult;
(ii) Unemployed or underemployed;
(iii) Experiencing difficulty in obtaining or upgrading employment;
and
(iv) In recent years has worked primarily without remuneration to
care for the home and family, but has not worked full-time, full-year
in the labor force.
(3) An individual who is a single parent and who, except for owning
a home with a spouse, has had no ownership interest in a principal
residence during the three-year period ending on the date of loan
closing. Single parents include any individual who is:
(i) Unmarried or legally separated from a spouse; and
(ii) Has custody or joint custody of one or more children, or is
pregnant.
Floor interest rate. The rate of interest, determined at the time
of loan closing, that the borrower would pay if the note were amortized
at the rate corresponding to the borrower's income range as determined
in accordance with Sec. 3555.105(b).
Forbearance agreement. An agreement between the lender and the
borrower providing for temporary suspension of payments or a repayment
plan that calls for periodic payments of less than the normal monthly
payment, periodic payments at different intervals, etc. to bring the
account current.
Freddie Mac. Federal Home Loan Mortgage Corporation.
Full-time student. A person who carries at least the minimum number
of credit hours considered to be full-time by the university, college,
or vocational school in which the person is enrolled.
Funded buydown account. An escrow account funded by the lender,
seller, or through a third party gift, from which monthly payments are
released directly to the lender to reduce the amount of interest on a
loan, thereby improving an applicant's repayment ability.
Guaranteed loan. A loan guaranteed under section 502 of the Housing
Act of 1949. Under the guarantee, the owner of the loan note may be
reimbursed for all or part of a loss incurred if a borrower defaults on
a loan.
Household. All persons expected to be living in the dwelling as
principal residence, except for live-in aides, foster children, and
foster adults.
Housing Act of 1949. The Act which, in part, provides the authority
for single family housing programs, codified at 42 U.S.C. 1471, et seq.
HUD. The United States Department of Housing and Urban Development.
Interest assistance. Agency assistance available to eligible
borrowers that reduces the effective interest rate on the guaranteed
loan.
IRS. The Internal Revenue Service of the United States Department
of the Treasury.
Lender. The entity making, holding, or servicing a loan that is
guaranteed under the provisions of this part.
Live-in aide. A person who lives with an elderly or disabled person
and is essential to that person's care and well-being, not obligated
for the person's support, and would not be living in the unit except to
provide the support services.
Low-income. An adjusted income that is greater than the HUD
established very low-income limit, but that does not exceed the HUD
established low-income limit (generally 80 percent of median income
adjusted for household size) for the county or Metropolitan Statistical
Area where the property is or will be located.
Manufactured home. A structure that is built to Federally
Manufactured Home Construction and Safety Standards and the Agency's
Thermal Performance Standards. It is transportable in one or more
sections, which in the traveling mode is ten-body feet (3.048 meters)
or more in width, and when erected on site is 400 or more square feet
(37.16 square meters), and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent
foundation when connected to the required utilities. It is designed and
constructed for permanent occupancy by a single family and contains
permanent eating, cooking, sleeping, and sanitary facilities. The
plumbing, heating, and electrical systems are contained in the
structure. A permanent foundation is required.
Market value. The value of the property as determined by a current
appraisal made in accordance with the Uniform Standards of Professional
Appraisal Practices.
Median income. The area median income, adjusted for family size, as
established by HUD.
Moderate income. An adjusted income that is greater than the HUD-
established low-income limit, but that does not exceed 115 percent of
median income adjusted for household size for the county or
Metropolitan Statistical Area where the property is or will be located.
Modest housing. A property that is considered modest for the area,
with a cost that does not exceed the applicable limit established under
section 203 (b) of the National Housing Act (12 U.S.C. 1709). In
addition, the property must not be designed for income-producing
activities or have an in-ground swimming pool.
Mortgage. A form of security instrument or consensual lien on real
property including a real estate mortgage and a deed of trust.
Mortgage Credit Certificates. A credit to reduce the applicant's
Federal income tax liability, which improves an applicant's repayment
ability.
Net family assets. The value of assets available to a household, as
contained in Sec. 3555.152(d).
Net recovery value. The amount available to apply to the
outstanding principal balance after considering the value of the
security property and other amounts recovered, and deducting the costs
associated with liquidation, acquisition and sale of the property. Net
recovery value is calculated differently depending on the type of
disposition, as contained in Sec. 3555.353.
New dwelling. A dwelling that is to be constructed, or an already-
existing dwelling that is less than one year old and is not covered by
an approved ten-year warranty.
Participant. For the purpose of appeals, a participant is any
individual or entity that has applied for, or whose right to
participate in or receive a payment, loan guarantee, or other benefit,
is affected by an Agency decision and meets the definition of
``participant'' in Sec. 11.1 of this title.
[[Page 70134]]
Person with a disability. Any person who has a physical or mental
impairment that substantially limits one or more major life activities,
including functions such as caring for one's self, performing manual
tasks, walking, seeing, hearing, speaking, breathing, learning and
working, has a record of such an impairment, or is regarded as having
such an impairment.
PITI ratio. The amount to be paid by the borrower for principal,
interest, taxes, and insurance (PITI), divided by repayment income.
This is often known as the ``front-end ratio.''
Planned Unit Development. For the purpose of this definition, a
Condominium is not a Planned Unit Development (PUD). A PUD is a
development that has all of the following characteristics:
(1) The individual unit owners own a parcel of land improved with a
dwelling. This ownership is not in common with other unit owners;
(2) The development is administered by a homeowners association
that owns and is obligated to maintain property and improvements within
the development (for example, greenbelts, recreation facilities and
parking areas) for the common use and benefit of the unit owners; and
(3) The unit owners have an automatic, nonseverable interest in the
homeowners association and pay mandatory assessments.
Prior lien. A lien against the security property that is superior
in right to the lender's debt instrument.
Property. The land, dwelling, and related facilities for which the
applicant will use guaranteed funds.
Qualified alien. An alien who, at the time the alien applies for,
receives, or attempts to receive Federal public benefit, in accordance
with the Immigration and Nationality Act, is:
(1) An alien who is lawfully admitted for permanent residence;
(2) An alien who is granted asylum;
(3) A refugee who is admitted to the United States;
(4) An alien who is paroled into the United States for a period of
at least 1 year;
(5) An alien whose deportation is being withheld; or
(6) An alien who is granted conditional entry prior to April 1,
1980.
Real estate taxes. Taxes and the annual portion of assessments
estimated to be due and payable on the property.
Recapture. The amount of interest assistance to be repaid when the
borrower transfers title or ceases to occupy the property.
Recipient. Any person or entity that receives benefits or
assistance under the guaranteed loan program, including a lender that
receives a loan guarantee, or a borrower who receives a guaranteed loan
or interest assistance.
REO. (Real Estate Owned) Real estate that formerly served as
security for a guaranteed loan and for which the lender holds title.
Repayment income. Used to determine whether an applicant has the
ability to make monthly loan payments. Repayment income may include
amounts excluded for the purpose of determining adjusted income. See
Sec. 3555.152(a) for a complete description of repayment income.
Rural area: A rural area is any one of the following:
(1) Open country which is not part of or associated with an urban
area.
(2) Any town, village, city, or place, including the immediately
adjacent densely settled area, which is not part of or associated with
an urban area and which:
(i) Has a population not in excess of 10,000 if it is rural in
character; or
(ii) Has a population in excess of 10,000 but not in excess of
20,000, is not contained within a Metropolitan Statistical Area, and
has a serious lack of mortgage credit for low-and moderate-income
households as determined by the Secretary of Agriculture and the
Secretary of HUD.
(3) An area classified as a rural area prior to October 1, 1990
(even if within a Metropolitan Statistical Area), with a population
exceeding 10,000, but not in excess of 25,000, which is rural in
character, and has a serious lack of mortgage credit for low-and
moderate-income families. This is effective through receipt of census
data for the year 2000.
