[Federal Register Volume 61, Number 68 (Monday, April 8, 1996)]
[Proposed Rules]
[Pages 15395-15427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8492]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 68 / Monday, April 8, 1996 / Proposed
Rules
[[Page 15395]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
7 CFR Part 3550
RIN 0575-AB17; RIN 0575-AB80; RIN 0575-AB99; RIN 0575-AC00
Reengineering and Reinvention of the Direct Section 502 and 504
Single Family Housing (SFH) Programs
AGENCY: Rural Housing Service, United States Department of Agriculture
(USDA).
ACTION: Proposed rule.
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SUMMARY: The Rural Housing Service (RHS), formerly the Rural Housing
and Community Development Service (RHCDS), a successor agency to the
Farmers Home Administration (FmHA), proposes to streamline and
reengineer its regulations and to utilize private sector processes and
techniques in the administration of its direct Single Family Housing
(SFH) portfolio. 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 its SFH
portfolio. The agency is centralizing the servicing of its SFH
portfolio loans to provide more timely and consistent supervised
credit. The effect of this action is to provide better service and
reduce the Code of Federal Regulations (CFR) coverage of the SFH
program by an estimated 90 percent.
DATES: Comments must be received on or before June 7, 1996.
ADDRESSES: Submit written comments in duplicate to the Director,
Regulations and Paperwork Management Division, Rural Housing Service,
U.S. Department of Agriculture, Room 6348, South Agriculture Building,
Washington, DC 20250. All written comments made pursuant to this notice
will be made available for public inspection during regular work hours
at the above address.
FOR FURTHER INFORMATION CONTACT: Jean Leavitt, Senior Loan Specialist,
Single Family Housing Servicing and Property Management Division, RHS,
room 5307, South Agriculture Building, Washington, DC, 20250, telephone
(202) 720-1452.
SUPPLEMENTARY INFORMATION:
Classification
This proposed rule has been determined to be significant, but not
economically significant and was reviewed by the Office of Management
and Budget (OMB) under Executive Order 12866.
Executive Order 12778
This proposed rule has been reviewed under Executive Order 12778,
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; and (3) administrative proceedings of the
National Appeals (7 CFR Part 11) must be exhausted before bringing
suit.
Unfunded Mandate Reform Act
Title II of the Unfunded Mandate 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,
federal agencies generally must prepare a written statement, including
cost-benefit analysis, for proposed and final rules with ``Federal
mandates'' that may result in expenditures to State, local, or tribal
governments, in the aggregate, or to the private sector, of $100
million or more in any one year. When such a statement is needed for a
rule, section 205 of the UMRA generally requires RHS to identify and
consider a reasonable number of regulatory alternatives and adopt the
least costly, more cost-effective or least burdensome alternative that
achieves the objectives of the rule.
This rule contains no Federal mandates (under the regulatory
provisions of Title II of the UMRA) for State, local, and tribal
governments or the private sector. Therefore, this rule is not subject
to the requirements of sections 202 and 205 of the UMRA.
National Performance Review
This regulatory action is being taken as part of the National
Performance Review (NPR) program to reduce or eliminate unnecessary
regulations and improve those that remain in force. Currently, the
administration of the SFH program is guided by 16 separate regulations
totaling 290 pages in the CFR.
Earlier this year, RHS purchased a commercial-off-the-shelf
Dedicated Loan Origination and Servicing System (DLOS) which includes
escrow capability to improve program performance and efficiency to its
customers. RHS intends to adopt processes and techniques currently
utilized by the private sector including centralized servicing and
automation of many forms and processes. The system is being customized
to provide the additional features and servicing benefits available to
RHS customers to assist them in becoming successful homeowners.
Rather than modify the current 16 regulations to implement DLOS,
RHS committed itself to meet the true spirit and intent of the NPR. RHS
has undertaken a massive effort to completely reinvent and reengineer
its regulatory process. RHS is combining the guidance provided in all
16 regulations into one consolidated rule. Administrative matters have
been eliminated, remaining text has been completely revised to be
consistent, simple, and clear. RHS estimates the final rule, after DLOS
is fully implemented, will cover approximately 30 pages in the CFR, for
a 90% reduction in regulations. This regulatory initiative follows our
final rule of October 27, 1995, in which the cost of the direct section
502 program was reduced by 30%.