Rural Development. A mission area within USDA which includes the
Rural Housing Service, Rural Utilities Service, and Rural Business-
Cooperative Service.
Scheduled payment. The monthly installment on a promissory note
plus escrow payments, as modified by any interest assistance agreement
or forbearance agreement.
Secured loan. A loan that is collateralized by property so that in
the event of a default on the loan, the property may be sold to pay
down the debt.
Security instrument. The mortgage or deed of trust that secures the
promissory note or assumption agreement.
Security property. All the property that serves as collateral for a
guaranteed loan.
Supplemental loan. A guaranteed loan made in conjunction with a
transfer and assumption to provide funds to complete the transaction.
Suspension. An action taken under part 3017 of this title or title
48 of the Code of Federal Regulations to exclude a person or entity
from participation in Federal programs for a temporary period, pending
completion of an investigation of wrongdoing.
Total debt ratio. The amount paid by the borrower for PITI and any
recurring monthly debt, divided by repayment income. This is often
known as the ``back-end ratio.''
Unauthorized assistance. Any guaranteed loan or interest assistance
for which there was no regulatory or statutory authorization, or for
which the borrower was not eligible.
United States citizen. An individual who resides as a citizen in
any of the 50 States, the District of Columbia, the Commonwealth of
Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, the
Commonwealth of the Northern Marianas, the Federated States of
Micronesia, the Republic of Palau, or the Republic of the Marshall
Islands.
USDA. The United States Department of Agriculture.
VA. The United States Department of Veterans Affairs.
Value appreciation. The current market value of the property minus
the balance due prior lienholders (if any), the unpaid balance of the
debt, unreimbursed closing costs (if any), principal reduction, the
original equity (if any) of the borrower, and the value added by
capital improvements.
Veterans preference. A preference extended to any person applying
for a loan guarantee under this part who served on active duty and has
been discharged or released from the active forces on conditions other
than dishonorable from the United States Army, Navy, Air Force, Marine
Corps, or Coast Guard. The preference applies to the service person, or
the family of a deceased serviceperson who died in service before the
termination of such war or such period or era. The applicable time
frames are:
(1) During the period of April 6, 1917, through March 31, 1921;
(2) During the period of December 7, 1941, through December 31,
1946;
(3) During the period of June 27, 1950, through January 31, 1955;
(4) For a period of more than 180 days, any part of which occurred
after January 31, 1955, but on or before May 7, 1975; or
(5) During the period beginning August 2, 1990, and ending the date
prescribed by Presidential Proclamation or law.
[[Page 70135]]
Secs. 3555.11-3555.50 [Reserved]
Subpart B--Lender Participation
Sec. 3555.51 Lender eligibility.
To be approved to participate in the Guaranteed Rural Housing Loan
Program, a lender must meet the requirements described in this section.
(a) Ability to underwrite and service loans. The lender must have a
demonstrated ability to underwrite and service single family loans. A
lender will be considered to have such a demonstrated ability if it
qualifies as one of the following:
(1) A State Housing Agency;
(2) A lender approved as a supervised or nonsupervised mortgagee by
the HUD with direct endorsement authority for submission of
applications for Federal Housing Mortgage Insurance;
(3) A lender approved as a supervised or nonsupervised mortgagee by
VA with authority to close loans on the automatic basis;
(4) A lender approved by Fannie Mae for single family loans;
(5) A lender approved by Freddie Mac for single family loans;
(6) A Farm Credit System institution that provides documentation of
its ability to underwrite and service single family loans;
(7) A lender participating in other Rural Development or Farm
Service Agency guaranteed loan programs that provides documentation of
its ability to underwrite and service single family loans; or
(8) A Federally-supervised lender that provides documentation of
its ability to underwrite and service single family loans. Acceptable
sources of supervision include:
(i) Being a member of the Federal Reserve System;
(ii) The Federal Deposit Insurance Corporation (FDIC);
(iii) The National Credit Union Administration (NCUA); or
(iv) The Office of Thrift Supervision (OTS).
(b) Program participation requirements. Lenders and their agents
must comply with the following requirements:
(1) Keep up to date on, and comply with, all Agency regulations;
(2) Cooperate fully with Agency reporting and monitoring processes;
(3) Comply with limitations on loan purposes, loan limitations,
interest rates, and loan terms;
(4) Inform the Agency in advance of any sale, transfer, or change
of servicers of any Agency guaranteed loan;
(5) Maintain reasonable and prudent business practices;
(6) Remain responsible for servicing even if servicing has been
contracted to a third party;
(7) Use Rural Development, HUD, Fannie Mae, or Freddie Mac forms;
(8) Maintain eligibility under paragraph (a) of this section;
(9) Notify the Agency if there are any material changes in
organization or practices;
(10) Remain in good standing, and neither debarred nor suspended
from participation in Federal programs;
(11) Notify the Agency in the event of bankruptcy or insolvency of
the lender;
(12) Remain free from default and delinquency on any debt owed to
the Federal government;
(13) Maintain a fidelity and omissions policy consistent with the
volume of loans originated, and listing the Agency as the loss payee;
and
(14) Allow the Agency or any Agency's representative access to the
lender's records, including on-site reviews of the lender's operation
and the operations of any agent of the lender, for the purpose of
verifying compliance with Agency regulations and guidelines.
Sec. 3555.52 Lender approval.
(a) Initial approval. The lender must apply for and receive
approval from the Agency to participate in the program.
(b) Termination of approval. Once approved, the lender will remain
eligible to participate in the program unless the Agency determines
that one of the following has occurred.
(1) Lapse of any eligibility requirement. In the event that a
lender fails to comply with any of the requirements described in
Sec. 3555.51, the lender must notify the Agency immediately. The Agency
will determine whether the change warrants termination of the lender's
approval.
(2) Unsatisfactory lender performance or Government convenience. If
the Agency determines that continued lender approval is not in the best
interest of the Government, the Agency may terminate the lender's
approval.
(3) Voluntary withdrawal. The lender may choose to end
participation in the program at any time.
(c) Results of termination of approval or withdrawal from the
program. If the Agency terminates a lender's approval or the lender
withdraws from the program, the Agency may:
(1) Require that the lender transfer servicing of its loans to an
approved lender; and
(2) Pursue additional actions including, but not limited to,
suspension or debarment.
Sec. 3555.53 Contracting for loan origination.
Lenders may contract with brokers, nonapproved lenders, or other
loan originators for loan origination services, closing services, or
both, provided the loan is transferred immediately after closing to the
approved lender to which the guarantee will be issued. The approved
lender is responsible for underwriting the loan, obtaining the
conditional commitment, and ensuring that the loan is properly closed.
Sec. 3555.54 Sale of loans to approved lenders.
Lenders may sell guaranteed loans only to other Agency approved
lenders, Fannie Mae, or Freddie Mac. In such a sale, the purchasing
lender acquires all rights of the selling lender under the loan note
guarantee, and assumes all of the selling lender's obligations
contained in any note, security instrument, or loan note guarantee in
connection with the loan purchased. The purchasing lender will be
subject to any defenses, claims, or offsets that the Agency would have
had against the selling lender if the selling lender had continued to
hold the loan. The lender must notify the Agency immediately upon the
sale or transfer of servicing of a loan.
Secs. 3555.55-3555.100 [Reserved]
Subpart C--Loan Requirements
Sec. 3555.101 Loan purposes.
Guaranteed loan funds must be used to acquire a new or existing
dwelling to be used by the applicant as a principal residence.
(a) Loan funds may be used for:
(1) The construction of a new dwelling;
(2) The cost of acquisition of an existing dwelling;
(3) The cost of repairs associated with the acquisition of an
existing dwelling; or
(4) Acquisition and relocation of an existing dwelling.
(b) Loan funds also may be used to pay for the following items.
(1) Reasonable and customary expenses related to obtaining the
loan, including:
(i) Legal, architectural, and engineering fees;
(ii) Title clearance, title insurance, and loan closing costs;
(iii) Transfer taxes and recordation fees;
(iv) Appraisal, surveying, environmental, tax monitoring, and
technical services;
(v) Reasonable and customary lender fees and charges;
[[Page 70136]]
(vi) For low-income borrowers only, reasonable and customary loan
discount points; and
(vii) Homeownership education, for first-time homebuyers only.
(2) Special design features or equipment when necessary because of
a physical disability of the applicant or a member of the household.
(3) Reasonable connection fees, assessments, or the pro rata
installment costs for utilities such as water, sewer, electricity and
gas for which the borrower is responsible.
(4) The prorated portion of real estate taxes that are due and
payable on the property at the time of closing and for the
establishment of escrow accounts for real estate taxes, hazard and
flood insurance premiums, and related costs.
(5) Purchase and installation of essential equipment in the
dwelling, including but not limited to: ranges, refrigerators, washers,
and dryers.
(6) Purchase and installation of energy-saving measures.
(7) Site preparation including grading, foundation plantings,
seeding or sodding, trees, walks, yard fences, and driveways to a
building site.
(8) A supplemental loan to provide funds for seller equity or
essential repairs when an existing guaranteed loan is assumed
simultaneously.
(c) Refinancing is permitted only in the following situations:
(1) The loan may be used for permanent financing when financing to
construct a new dwelling, or to improve an existing dwelling, is
arranged as a part of the loan package.
(2) In the case of loans for a site without a dwelling, refinancing
is permitted if:
(i) The debt to be refinanced was incurred for the sole purpose of
purchasing the site;
(ii) The applicant is unable to acquire adequate housing without
refinancing; and
(iii) An appropriate dwelling has been constructed on the site.
Sec. 3555.102 Loan restrictions.
A guarantee will not be issued if loan funds are to be used for:
(a) Purchase of an existing manufactured home, except as provided
in Sec. 3555.208(b)(3);
(b) Purchase or improvement of income-producing land or buildings
to be used principally for income-producing purposes;
(c) Loan discount points, except as provided in
Sec. 3555.101(b)(1)(vi);
(d) Refinancing, except as provided in Sec. 3555.101(c); or
(e) Payments on a lease.
Sec. 3555.103 Maximum loan amount.
The amount of the loan must not exceed the lesser of:
(a) The maximum dollar limitation provided in section 203(b)(2) of
the National Housing Act of 1949, (12 U.S.C. 1702); or
(b) The market value of the property.
Sec. 3555.104 Loan terms.
(a) Interest rate. The loan must be written at an interest rate
that is fixed over the term of the loan and shall be negotiated between
the lender and borrower. In no case may the maximum interest rate
exceed the maximum rate published by the Agency through a Notice in the
Federal Register.
(b) Repayment period. The loan term will be 30 years.
(c) Repayment schedule. Amortized payments will be due and payable
monthly.
(d) Negative amortization. The loan note must not provide for
interest on interest.
Sec. 3555.105 Interest assistance.
Subject to the availability of funds, the Agency may provide
interest assistance to eligible borrowers.
(a) Eligibility for interest assistance. (1) Borrowers whose loan
was approved as a subsidized guaranteed loan between April 17, 1991,
and September 30, 1991, and executed Form RD 1980-12, ``Master Interest
Assistance and Shared Equity Agreement With Promissory Note,'' at loan
closing, are eligible to receive interest assistance if they:
(i) Have not sold or transferred the property;
(ii) Occupy the property as a principal residence; and
(iii) Qualify for at least $20.00 per month interest assistance.
(2) If a borrower ceases to receive interest assistance, they must
have an adjusted household income that is at or below the applicable
low-income limit in order to qualify to receive interest assistance
again.
(b) Floor interest rate. The floor interest rate is determined by
comparing the household's adjusted income to the adjusted median income
for the area in which the security property is, or will be, located.
The following chart is used to determine the floor interest rate paid
by households that receive interest assistance.
Percentage of Median Income and the Floor Interest Rate
[Figures are in percents]
----------------------------------------------------------------------------------------------------------------
When the adjusted income for the household is-- Then the floor High cost area
--------------------------------------------------------------------------------- interest rate floor interest
Equal to or more than But less than is \1\ rate is
----------------------------------------------------------------------------------------------------------------
0.................................... 60% of adjusted median income...... 3 3
60.................................... 65% of adjusted median income...... 4 3
65.................................... 70% of adjusted median income...... 5 4
70.................................... 75% of adjusted median income...... 6 5
75.................................... 80% of adjusted median income...... 7 6
80.................................... 90% of adjusted median income...... 8 7
90.................................... 100% of adjusted median income..... 9 8
100.................................... 110% of adjusted median income..... 10 9
110.................................... 115% of adjusted median income..... 11 10
115% of adjusted median income.............................................. 12 11
----------------------------------------------------------------------------------------------------------------
\1\ Or note rate, whichever is less; in no case will the floor interest rate be less than 3 percent.
(c) High cost area. (1) A borrower who received a loan in a
designated high cost area will be granted an additional 1 percent
interest assistance in order to assist the borrower in obtaining
financial assistance.
(2) The change in designation to (or from) a high cost area will
not affect existing loans.
(3) A borrower's loan eligibility for high cost designation is
determined at the time of issuance of the Conditional Commitment for
the loan guarantee.
[[Page 70137]]
(d) Annual interest assistance review. (1) The lender must review
annually each borrower's eligibility for continued interest assistance
and determine the appropriate level of assistance. As part of renewal
for interest assistance, borrowers must submit documentation requested
for the review, and must continue to occupy the property as a principal
residence.
(2) If the renewal is not completed before the expiration date of
the existing agreement, the effective date of the renewal will be
either the expiration date of the previous agreement if an Agency or
lender error caused the delay, or the next due date after the renewal
is approved in all other cases.
(3) The borrower must notify the lender whenever household income
increases by $100 or more per month. The household may also report
decreases in income of $100 or more per month and which may result in
the borrower being eligible for at least an additional $20 interest
assistance per month. If the change in the household's income will
cause the payment for principal and interest to change, the household's
interest assistance may be adjusted for a new 12-month period. The new
agreement will be effective on the due date following the date the
borrower's information is verified by the lender.
(e) Processing fee. The Agency will pay the lender a fee for each
Interest Assistance Agreement processed, unless the Interest Assistance
Agreement was incorrect due to the lender's error.
(f) Overpayment of interest assistance. When the lender becomes
aware of circumstances that have resulted in an overpayment of interest
assistance for any reason, the following actions will be taken:
(1) The lender must immediately notify the borrower and the Agency;
(2) The interest assistance agreement will be corrected; and
(3) A repayment agreement acceptable to the Agency will be reached.
(g) Cancellation of interest assistance. The lender must notify the
Agency that the borrower no longer qualifies for interest assistance
if:
(1) The borrower ceases to occupy the property;
(2) The security property is sold or title to the property is
transferred; or
(3) The borrower qualifies for interest assistance of less than $20
per month.
(h) Assumed loans. Loans which were approved as subsidized
guaranteed loans between April 17, 1991, and September 30, 1991, and
are assumed by a new borrower are not eligible for interest assistance
regardless of the income of the new owner.
Sec. 3555.106 Recapture.
Borrowers with guaranteed loans may be required to repay interest
assistance. Amounts to be recaptured are due and payable when the
borrower transfers title or ceases to occupy the property. If an entity
other than the Agency provides assistance to a borrower and requires
recapture, the Agency will collect its recapture amounts prior to
recapture by the other entity.
(a) Amount to be recaptured. The maximum amount to be recaptured is
the lesser of:
(1) The amount of interest assistance received; or
(2) 50 percent of the value appreciation.
(b) Assumed loans. When a loan subject to recapture is assumed, the
recapture amount must be paid in full by the seller, unless title is
transferred and the loan is assumed under Sec. 3555.256(d). Under this
exception, recapture amounts will not be due at the time the loan is
assumed; however, when the new borrower transfers title or ceases to
occupy the property, all interest assistance subject to recapture
before and after the assumption must be paid in full.