Environmental Impact Statement
This document has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' It is the determination of RHS
that 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, Public
Law 91-190, an Environmental Impact Statement is not required.
[[Page 15396]]
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
substantial number of small entities since this rulemaking action does
not involve a new or expanded program.
Programs Affected
These programs are listed in the Catalog of Federal Domestic
Assistance under Number 10.410, Very-Low-to Moderate Income Housing
Loans (Section 502 Rural Housing Loans) and 10.417 Very-Low Income
Housing Loans and Grants (Section 504 Rural Housing Loans and Grants).
Intergovernmental Consultation
These programs are not subject to the provision of Executive Order
12372 which requires intergovernmental consultation with state and
local officials. See 7 CFR part 3015, subpart V (48 FR 29112, June 24,
1983) and FmHA Instruction 1940-J, ``Intergovernmental Review of
Farmers Home Administration Programs and Activities.''
Background Information
An Overview
The RHS is taking the next steps in the reengineering and
reinvention of the manner in which direct Section 502 and Section 504
loans and grants are made and serviced. This follows our October 27,
1995, final rule in which the cost of our direct single family housing
low income loan program under section 502 of the Housing Act of 1949
was reduced by 30%. The proposed regulations which follow are a
significant departure from business practices of the former FmHA. As
part of the USDA reorganization, RHS made a commitment to make its
programs more customer friendly, to streamline processes, reduce costs
to the taxpayer, and increase our level of customer service. These
regulations will accomplish these goals within our SFH program and set
the standard for future regulatory actions within RHS.
The RHS has over 725,000 direct Section 502 and 504 loans with
approximately 625,000 customers in its portfolio. With our Fiscal Year
(FY) 1996 direct section 502 and 504 loan appropriation, the Agency
anticipates making 35,000 new direct SFH loans this year. The
accounting system established by FmHA to maintain its vast farm,
housing, community and business loan programs is severely outdated and
not capable of expansion to keep pace with an ever increasingly
automated society. FmHA was not able to provide the same level of
customer service provided by commercial lenders such as the escrow of
real estate taxes and insurance for its customers and toll free
telephone numbers to contact a servicing representative. These features
are critical for RHS to provide prudent supervised credit to its very-
low and low income customers and assist these families in becoming
successful homeowners.
Additionally, RHS is aggressively meeting the Administration's goal
of reducing staff through reorganization and streamlining of processes.
National and field staffs are being reduced and many offices will be
consolidated. This, coupled with our outdated accounting system, made
the accomplishment of our Agency goals more challenging.
In May 1995, the RHS awarded a contract to Fiserv, Inc. and its
subsidiary, Data-Link systems for the purchase of a commercial-off-the-
shelf Dedicated Loan Origination and Servicing System (DLOS) which
includes escrow capability. This system will replace the Agency's
current Program Loan Accounting System (PLAS) and the Management
Records System (MRS) and will provide agency personnel with the tools
to deliver high quality customer services to its customers. RHS intends
to adopt processes and techniques currently utilized by the private
sector including centralized servicing and automation of many forms and
processes. The system is being customized to provide the additional
features and servicing benefits available to RHS customers to assist
them in becoming successful homeowners. The Agency intends to begin
implementing this system on October 1, 1996 with two pilot states.
Other states will be phased into the DLOS system through FY 1996 with
full implementation anticipated by September 30, 1997. Further
information on the implementation of the system follows.
The centralized servicing unit will be located in St. Louis,
Missouri, and will assume primary responsibility for the functions
associated with servicing and managing the loan portfolio such as
collection of loan payments, day to day loan servicing, escrowing, and
accounting in a focused effort to monitor and reduce loan defaults
thereby achieving our goal of having successful homeowners that can
eventually refinance to commercial credit. The centralized unit will be
staffed with many existing RHS employees.
The objectives of DLOS are to:
Establish an escrow system for real estate taxes and
insurance.
Facilitate the centralization of RHS SFH loan servicing.
Reduce the foreclosure rate through early and consistent
intervention with borrowers having trouble making payments.
Reduce costs by reducing delinquency rates, loan losses
and operating costs.
Account for direct SFH loans on a amortized rather than
simple interest rate.
Improve efficiency and service to our customers.
Develop clear, concise and easy to read regulations and
handbooks.
Reduce burden on our customers.