Sec. 3555.107 Application for and issuance of the loan guarantee.
(a) Processing of applications. In general, the Agency will process
loan guarantee applications in the order that completed applications
are received.
(1) When funding is not available, applications will be placed on a
waiting list, with priority given to applications submitted on behalf
of first-time homebuyers.
(2) In the case of applications with equivalent priority status
that are received on the same day, preference will be given to those
qualifying for veteran's preference.
(b) Appraisals. The lender must supply, as part of the application
package, a current appraisal of the property for which the guarantee is
requested. Appraisals must be conducted in accordance with the Uniform
Standards of Professional Appraisal Practices.
(c) Environmental requirements. The lender will meet all its
responsibilities in accordance with Sec. 3555.5.
(d) Issuance of a conditional commitment. The lender must
demonstrate that all the general loan, applicant, and site requirements
of this part are met before the Agency will issue a conditional
commitment.
(e) Loan guarantee fee. The lender must pay a fee of up to 1
percent of the loan amount, the cost of which may be passed on to the
borrower. Once the guarantee has been issued, the fee will not be
refunded.
(f) Proper closing. The lender must ensure that any loan to be
guaranteed is properly closed using documents acceptable to the Agency.
(g) Issuance of the guarantee. The loan guarantee does not take
effect until:
(1) The lender transmits the required guarantee fee in accordance
with Sec. 3555.107(e), the lender certification form provided by the
Agency, and loan closing documents to the Agency;
(2) Any construction or rehabilitation, except exterior development
as described in Sec. 3555.202(d) is complete; and
(3) The Agency issues the loan guarantee document.
Secs. 3555.108-3555.150 [Reserved]
Subpart D--Underwriting the Applicant
Sec. 3555.151 Eligibility requirements.
(a) Income eligibility. At the time of loan approval, the
household's adjusted income must not exceed the applicable moderate-
income limit for the area.
(b) Citizenship status. Applicants must be United States citizens
or qualified aliens, as defined in Sec. 3555.10.
(c) Principal residence. Applicants must agree to and have the
ability to occupy the dwelling as a principal residence on a permanent
basis. The Agency will not guarantee loans for temporary housing.
(d) Eligibility of current homeowners. Current homeowners are
eligible for guaranteed loans: Provided, that by closing of the
guaranteed loan, they do not own nor are they financially responsible
for another home or other real property.
(e) Legal capacity. Applicants must have the legal capacity to
incur the loan obligation, or have a court-appointed guardian or
conservator who is empowered to obligate the applicant in real estate
matters.
(f) Suspension or debarment. Applicants who are suspended or
debarred from participation in Federal programs under part 3017 of this
title or title 48 of the Code of Federal Regulations are not eligible
for loan guarantees.
(g) Repayment ability. Applicants must demonstrate adequate
repayment ability.
(1) An applicant is considered to have adequate repayment ability
when the monthly amount required for payment of principal, interest,
taxes, and insurance (PITI) does not exceed 29 percent of the
applicant's repayment income, and the monthly amount required to pay
PITI plus recurring
[[Page 70138]]
monthly debts does not exceed 41 percent of the applicant's repayment
income.
(2) Repayment ratios may exceed the percentages specified in
paragraph (g)(1) of this section if the lender determines that
compensating factors demonstrate that the household has a higher
repayment ability and the lender obtains Agency approval.
(3) If an applicant does not meet the repayment ability
requirements, the applicant can increase repayment ability by having
other household members join the application.
(4) Mortgage Credit Certificates may be considered in determining
an applicant's repayment ability.
(5) A funded buydown account may be used to improve repayment
ability when all of the following requirements are met.
(i) The interest rate must be bought down to no more than 2
percentage points below the note rate.
(ii) The interest rate paid by the borrower must increase to the
note rate within 2 years of loan closing, with an increase of no more
than 1 percentage point annually.
(iii) Funds must be placed in an escrow account with monthly
releases scheduled directly to the lender.
(iv) Funds must be placed with a Federally-or state-regulated
lender.
(v) The escrow account must be fully funded for the buydown period.
(vi) The borrower is not permitted to fund the escrow account and
must not be required to repay the funds.
(h) Credit qualifications. Applicants must meet the following
credit qualifications:
(1) Applicants must have a credit history that indicates reasonable
ability and willingness to meet debt obligations. Indicators of
unacceptable credit include:
(i) An outstanding judgment obtained by the United States in a
Federal court, other than the United States Tax Court;
(ii) A delinquent Federal debt;
(iii) Three or more debt payments more than 30 days late within the
last 12 months;
(iv) A foreclosure which has been completed within the last 36
months;
(v) An outstanding Internal Revenue Service (IRS) tax lien or any
other outstanding tax liens with no satisfactory arrangement for
payment;
(vi) A court-created or court-affirmed obligation or judgment
caused by nonpayment that is currently outstanding or has been
outstanding within the last 12 months, except for those excluded in
paragraph (h)(2) of this section;
(vii) Two or more rent payments paid 30 or more days late within
the last two years. If the applicant has experienced no other credit
problems in the past 2 years, only 1 year of rent history will be
evaluated. Rent payment history requirements may be waived by the
lender if the guaranteed loan will reduce shelter costs significantly
and contribute to an improved repayment ability;
(viii) Outstanding collection accounts with a record of irregular
payment with no satisfactory arrangements for repayment, or collection
accounts that were paid in full within the last 6 months;
(ix) Non-Agency debts written off within the last 36 months unless
paid in full at least 12 months ago; and
(x) Agency debts that were debt settled within the last 36 months,
or are being considered for debt settlement.
(2) The following will not be considered indicators of unacceptable
credit:
(i) A bankruptcy in which debts were discharged more than 36 months
prior to the date of application or where an applicant successfully
completed a bankruptcy debt restructuring plan and has demonstrated a
willingness to meet obligations when due for the 12 months prior to the
date of application; and
(ii) A judgment satisfied more than 12 months before the date of
application.
(3) The lender may consider mitigating circumstances to establish
the borrower's intent for good credit (except when an applicant is
delinquent on a Federal debt or has an outstanding judgment obtained by
the United States in a Federal Court, other than the United States Tax
Court) when the applicant provides documentation that:
(i) The circumstances were of a temporary nature and have been
removed; or
(ii) The loan will significantly reduce the applicant's shelter
costs, which will result in enhanced debt repayment ability.
(i) Homeownership education. The lender must ensure that borrowers
who are first-time homebuyers, prior to loan closing, obtain education
that adequately prepares them for the obligations of homeownership.
Sec. 3555.152 Calculation of income and assets.
(a) Repayment income. Repayment income is the annual amount of
adequate and dependable income from all sources that those household
members who are parties to the promissory note are expected to receive,
except for any student financial aid received by household members for
tuition, fees, books, equipment, materials, and transportation.
Repayment income is used to determine the applicant's ability to repay
a loan.
(b) Annual income. Annual income is the income of all household
members from all sources, including, but not limited to, net family
assets as defined in paragraph (d) of this section except for the
following:
(1) Earned income of persons under the age of 18 unless they are an
applicant or a spouse of a member of the household;
(2) Payments received for the care of foster children or foster
adults;
(3) Amounts granted for, or in reimbursement of, the cost of
medical expenses;
(4) Earnings of each full-time student 18 years of age or older,
except the head of household or spouse, that are in excess of any
amount determined pursuant to 24 CFR 5.609(c);
(5) Temporary, nonrecurring, or sporadic income (including gifts);
(6) Lump sum additions to family assets such as inheritances;
capital gains; insurance payments under health, accident, or worker's
compensation policies; settlements for personal or property losses; and
deferred periodic payments of supplemental security income and Social
Security benefits received in a lump sum;
(7) Any earned income tax credit;
(8) Adoption assistance in excess of any amount determined pursuant
to 24 CFR 5.609(c);
(9) Amounts received by the family in the form of refunds or
rebates under State or local law for property taxes paid on the
dwelling;
(10) Amounts paid by a State agency to a family with a
developmentally disabled family member living at home to offset the
cost of services and equipment needed to keep the developmentally
disabled family member at home;
(11) The full amount of any student financial aid; and
(12) Any other revenue exempted by a Federal statute, a list of
which is available from any Rural Development office.