This initiative has been highlighted in the NPR and will streamline
and improve the delivery of program assistance to customers. There are
anticipated savings to the Government of $250 million over a five year
period.
The Regulations
RHS has undertaken a major redevelopment and consolidation of FmHA
regulations affecting the direct Section 502 and 504 programs. At the
current time, direct SFH customers are affected, in part, by the
following regulations:
7 CFR Part 1910, Subpart A--Receiving and Processing
Applications.
7 CFR Part 1944, Subpart A--Section 502 Rural Housing Loan
Policies, Procedures, and Authorizations.
7 CFR Part 1944, Subpart J--Section 504 Rural Housing
Loans and Grants.
7 CFR Part 1951, Subpart B--Collections.
7 CFR Part 1951, Subpart C--Offsets of Federal Payments to
FmHA or its successor agency under Public Law 103-354 Borrowers.
7 CFR Part 1951, Subpart D--Final Payment on Loans.
7 CFR Part 1951, Subpart F--Analyzing Credit Needs and
Graduation of Borrowers.
7 CFR Part 1951, Subpart G--Borrower Supervision,
Servicing and Collection of Single Family Housing Loan Accounts.
7 CFR Part 1951, Subpart I--Recapture of Section 502 Rural
Housing Subsidy.
7 CFR Part 1951, Subpart J--Management and Collection of
Nonprogram (NP) Loans.
7 CFR Part 1951, Subpart M--Servicing Cases Where
Unauthorized Loan or Other Financial Assistance Was Received--Single
Family Housing.
[[Page 15397]]
7 CFR Part 1955, Subpart A--Liquidation of Loans Secured
by Real Estate and Acquisition of Real and Chattel Property.
7 CFR Part 1955, Subpart B--Management of Property.
7 CFR Part 1955, Subpart C--Disposal of Inventory
Property.
7 CFR Part 1956, Subpart B--Debt Settlement--Farmer
Programs and Housing.
7 CFR Part 1965, Subpart C--Security Servicing for Single
Family Rural Housing Loans.
Some of the above mentioned regulations involve only SFH loans,
while others are combined with regulatory provisions of other programs
of the former FmHA such as farm loans, business and industrial loans,
community facilities and multi-family housing. RHS is consolidating all
regulatory actions in the above mentioned regulations which affect
direct SFH loans into one new regulation--7 CFR Part 3550. This
consolidated regulation will make it easier for RHS field staff, and
most importantly, our customers, to understand how to obtain program
benefits.
Additionally, RHS has removed all administrative processes from the
regulations, leaving only regulatory actions which impact the public in
the Federal Register. This streamlining makes the regulation more
concise and much easier to read and understand. The Agency is
developing a separate handbook with administrative matters such as what
forms must be filed and where to submit loan requests and the agency's
internal processing procedures. This handbook will not be published in
the Federal Register but will be available upon request to the public
at no cost.
Implementation Proposal
As previously mentioned, the DLOS system will be implemented over a
one year period. Two pilot states will start the process and other
states will be added to DLOS over the next 12 months. The 12 month
implementation period is critical to ensure for the orderly transfer of
account information on 725,000 loans to the new DLOS system. This
implementation period presents administrative challenges to the Agency
as states will be operating under different computer systems with
significantly different capabilities. When RHS publishes this Proposed
Rule in final, it intends to remove from the CFR the following
regulations:
7 CFR Part 1944, Subpart A--Section 502 Rural Housing Loan
Policies, Procedures, and Authorizations.
7 CFR Part 1944, Subpart J--Section 504 Rural Housing
Loans and Grants.
7 CFR Part 1951, Subpart G--Borrower Supervision,
Servicing and Collection of Single Family Housing Loan Account.
7 CFR Part 1951, Subpart I--Recapture of Section 502 Rural
Housing Subsidy.
7 CFR Part 1951, Subpart M--Servicing Cases Where
Unauthorized Loan or Other Financial Assistance Was Received--Single
Family Housing.
7 CFR Part 1965, Subpart C--Security Servicing for Single
Family Rural Housing Loans.
These regulations deal strictly with the direct SFH programs of the
RHS. The following regulations will remain in the CFR as they contain
provisions relating to other program areas. These regulations will be
amended at the time of our final rulemaking action to clearly indicate
that they no longer apply to the direct SFH programs:
7 CFR Part 1910, Subpart A--Receiving and Processing
Applications.
7 CFR Part 1951, Subpart B--Collections.
7 CFR Part 1951, Subpart C--Offsets of Federal Payments to
FmHA or its successor agency under Public Law 103-354 Borrowers.
7 CFR Part 1951, Subpart D--Final Payment on Loans.
7 CFR Part 1951, Subpart F--Analyzing Credit Needs and
Graduation of Borrowers.
7 CFR Part 1951, Subpart J--Management and Collection of
Nonprogram (NP) Loans.
7 CFR Part 1955, Subpart A--Liquidation of Loans Secured
by Real Estate and Acquisition of Real and Chattel Property.
7 CFR Part 1955, Subpart B--Management of Property.
7 CFR Part 1955, Subpart C--Disposal of Inventory
Property.
7 CFR Part 1956, Subpart B--Debt Settlement--Farmer
Programs and Housing.
After the effective date of the final rule, the direct SFH program
will be guided by 7 CFR Part 3550. The proposed handbook will provide
RHS field personnel and its customers with administrative guidance in
states under the DLOS system. In states not yet under the DLOS system,
RHS field personnel and its customers will be guided by current FmHA
Instructions. These current FmHA Instructions will serve as the
handbook for states not under the DLOS system. Where current FmHA
Instructions may differ from 7 CFR Part 3550, RHS will make changes to
the current FmHA Instructions to reflect such changes concurrently with
publication of the Final Rule.
For example, the proposed regulations provide for a different
manner in which interest credit recapture is calculated. Currently,
guidance for calculating interest credit recapture is published in 7
CFR Part 1951, Subpart I. The formula for determining recapture is very
complex requiring the calculation of the average interest rate and
number of months the borrower has lived in the property. In addition,
the borrower is not given credit for improvements made to the security
property. The proposed rule, in brief, provides credit for improvements
and limits recapture to 50% of value appreciation regardless of average
interest rate and the length of time the borrower has lived in the
property.
When the proposed rule is published in final, RHS intends to remove
7 CFR Part 1951, Subpart I from the CFR. Part 3550 will contain the
guidance on calculation of interest credit recapture, and the proposed
handbook will provide administrative guidance on handling recapture
under the new DLOS computer system. This process will work in states
with access to the DLOS computer system. However, in states without
access to DLOS, they will be unable to use the proposed handbook. These
states will continue to be guided by FmHA Instruction 1951-I which is a
duplicate of 7 CFR Part 1951, Subpart I. Although RHS will remove 7 CFR
Part 1951, Subpart I from the CFR, the FmHA Instruction will continue
to be used in states not under the DLOS computer system until DLOS is
fully implemented. RHS will amend FmHA Instruction 1951-I to include
the new guidance on calculation of interest credit recapture. In this
manner, RHS can ensure that its customers receive equal access to
program benefits. Everyone will be guided by 7 CFR Part 3550, and in
the aforementioned situation, states under DLOS will look to the
proposed handbook for administrative guidance, and states not under
DLOS will look to FmHA Instruction 1951-I for administrative guidance.
After full implementation of DLOS, all states will operate under the
proposed handbook and applicable FmHA Instructions will be removed from
field use.
This proposed method will ensure that all borrowers have access to
the same program benefits. However, some changes proposed in 7 CFR Part
3550, which cannot be implemented under the PLAS computer system, will
be applicable to customers only in states under the DLOS computer
system. For
[[Page 15398]]
example, the proposed regulation imposes a late fee on payments which
are more than 15 days delinquent. The DLOS computer system can handle
such a charge, whereas the current PLAS computer system cannot.
Therefore, borrowers in states under DLOS will be subject to a late
fee. Borrowers in states under the PLAS system will not be subject to a
late fee until they are put under the DLOS system. These differences
are unavoidable due to the shortcomings of the current PLAS computer
system and the massive effort the Agency will be undertaking to convert
all 725,000 loans to the new system. Where 7 CFR 3550 provides a
customer with any additional program benefits, RHS will ensure that all
customers are provided access to these benefits regardless of whether
their state is under DLOS.
Technical enhancements to improve program delivery:
(a) Section 502 Loan Origination
Funding Priorities
RHS has clarified the funding priorities for applications needing
immediate assistance. Previously, there were four categories which all
were eligible for priority funding. These categories for priority
funding were hardship applications, self-help housing applications,
participation loan applications, and applications for servicing type
loans. However, the agency recognizes the need for more explicit
guidance in selection of competing applications for limited resources.