(c) Adjusted income. Adjusted income is used to determine program
eligibility and the amount of payment subsidy, if any, for which the
household qualifies. Adjusted income is annual income as defined in
paragraph (b) of this section, less any of the following deductions for
which the household is eligible.
(1) A reduction for each family member, except the head of
household or spouse, who is under 18 years of age, 18 years of age or
older with a disability, or a full-time student, the amount of which
will be determined pursuant to 24 CFR 5.611.
[[Page 70139]]
(2) A deduction of reasonable expenses for the care of a child 12
years of age or under that:
(i) Enables a family member to work, to actively seek work, or to
further a member's education;
(ii) Are not reimbursed or paid by another source; and
(iii) In the case of expenses to enable a family member to work, do
not exceed the amount of income, including the value of any health
benefits, earned by the family member enabled to work.
(3) A deduction of reasonable expenses related to the care of
household members with disabilities that:
(i) Enable a family member to work, to actively seek work, or to
further a member's education;
(ii) Are not reimbursed from insurance or another source; and
(iii) Are in excess of 3 percent of the household's annual income.
(4) For any elderly family, a deduction in the amount determined
pursuant to 24 CFR 5.611.
(5) For elderly and disabled families only, a deduction for
household medical expenses that are not reimbursed from insurance or
another source and which, in combination with any expenses related to
the care of household members with disabilities described in paragraph
(c)(3) of this section, are in excess of 3 percent of the household's
annual income.
(d) Net family assets. Income from net family assets must be
included in the calculation of annual income.
(1) Net family assets include the cash value of:
(i) Equity in real property, other than the dwelling or site;
(ii) Cash on hand and funds in savings or checking accounts;
(iii) Amounts in trust accounts that are available to the
household;
(iv) Stocks, bonds, and other forms of capital investments that are
accessible to the applicant without retiring or terminating employment;
(v) Lump sum receipts such as lottery winnings, capital gains, and
inheritances;
(vi) Personal property held as an investment; and
(vii) Any value, in excess of the consideration received, for any
business or household assets disposed of for less than fair market
value during the 2 years preceding the income determination. The value
of assets disposed of for less than fair market value shall not be
considered if they were disposed of as a result of foreclosure,
bankruptcy, or a divorce or separation settlement.
(2) Net family assets do not include:
(i) Interest in American Indian restricted land;
(ii) Cash on hand which will be used to reduce the amount of the
loan;
(iii) The value of necessary items of personal property;
(iv) Assets that are part of the business, trade, or farming
operation of any member of the household who is actively engaged in
such operation;
(v) Amounts in voluntary retirement plans such as individual
retirement accounts (IRAs), 401(k) plans, and Keogh accounts (except at
the time interest assistance is initially granted); and
(vi) The value of an irrevocable trust fund or any other trust over
which no member of the household has control.
Secs. 3555.153-3555.200 [Reserved]
Subpart E--Underwriting the Property
Sec. 3555.201 Site requirements.
(a) Rural areas. The Agency will only guarantee loans made in rural
areas designated by the Agency. However, if a rural area designation is
changed to nonrural:
(1) Existing conditional commitments in the former rural area will
be honored; and
(2) A supplemental loan may be made in conjunction with a transfer
and assumption of a guaranteed loan.
(b) Site standards. Sites must be developed in accordance with any
standards imposed by a State or local government and must meet all of
the following requirements.
(1) The value of the site, excluding the dwelling and any
outbuildings, must not exceed 30 percent of the market value of the
property, except that if the value of the site is typical for the area
and the site is not large enough to subdivide into more than one site
under existing zoning ordinances, the 30 percent limitation may be
exceeded.
(2) The site must not include farm service buildings, but small
outbuildings such as a storage shed may be included.
(3) The site must be contiguous to and have direct access from a
street, road, or driveway. Streets and roads must be hard surfaced or
all-weather surfaced and arrangements must be in place to ensure that
needed maintenance will be provided.
(4) The site must be supported by adequate utilities and water and
wastewater disposal systems.
Sec. 3555.202 Dwelling requirements.
(a) Modest dwelling. Dwellings financed with a guaranteed loan must
be considered modest housing for the area as defined in Sec. 3555.10.
(b) New dwellings. New dwellings must meet the thermal standards
and be constructed in accordance with certified plans and
specifications as described in part 1924, subpart A, of this title. To
ensure acceptable construction quality, the lender must obtain:
(1) Documentation of acceptable construction quality and evidence
of a 1-year builder's warranty; or
(2) A final inspection report and evidence of a 10-year builder's
warranty.
(c) Existing dwellings. Existing dwellings must:
(1) Be structurally sound;
(2) Be functionally adequate;
(3) Be in good repair, or to be placed in good repair with loan
funds;
(4) Have adequate and safe electrical, heating, plumbing, water,
and wastewater disposal systems;
(5) Be free of termites and other wood damaging pests and
organisms; and
(6) Meet the thermal standards specified in part 1924, subpart A of
this title.
(d) Escrow account for exterior development. If a dwelling is
complete with the exception of exterior development work, the Agency
may guarantee the loan if the following conditions are met:
(1) The exterior cannot be completed immediately because of weather
conditions;
(2) All unfinished work will be completed within 120 calendar days
of loan closing;
(3) The unfinished work will not affect habitability; and
(4) The lender establishes an escrow account at closing funded at
150 percent of the estimated completion cost of the remaining work.
Sec. 3555.203 Ownership requirements.
After the loan is closed, the borrower must have an acceptable
ownership interest in the property as evidenced by one of the
following:
(a) Fee-simple ownership. Acceptable fee-simple ownership is
evidenced by a fully marketable title with a deed vesting a fee-simple
interest in the property to the borrower.
(b) Secure leasehold interest. Loans may be guaranteed on leasehold
properties if the lender determines that the following conditions are
met:
(1) The applicant is unable to obtain fee simple title to the
property;
(2) Such leaseholds are fully marketable in the area, except in the
case of properties located on American Indian restricted land; and
(3) The lease has an unexpired term of at least 45 years from the
date of loan closing, except in the case of properties located on
American Indian restricted land where the lease must have an
[[Page 70140]]
unexpired term at least equal to the term of the loan.
Sec. 3555.204 Security requirements.
The Agency will only guarantee loans that are adequately secured. A
loan will be considered adequately secured only when all of the
following requirements are met:
(a) The lender obtains, at closing, a mortgage on all required
ownership and leasehold interests in the security property and ensures
that the loan is properly closed;
(b) No liens prior to the guaranteed mortgage exist except in
conjunction with a supplemental loan for transfer and assumption;
(c) Existing and proposed property improvements are completely on
the site and do not encroach on adjoining property; and
(d) All collateral secures the entire loan.
Sec. 3555.205 Special requirements for condominiums.
Loans may be guaranteed for condominium units that meet all of the
requirements of this part and the unit is in a project approved or
accepted by HUD, Fannie Mae, VA, or Freddie Mac.
Sec. 3555.206 Special requirements for community land trusts.
Loans may be guaranteed for dwellings on land owned by a community
land trust if all the requirements of this part are met, and any
restrictions imposed by the community land trust on the property or
applicant:
(a) Are reviewed and accepted by the Agency before loan closing;
and
(b) Automatically and permanently terminate upon foreclosure or
acceptance by the lender of a deed in lieu of foreclosure.
Sec. 3555.207 Special requirements for Planned Unit Developments.