In the interest of better serving our active borrowers, the agency
proposes to provide first priority to active borrowers needing
subsequent loans to correct health and safety hazards. The agency is
compelled to provide decent, safe and sanitary housing to active
borrowers and protect the government's security interest. Second
priority is a consolidated grouping giving preference to an application
for a hardship loan, Real Estate Owned (REO), a loan related to the
transfer of an existing RHS property, a self-help loan and a leveraging
loan made in conjunction with funding from the other sources.
Maximum Loan Amount
In order to minimize the impact of instituting escrow accounts for
borrowers, the maximum loan amount can include the cost of the charge
to establish an escrow account. The amount of the loan can exceed the
appraised value by the cost of an appraisal and the cost to establish
the escrow account. The agency considered this a fair practice for the
very low- and low-income customers we serve.
Deferred Mortgage Payments
A technical clarification was made which states that the amount
deferred will be up to 25 percent of the payment due at one percent
when a borrower qualifies for a deferred mortgage.
(b) Section 504 Originations
Net Family Assets
A technical clarification has been made to define net family assets
the same as in Section 502. This change will provide consistency in the
treatment of assets between the 502 and the 504 program.
Loan and Grant Purposes
Loan and grant funds may be used to refinance a debt incurred for
the installation as well as the assessment of utilities, prior to the
date of application.
Eligibility of Mobile and Manufactured Homes
The requirement that a mobile or manufactured home must need
repairs to remove health and safety hazards as a condition for 504
assistance has been removed. This revision is consistent with meeting
program objectives.
(c) Tax Service and the Escrow of Taxes and Insurance
Section 501(e) of the Housing Act of 1949 (42 U.S.C. Sec. 1471(e))
mandates the Agency to establish procedures under which SFH borrowers
are required to escrow for the payment of real estate taxes,
assessments and insurance.
RHS currently does not maintain escrow accounts for payment of real
estate taxes for any of its SFH borrowers. With few exceptions (such as
the borrower's name and mailing address) the current loan servicing
system (PLAS) has minimal on-line data concerning the borrower and
property. Information essential to the escrow process is not maintained
on-line in the current system. This loan data is instead, currently
maintained in the hard copy files retained in each county office. The
primary responsibility for verifying that borrowers have complied with
the terms of their mortgage and made the appropriate real estate tax
payments resides with the county offices. Methods used to insure that
taxes have been paid vary from office to office. These methods include
(1) sending listings to tax collectors for tax verification (2)
reviewing local newspapers for tax sales and (3) requesting borrowers
to provide proof of tax payment. Previously, once taxes have been found
to be delinquent, the county office staff informed the borrower of the
default and requested the taxes to be paid. In the event of the
borrower's unwillingness or inability to pay the delinquent taxes, RHS
at its option advanced funds for this purpose and charged the advance
to the borrower's account. This decentralized method of monitoring and
processing delinquent taxes has not been successful in assisting
borrowers before they default on the payment of their taxes. With the
escrowing of taxes and insurance the agency does not have to advance
funds to pay delinquent taxes and borrowers are not put in a position
of having a large tax or insurance payment due without adequate funds
to pay it.
The agency intends to utilize a nationwide tax service to obtain
annual tax information on the RHS loan portfolio, and to obtain tax
bills for loans that are escrowed loans. It is common industry practice
to use a tax service and to require all borrowers to pay a one-time
cost of the service. Other major government housing lenders such as
Federal Housing Administration and Department of Veteran Affairs
utilize a tax service.
The process of converting existing loans to a tax service will be
phased-in as states are included in the DLOS system. A small, tax
service fee which is estimated to be approximately $20 will be charged
to each borrower to establish the escrow account. Each existing SFH
borrower agreed, as one of the terms of the security instruments they
executed (mortgage or deed of trust), to pay fees and charges
established by the agency in its regulations. Existing borrowers will
be given the option to either pay the fee or add the fee to the
principal balance of their loan. Borrowers who receive loans after the
effective date of this regulation will be charged a tax service fee
which is estimated to be approximately $60 to be paid at loan closing.
To minimize the impact on our very-low and low income customers, this
fee can be included as part of the loan. These tax service fees are
consistent with industry standards.
The tax service will be responsible for: (1) conducting a search
for delinquent taxes on all existing loans that are converted to the
new loan servicing system; (2) reporting delinquent taxes to the agency
during the life of the loan and (3) assuming responsibility for any
forfeiture that results from properties being sold at a tax sale if the
tax servicer does not inform RHS of delinquent taxes on the properties
so sold. The tax servicer will also be responsible for procuring the
tax bills on all escrowed loans and paying
[[Page 15399]]
the taxes from the borrower's escrow account. The tax service is
responsible for any penalty, loss of discount or incorrect disbursement
should they fail to provide accurate and timely information.
Escrow accounts will be established for all new direct 502 loans
approved after October 27, 1995, except for participation loans where
another lender will be establishing an escrow account. Borrowers whose
loans were approved after October 27, 1995, agreed to the escrow of
taxes and insurance when they received their loan. Section 504 loan
recipients may be required to escrow if their current lender does not
escrow. As existing loans are converted to escrow, the accounting
system used by the agency to credit borrower payments will change from
Daily Simple Interest to a Preamortized Schedule payment. There are two
conditions under which escrow accounts for existing loans will be
established:
(1) The borrower requests that an escrow account be established.
Existing borrowers will be allowed to voluntarily establish an escrow
account once their loan has been converted to the DLOS system.
(2) RHS requires that an escrow account be established. RHS will
require that an escrow account be established for a given loan if
either of the following conditions exists:
(i) A borrower defaults on the responsibility to pay either the
real estate taxes or hazard insurance premiums in a timely manner; or
(ii) A borrower defaults on regular monthly payments and requests
RHS assistance to cure the default.
In both cases (1) and (2) above, the borrower may add the cost of
the tax service fee, and initial escrow to their loan and have the
account reamortized. This will minimize costs to our customers. The tax
service will enhance the agency's ability to provide supervised credit
in rural America and assist more customers in becoming successful
homeowners.
(d) Regular Servicing
(1) Application of payments. If less than the full scheduled
payment is received the payment will be held in suspense and not
applied. For borrowers who remain under daily simple interest, interest
will continue to accrue until the full payment is received. For
borrowers under a predetermined amortized schedule, no additional
interest will accrue against the scheduled payment that is due,
however, the borrower may be charged a late fee. Full scheduled
payments will be applied as follows:
(i) Protective advances due.
(ii) Accrued interest due.
(iii) Principal due.
(iv) Escrow for taxes and insurance.
(v) Fees or charges applied to the account.
(2) Payment Subsidies. RHS currently provides two types of payment
subsidies to borrowers. Interest credit assistance was provided to
borrowers whose loans were approved prior to FY 1996. The interest rate
on these loans could be reduced as low as 1% to allow borrowers to pay
20% of their income for payments, taxes and insurance. Payment
assistance has been provided to borrowers whose loans were approved
after October 1, 1995. Under payment assistance, borrowers must pay 22,
24, or 26% of their income towards payments, taxes and insurance. The
percentage is determined by the borrower's income. Interest credit
assistance and payment assistance are herein referred to as payment
subsidies.
Payment subsidy guidelines are being modified to provide that if a
borrower's income should increase or decrease, a new 12-month agreement
may be prepared, if the amount of assistance changes by at least $10
per month. Currently, there is no dollar threshold which has created an
administrative burden on the agency and its customers.
To assist borrowers who are currently receiving interest credit,
the agency will allow them to continue to stay under the interest
credit program provided they continuously remain eligible. A borrower
who has stopped receiving interest credit and at a later date qualifies
for a payment subsidy will be converted to payment assistance.
Currently, a borrower who is receiving interest credit assistance is
required to convert to payment assistance if they obtain a subsequent
loan or the account is reamortized. This has caused a hardship for
several borrowers whose payments significantly increase because of the
conversion.
(3) Late Fees. A late charge fee will be assessed if the scheduled
payment is not received by the 15th day after the due date. Initially,
the agency intends to set the late charge fee at 4% of the borrower's
scheduled payment. This is an industry standard incentive to encourage
borrowers to pay on time, thereby reducing delinquencies and helping
borrowers to maintain a good credit history.