Loans may be guaranteed for PUDs that meet all of the requirements
of this part, as well as the criteria for PUDs established by HUD, VA,
Fannie Mae, or Freddie Mac.
Sec. 3555.208 Special requirements for manufactured homes.
Loans may be guaranteed for manufactured homes if all of the
requirements of this part are met.
(a) Eligible costs. In addition to the loan purposes described in
Sec. 3555.101, the Agency may guarantee a loan used for the following
purposes related to manufactured homes when a real estate mortgage
covers both the unit and the site:
(1) Purchase of a new manufactured home meeting the requirements of
manufactured housing in Sec. 3555.10, transportation, permanent
foundation, and set-up costs of the manufactured home, and purchase of
an eligible site if not already owned by the applicant; and
(2) Site development work in accordance with part 1924, subpart A
of this title.
(b) Loan restrictions. In addition to the loan restrictions
contained in Sec. 3555.102, the following loan restrictions also will
apply.
(1) A loan will not be guaranteed if it is used to purchase a site
without also financing a new unit.
(2) A loan will not be guaranteed if it is used to purchase
furniture, including but not limited to: movable articles of personal
property such as drapes, beds, bedding, chairs, sofas, divans, lamps,
tables, televisions, radios, and stereo sets. Furniture does not
include wall-to-wall carpeting, refrigerators, ovens, ranges, washing
machines, clothes dryers, heating or cooling equipment, or other
similar items.
(3) A loan will not be guaranteed to purchase an existing
manufactured home and site unless:
(i) The unit and site are already financed with an Agency direct
single family or guaranteed loan;
(ii) The unit and site are being sold from the Agency's inventory;
or
(iii) The unit and site are being sold from the lender's inventory,
and the loan for which the unit and site served as security was a loan
guaranteed by the Agency.
(c) Dealer-contractors. No loans will be guaranteed on a
manufactured home sold by any entity that is not an Agency-approved
dealer-contractor that will provide complete sales, service, and site
development services.
(d) Construction and development. Unit construction must conform to
the Federal Manufactured Home Construction and Safety Standards
(FMHCSS) and the Agency's thermal standards in accordance with part
1924, subpart A of this title. The site development and set-up also
must conform with that subpart and the manufacturer's requirements for
a permanent installation.
(e) Warranty requirements. The dealer-contractor must provide a
warranty in accordance with the provisions part 1924, subpart A of this
title. The warranty must identify the unit by serial number. The
dealer-contractor must certify that the manufactured home has sustained
no hidden damage during transportation and, if manufactured in separate
sections, that the sections were properly joined and sealed according
to the manufacturer's specifications. The data plate, affixed to the
inside of the unit, and the certification label, affixed to each
transportable section at the tail-light end of each unit, indicates
that the manufactured home substantially conforms with the plans and
specifications. The dealer-contractor also must furnish the applicant
with a copy of all manufacturer's warranties.
Secs. 3555.209-3555.250 [Reserved]
Subpart F--Regular Servicing
Sec. 3555.251 Servicing responsibility.
(a) Lenders must perform those servicing actions that a reasonable
and prudent lender would perform in servicing its own portfolio of
unguaranteed loans.
(b) The Agency may require a lender to transfer its loan servicing
activities to an approved lender if the lender fails to provide
acceptable servicing.
(c) A lender may choose to contract with a third party to service
its loans, but remains responsible for the quality of the servicing.
Sec. 3555.252 Required servicing actions.
Lender servicing responsibility includes, but is not limited to,
the following actions.
(a) Collecting regularly scheduled payments. Lender must collect
regularly scheduled loan payments and apply them to the borrower's
account.
(b) Payment of taxes and insurance. Lenders must ensure that real
estate taxes, assessments, and flood and hazard insurance premiums for
all property that secures a guaranteed loan are paid on schedule.
(1) Establish escrow account. Lenders with the capacity to escrow
funds must establish escrow accounts for all guaranteed loans for the
payment of taxes and insurance. Escrow accounts must be administered in
accordance with the Real Estate Settlement and Procedures Act (RESPA)
of 1974, and insured by the Federal Deposit Insurance Corporation
(FDIC).
(2) Plan and responsibility of lender to ensure payment. Lenders
that do not have the capacity to escrow funds must obtain Agency
approval of a plan for ensuring that the borrower pays such obligations
on a timely basis. In addition, such lenders must accept the
responsibility for payment of taxes and insurance that come due prior
to liquidation. The Agency will not include any taxes or insurance
amounts that accrued prior to acceleration in any potential loss claim.
(c) Insurance. (1) Until the loan is paid in full, lenders must
ensure that borrowers maintain hazard and flood
[[Page 70141]]
insurance on property securing guaranteed loans. The insurance must be
issued by companies, in amounts, and on terms and conditions acceptable
to the Agency. Flood insurance through the National Flood Insurance
Program must be maintained for all property located in special flood or
mud slide areas identified by FEMA and must be consistent with part
1806, subpart B of this title.
(2) Lenders must ensure that borrowers immediately notify them of
any loss or damage to insured property and collect the amount of the
loss from the insurance company. Unless the borrower pays off the
guaranteed loan using the insurance proceeds, the following
requirements must be met.
(i) All repairs and replacements must be planned, performed, and
inspected in accordance with Agency construction requirements.
(ii) When insurance funds remain after payments for all repairs,
replacements, and other authorized disbursements have been made, the
funds must be applied in the following order: prior liens (including
past-due property taxes); past-due amounts; protective advances; and
released to the borrower if the lender's debt is adequately secured.
(d) Credit reporting. The lender must notify a credit repository of
each new guaranteed loan, and must report to that repository whenever
any account becomes more than 30 calendar days past due.
Sec. 3555.253 Late payment charges.
Late payment charges will not be covered by the guarantee and
cannot be added to the principal and interest due under any guaranteed
note.
(a) Maximum amount. The late payment charge must be reasonable and
customary for the area.
(b) Loans with interest assistance. The lender must not charge a
late fee if the only unpaid portion of the borrower's scheduled payment
is interest assistance owed by the Agency.
Sec. 3555.254 Final payments.
Lenders may release security instruments only after full payment of
all amounts owed, including recapture, has been received and verified.
Sec. 3555.255 Borrower actions requiring lender approval.
(a) Mineral leases. A lender may consent to the lease of mineral
rights and subordinate its lien to the lessee's rights and interests in
the mineral activity if the security property will remain suitable as a
residence, the lender's security interest will not be adversely
affected, and the environmental requirements of part 1940, subpart G,
of this title are met. Subordination of guaranteed loans to a mineral
lease does not entitle the leaseholder to any proceeds from the sale of
the security property.
(1) If the proposed activity is likely to decrease the value of the
security property, the lender may consent to the lease only if the
borrower assigns 100 percent of the income from the lease to the lender
to be applied to reduce principal, and the total rent to be paid is at
least equal to the estimated decrease in the market value of the
security property.
(2) If the proposed activity is not likely to decrease the value of
the security property, the lender may consent to the lease if the
borrower agrees to use any damage compensation received from the lessee
to repair damage to the site or dwelling, or to assign it to the lender
to be applied to reduce principal.
(b) Partial release of security property. A lender may consent to
transactions affecting a security property, such as selling or
exchanging security property or granting of a right-of-way across the
security property, and grant a partial release, provided that the
following conditions are met.
(1) The borrower will receive adequate compensation.
(i) For sale of security property, the borrower must receive cash
in an amount equal to or greater than the value of the security
property being sold or interests being conveyed.
(ii) For exchange of security property, the borrower must receive
another parcel of property with value equal to or greater than that
being disposed of.
(iii) For granting an easement or right-of-way, the borrower must
receive benefits that are equal to or greater than the value of the
security property being disposed of or interests being conveyed.
(2) An appraisal will be conducted if the most current appraisal is
more than 1 year old or if it does not reflect current market value.
(3) The security property, after the transaction is completed, will
be an adequate but modest, decent, safe, and sanitary dwelling.