(4) Returned Check Fee. A returned check charge will be assessed
for any check that is returned for nonsufficient funds. This is
consistent with industry standards. Initially, the agency intends to
set the returned check fee at $15. This fee is less than industry
standards; however, a typical RHS borrower's mortgage payment is
significantly lower than that of a typical industry standard mortgage
payment. RHS feels the lower proposed returned check fee is more
consistent with the borrower's ability to pay.
(5) Final Payment. The RHS will provide a written statement
indicating the amount required to pay the account in full. A fee may be
charged for payoff statements if more than two statements are requested
on the same account in any 30 day period. Initially, the agency intends
to set the fee at $25 per statement which is consistent with industry
standards.
(6) Subsidy recapture. The RHS may now subordinate its lien to
include funds obtained from the other lender to improve or make repairs
to the dwelling if it is in the best interest of the government.
Currently, RHS will only allow a subordination to include the unpaid
principal and interest plus reasonable closing costs. If a borrower
desired to obtain additional funds for improvements or repair, the
lender had to agree to a third lien position which in many cases
prevented the borrower from refinancing.
Further subordination (as in a case where recapture has previously
been subordinated) of a lien securing a recapture receivable will now
be allowed if the borrower is refinancing with no increase in the
amount of the debt to which RHS has subordinated (except reasonable
closing costs).
The recapture formula has been changed to (1) provide a value added
credit for capital improvements (2) cease accrual or additional
principal reduction attributed to subsidy (PRAS) and (3) limit
recapture to 50 percent of value appreciation. This change eliminates
the major complaint concerning recaputure--nonconsideration of
improvements made subsequent to loan closing. It also partially
eliminates another major complaint--PRAS. PRAS is the accelerated
principal write-down that occurred when subsidy was applied to the
account by reducing the effective interest rate under the interest
credit program. RHS intends to ``freeze'' PRAS on the same date for all
borrowers who are subject to PRAS. At this time, we estimate such date
to be October 1, 1996.
By ``freezing'' PRAS, only the amount of accumulated PRAS (as of
the date of the ``freeze'') will be subject to recapture. Freezing PRAS
is to the borrower's financial advantage because PRAS, as it presently
operates,
[[Page 15400]]
continues to accrue even after a borrower no longer qualifies for
subsidy. PRAS continues to accrue until approximately the 20th year in
the life of the loan at which time it gradually decreases until the
loan reaches maturity. To ensure that no borrower is adversely affected
by this change, RHS will reduce the ``frozen'' PRAS starting in the
loan's 15th year by an equal amount each year so the PRAS will be zero
at loan maturity. For example, on an existing 33-year loan, PRAS was
frozen on October 1, 1996 at $5,000. In year 15 of this loan, 18 years
would be remaining. PRAS would be reduced in year 15 by $278 ($5,000
divided by 18), and by an additional $278 each year thereafter. If the
borrower paid off the loan in year 19, there would be $3,610 of PRAS
subject to recapture [$5,000-$1390 ($278 times 5 years).
These proposed changes will allow a borrower to better estimate
their equity position and eliminate this often confusing aspect of the
program. These proposed revisions to subsidy recapture will apply to
all new and existing borrowers.
Borrowers who cease to occupy their dwelling will now have the
amount of recapture due determined and given a choice of either paying
the recapture amount or having it included in the unpaid balance and
reamortized. Existing regulations were unclear when recapture was
calculated and repaid.
Borrowers will also be given a discount on the recapture amount due
if the recapture is repaid within 30 days of refinancing or payment of
the last loan installment and the borrower continues to occupy the
property.
(7) Transfer of security and assumption of indebtedness. The
regulation has been clarified to provide that, unless it is in the
government's best financial interests, RHS will not approve the
assumption of a secured loan if the seller fails to repay any unsecured
loans with USDA.
(e) Special Servicing Actions
(1) Delinquency workout agreements. All past due balances under
workout agreements will be required to be repaid within 2 years or the
remaining term of the loan whichever is shorter. Currently, Agency
regulations encourage but do not require a 2-year payback. With more
timely and consistent servicing, the Agency anticipates the amount of
delinquencies will decrease and the two year timeframe is sufficient.
Borrowers will become current on the account in a shorter period of
time and restore their good credit history.
(2) Moratorium. Moratoriums will be granted for the borrower's full
scheduled payment to include principal, interest, taxes and insurance
or for the borrower's scheduled payment for principal and interest,
based on the borrower's repayment ability. Moratoriums will continue to
be granted for a maximum of 2 years but will be reviewed semiannually.