(4) Repayment of the guaranteed debt will not be jeopardized.
(5) When exchange of all or part of the security property is
involved, title clearance will be obtained before release of the
existing security.
(6) Proceeds from the sale of a portion of the security property,
granting an easement or right-of-way, damage compensation, and all
similar transactions requiring the lender's consent, will be used in
the following order:
(i) To pay customary and reasonable costs related to the
transaction that must be paid by the borrower.
(ii) To be applied on a prior lien debt, if any.
(iii) To be applied to the guaranteed indebtedness or used for
improvements to the security property consistent with the purposes and
limitations applicable for use of guaranteed loan funds. Proposed
development will be planned and performed in accordance with Agency
standards and supervised by the lender to ensure that the proceeds are
used as planned.
(7) The Agency determines that the environmental requirements of
part 1940, subpart G of this title are met.
Sec. 3555.256 Transfer and assumptions.
This section addresses requirements imposed upon the lender for
notifying the Agency of a borrower's intent to transfer title to a
security property, and if title is transferred, under what conditions
the Agency will continue to honor the guarantee.
(a) Transfer without assumption. (1) The lender must notify the
Agency if the borrower transfers the security property and the
transferee does not assume the debt.
(2) Except as described in paragraph (d) of this section, the
Agency will withdraw the guarantee if a security property is
transferred with the lender's knowledge without assumption of the debt.
(b) Transfer with assumption. (1) The lender must obtain Agency
approval before consenting to a transfer with an assumption of the
outstanding debt.
(2) The Agency may approve a transfer with an assumption of the
outstanding debt if the following conditions are met.
(i) The transferee must assume the entire outstanding debt and
acquire all property securing the guaranteed loan balance; however, the
transferor must remain personally liable.
(ii) The transferee must meet the eligibility requirements
described in subpart D of this part.
(iii) The property generally must meet the site and dwelling
requirements described in subpart E of this part, or be brought to
those standards. Guaranteed loans secured by properties located in
areas that have ceased to be rural may be assumed, however,
notwithstanding the fact that the property is located in a nonrural
area.
(iv) The priority of the existing lien securing the guaranteed loan
must be maintained or improved.
(v) Any new rates and terms must not exceed the rates and terms
allowed for
[[Page 70142]]
new loans under this part, and the interest rate must not exceed the
interest rate on the initial loan.
(vi) The transferor must pay any recapture owed at the time of the
transfer and assumption.
(vii) A new guarantee fee, calculated based on the remaining
principal balance, must be paid to the Agency in accordance with
Sec. 3555.107(e).
(viii) If additional financing is required to complete the transfer
and assumption or to make needed repairs, the Agency may approve a
supplemental guaranteed loan provided adequate security exists.
(c) Transfer without approval. If a lender becomes aware that a
borrower has transferred a property without the lender's knowledge, the
lender must take one of the following actions:
(1) Notify the Agency and continue the loan without the guarantee;
(2) Obtain Agency approval for the transfer with assumption; or
(3) Liquidate the guaranteed loan and submit a claim for any loss.
(d) Transfer without triggering the due-on-sale clause. (1) Due-on-
sale clauses in security instruments are not triggered by the following
types of transfers:
(i) A transfer from the borrower to a spouse or children not
resulting from the death of the borrower;
(ii) A transfer to a relative, joint tenant, or tenant by the
entirety resulting from the death of the borrower;
(iii) A transfer to a spouse or ex-spouse resulting from a divorce
decree, legal separation agreement, or property settlement agreement;
(iv) A transfer to a person other than a deceased borrower's spouse
who wishes to assume the loan for the benefit of persons who were
dependent on the deceased borrower at the time of death, if the
dwelling will be occupied by one or more persons who were dependent on
the borrower at the time of death, and there is a reasonable prospect
of repayment; or
(v) A transfer into an inter vivos trust in which the borrower does
not transfer rights of occupancy in the property.
(2) When a transferee obtains a property with a guaranteed loan
through a transfer that does not trigger the due-on-sale clause:
(i) The lender will notify the Agency of the transfer;
(ii) The Agency will continue with the guarantee, whether or not
the transferee assumes the guaranteed loan;
(iii) The transferee may assume the guaranteed loan on the rates
and terms contained in the promissory note. If the account is past due
at the time an assumption agreement is executed, the loan may be
reamortized to bring the account current;
(iv) The transferee may assume the guaranteed loan under new rates
and terms if the transferee applies and is eligible; and
(v) The transferee may receive interest assistance if eligible in
accordance with Sec. 3555.105.
(3) Any subsequent transfer of title, except upon death of the
inheritor or between inheritors to consolidate title, will trigger the
due-on-sale clause.
Sec. 3555.257 Unauthorized assistance.
(a) Unauthorized assistance due to false information.
(1) If the borrower receives a guaranteed loan based on false
information provided by the borrower, the Agency may require the lender
to accelerate the guaranteed loan. If the lender fails to accelerate
the loan upon request, the Agency may withdraw the guarantee.
(2) If the borrower receives a guaranteed loan based on false
information provided by the lender, the Agency may withdraw the
guarantee, and may withdraw the lender's approval to participate in the
program.
(3) If, based on false information provided by either the lender or
the borrower, the borrower receives interest assistance above the
amount to which the borrower was entitled, the lender must require the
borrower to repay the unauthorized amount within 30 calendar days. If
the borrower repays the excess interest assistance, the guaranteed loan
may be continued. If the false information was not provided by the
borrower, and if the borrower cannot repay the excess amount within 30
calendar days, the account can be reamortized to include the excess
interest assistance.
(4) If the borrower or lender provides false information, the
Agency may, in addition to criminal and civil false claim actions,
pursue suspension or debarment.
(b) Unauthorized assistance due to inaccurate information. (1)
Inaccurate information is incorrect information inadvertently provided,
used, or omitted without the intent to obtain benefits for which the
recipient was not eligible.
(2) The Agency will continue to honor a guarantee for a loan made
to an applicant who receives a guaranteed loan based on inaccurate
information if the applicant was eligible to receive the guaranteed
loan at the time it was made, and if the loan funds were used only for
eligible loan purposes.
(3) If, based on inaccurate information, the borrower receives
interest assistance above the amount to which the borrower was
entitled, the lender must require the borrower to repay it within 30
calendar days. If the borrower cannot repay the excess amount within 30
calendar days, the lender may enter into a forbearance agreement with
the borrower, or reamortize the guaranteed loan. If the borrower
arranges to repay the interest assistance, the Agency will continue to
honor the guarantee.
Secs. 3555.258-3555.300 [Reserved]
Subpart G--Servicing Accounts With Repayment Problems
Sec. 3555.301 General policy.
Lenders must make reasonable efforts to resolve any repayment
problems and provide borrowers with the maximum opportunity to become
successful homeowners. The lender may use the servicing options
described in this subpart if a borrower is having difficulty keeping an
account current.
Sec. 3555.302 Forbearance.
Lenders may offer borrowers the opportunity to avoid liquidation by
entering into a forbearance agreement that specifies a reasonable plan
for bringing the account current.
Sec. 3555.303 Protective advances.
Lenders may pay for the following expenses necessary to protect the
security property and charge the cost against the borrower's account.
(a) Advances for taxes and insurance. Lenders may advance funds to
pay past due real estate taxes, hazard and flood insurance premiums,
and other related costs.
(b) Advances for costs other than taxes and insurance. Protective
advances for costs other than taxes and insurance, such as emergency
repairs, can be made only if the borrower cannot obtain an additional
loan or reimbursement from an insurer, or the borrower has abandoned
the property.
Sec. 3555.304 Reamortization.
(a) Situations with false information provided by the borrower. If
a borrower has received unauthorized assistance only due to false
information provided by the borrower, reamortization is not permitted.
(b) All other situations. If the borrower has not provided false
information, the lender may bring a borrower's account current by
reamortizing the guaranteed loan at the promissory note interest rate
if:
(1) The lender can demonstrate that there is a reasonable
possibility that the borrower will be able to repay the loan after
reamortization;
[[Page 70143]]
(2) Reamortization is required to enable the borrower to meet
scheduled obligations;
(3) The lender's lien priority will not be adversely affected; and
(4) The loan term after reamortization does not exceed the
remaining term of the loan before reamortization.
(c) Loan guarantee amount. The amount of the loan guarantee is not
changed by reamortization.
Sec. 3555.305 Liquidation.
(a) Policy. When a lender determines that a borrower is unable or
unwilling to meet loan obligations, the lender may accelerate the
guaranteed loan and, if necessary, foreclose. The lender must
accelerate the guaranteed loan when the account is three scheduled
payments past due unless there is a reasonable prospect of resolving
the delinquency through another method. The borrower is responsible for
all expenses associated with liquidation and acquisition.
(b) Acceleration and foreclosure. The lender must initiate
foreclosure within 90 calendar days of the decision to liquidate unless
Federal, State, or local law requires that foreclosure action be
delayed. In such a case, foreclosure must be initiated within 60
calendar days after acceleration becomes possible.
(c) Reinstatement of accounts. Unless State law imposes other
requirements, the lender may reinstate an accelerated account only if
the borrower:
(1) Pays in a lump sum all past-due amounts, any protective
advances, and any foreclosure-related costs incurred by the lender; and
(2) Has the ability to continue making scheduled payments on the
guaranteed loan.
(d) Bankruptcy. (1) When a petition in bankruptcy is filed by a
borrower after acceleration, the lender must suspend collection and
foreclosure actions in accordance with title 11 of the United States
Code (title 11).
(2) The lender may accept conveyance of security property by the
trustee in the bankruptcy, or the borrower, if the bankruptcy court has
approved the transaction, and the lender will acquire title free of all
liens and encumbrances except the lender's liens.
(3) Whenever possible after the borrower has filed for protection
under Chapter 7 of title 11, a reaffirmation agreement will be signed
by the borrower and approved by the bankruptcy court prior to
discharge, if the lender and the borrower decide to continue.
(e) Voluntary liquidation. A borrower may voluntarily liquidate the
security property using any of the following methods.
(1) Refinancing or sale. The borrower may refinance or sell the
security property for a price that reflects at least the property's
estimated market value. The sale proceeds, less any reasonable and
customary sale or closing costs incurred by the borrower, must be
applied to the borrower's account.
(2) Deed in lieu of foreclosure. The lender may accept a deed in
lieu of foreclosure unless the lender's anticipated costs for selling
the property, including any costs required to make the property
marketable, exceed the property's estimated market value.
(3) Offer by junior lienholder. If a junior lienholder makes an
offer in the amount of at least the anticipated net recovery value, as
calculated in accordance with Sec. 3555.353, the lender may assign the
note and mortgage to the junior lienholder.
(f) Maintain condition of security property. The lender must make
reasonable and prudent efforts to ensure that the condition of the
security property is maintained during any liquidation, acquisition,
and sale of the property.
(g) Interest assistance. If the borrower is receiving interest
assistance, the interest assistance agreement will be canceled when the
borrower transfers title or ceases to occupy the property.
(h) Debt settlement reporting. The lender must report to the IRS
and credit reporting agencies any debt settled through liquidation.
Secs. 3555.306-3555.350 [Reserved]
Subpart H--Collecting on the Guarantee
Sec. 3555.351 Loan guarantee limits.
(a) The maximum loss payment under the guaranteed loan program is
the lesser of:
(1) Any loss sustained by the lender of an amount equal to 90
percent of the principal amount actually advanced to the borrower; or
(2) For the first portion of the loss, up to 35 percent of the
principal actually advanced, the Agency will pay 100 percent of the
loss. For any remaining loss, up to 65 percent of the principal
actually advanced, the Agency will pay 85 percent of the loss.
(b) For purposes of this section, the ``principal amount actually
advanced'' means the total amount of the loan as indicated by the
promissory note, less any loan funds not actually disbursed to the
borrower or on behalf of the borrower.
Sec. 3555.352 Loss covered by the guarantee.
When a loan is liquidated, the Agency will reimburse the lender for
the difference between the guaranteed loss incurred by the lender and
the net recovery value of the property up to the guarantee limit.
Guaranteed losses may include the following:
(a) Principal and interest, as evidenced by the guaranteed loan
note;
(b) Additional interest accrued from the start of liquidation to
the date of final loss settlement; and
(c) Any principal and interest indebtedness on protective advances,
as described in Sec. 3555.303.
Sec. 3555.353 Net recovery value.
The net recovery value of the property is determined differently
for properties that have been sold than for properties that are in the
lender's inventory at the time the loss claim is filed.
(a) Actual net recovery value. For a property that the lender has
sold when a loss claim is filed, net recovery value is calculated as
the difference between:
(1) The proceeds from the sale and any other amounts recovered; and
(2) Liquidation and disposition costs that are reasonable and
customary for the area. Costs incurred by in-house staff are not
allowable.
(b) Anticipated net recovery value. For a property that the lender
has not sold when a loss claim is filed, net recovery value is
calculated as the difference between:
(1) The value of the property as determined by an appraisal that is
calculated to provide reasonable assurance that the property will sell
within 90 days of being placed on the market; and
(2) Liquidation and estimated disposition costs that are reasonable
and customary for the area. Costs incurred by in-house staff are not
allowable.
Sec. 3555.354 Loss claim procedures.
(a) Sold property. For property that has been sold, the lender must
submit a loss claim within 30 calendar days of the sale.
(b) REO property. If the property has not been sold and remains an
REO property, the lender must take the following steps.
(1) Notify the Agency that the property has not been sold.
(i) If the property is not located on American Indian restricted
land, the lender must notify the Agency if the property has not been
sold within 90 calendar days of foreclosure, or from the end of any
applicable redemption period, whichever is later.
(ii) If the property is located on an American Indian restricted
land, the
[[Page 70144]]
lender must notify the Agency if the property has not been sold within
12 months of foreclosure, or from the end of any redemption period,
whichever is later.
(2) Upon notification that the property has not been sold, the
Agency will conduct an appraisal and provide the results to the lender.
The lender must submit a loss claim within 30 calendar days of
receiving the results of the appraisal.
(c) Deficiency judgments. The lender must enforce any judgment for
which there are current prospects of collection before filing a loss
claim, and amounts collected must be applied against the outstanding
debt. The Agency will make a loss payment if there are not current
prospects for collection.
Sec. 3555.355 Reducing or denying the claim.
(a) Determination of loss payment. If the lender has failed to
fulfill any of its obligations under this part, the Agency may cancel
the guarantee or reduce any loss claim by the portion of the loss that
the Agency determines was caused by the lender's failure to comply with
the full faith and credit provision of the guarantee agreement. The
circumstances under which loss claims may be denied or reduced include,
but are not limited to, the following lender actions:
(1) Failure to adhere to required servicing and liquidation
procedures;
(2) Failure to ensure that the security property is adequately
maintained;
(3) Delay in filing a loss claim;
(4) Claiming unauthorized expenses;
(5) Providing unauthorized assistance;
(6) Failure to obtain the required security or maintain the
security position;
(7) Violating usury laws; or
(8) Committing, or failing to report knowledge of, fraud.
(b) Disputes. If the lender disputes the loss claim amount
determined by the Agency, the Agency will pay the undisputed portion of
the loss claim, and the lender may appeal the decision.
Sec. 3555.356 Future recovery.
If the lender recovers additional funds after the loss claim has
been paid, the proceeds will be distributed so that the total loss to
the Government is equivalent to the loss that would have been incurred
had the recovered amount been included in the initial loss calculation.
Secs. 3555.357-3555.400 [Reserved]
Dated: November 30, 1999.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 99-32287 Filed 12-14-99; 8:45 am]
BILLING CODE 3410-XV-U