This will benefit borrowers that no longer meet moratorium conditions
by reinstating scheduled payments at an earlier date thus reducing the
arrearage that must be repaid at the end of the moratorium period.
Borrowers not on escrow will be assisted by establishing an escrow
account and convert to a preamortized schedule prior to reamortization
at the end of the moratorium period.
(3) Unauthorized assistance. Unauthorized payment assistance can
occur through RHS error, or incorrect or false information provided by
the borrower. Borrowers who received unauthorized payment assistance by
providing false information will not be allowed to reamortize their
account to remove the delinquency that occurred when account
adjustments were made and may be recommended for suspension or
debarment. This will eliminate the inequity that currently exists
between borrowers who received unauthorized payment assistance through
no fault of their own and borrowers who provided false information.
(4) Graduation of SFH loans. The term ``graduation'' is being
replaced with ``refinancing'' to other credit.
(5) Debt Settlement. These regulations are revised to encourage the
use of offsets (Administrative, Salary and Internal Revenue) to affect
collection.
(6) Disposition of inventory property. Consistent with industry
standards, the term ``inventory property'' is being replaced with
``REO.''
Program property will now be made available to program applicants
for 60 days instead of 45 days. This sale period is effective from the
date of the notice of sale, and for any reduction in price or any other
change in credit terms or other sale terms. This will allow program
properties to be marketed for a greater period of time to those
individuals most in need of housing.
When a nonprofit organization or public body notifies RHS in
writing of its intent to buy property, RHS will withdraw the property
from the market for up to 30 days to provide the entity with the
opportunity to execute a sale contract. For program properties, the
listed price will now be discounted after the 60 day reservation period
for program applicants has elapsed. Nonprogram properties will continue
to be discounted from the listed price at any time. Initially, the
Agency intends to set the discount at its current rate of 10%.
For properties listed with a real estate broker, offers will now be
held for 3 business days after the date the property is offered for
sale. Offers received during the holding period are considered received
on the 4th business day and evaluated with any other offers received
that day. This action is taken to provide all real estate brokers with
a reasonable timeframe to receive the notice of listing and sell the
property. Problems had occurred in areas with a high housing demand
whereby sale information was obtained by real estate brokers at
different times due to the difference in mailing periods.
(7) Escrow of taxes and insurance. Any remaining funds held in
escrow or unapplied funds will be applied against the debt. Escrow
disbursement will stop immediately upon debt settlement or release of
security or at anytime RHS does not intend to take title.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995, the RHS
announces its intention to seek Office of Management and Budget (OMB)
approval of new reporting and recordkeeping requirements.
The RHS offers a supervised credit program to extend financial
assistance to construct, improve, alter, repair, replace or
rehabilitate dwellings, which will provide modest, decent, safe, and
sanitary housing to eligible individuals living in rural areas. To
assist individuals in obtaining affordable housing, a borrower's house
payment may be subsidized to an interest rate as low as 1% and under
the deferred mortgage program the subsidy can be reduced further. The
amount of subsidy is based on the borrower's household income. The
information requested by RHS is vital to be able to process
applications for RHS assistance and make prudent credit and program
decisions. It includes borrower financial information such as household
income, assets and liabilities and monthly expenses. Without this
information the Agency is unable to determine if a borrower would
qualify for any services or if assistance has been granted that the
borrower may not have been eligible for. In addition, proper
liquidation and debt settlement decisions are made.
Another integral part of Agency lending requires borrowers to
refinance to other credit when they are able to do so. If a borrower is
unable to find other credit available at reasonable rates and terms,
the Agency will continue to review the borrower for possible
[[Page 15401]]
refinancing at periodic intervals. If it is determined that all loan
servicing efforts have failed to produce a successful outcome the
account will be liquidated through voluntary liquidation or
foreclosure. The agency may also accept a deed in lieu of foreclosure
if it is in the best interest of the Government.
As mentioned in the ``Implementation Proposal,'' RHS field staff in
states under the DLOS system will be utilizing the proposed Handbook
for administrative operations of the program. RHS field staff in states
not under the DLOS system will be utilizing existing FmHA Instructions
for administrative operations, until they come under DLOS at which time
they will use the proposed Handbook. The information collection
requirements for existing FmHA Instructions has been previously
approved by OMB. Therefore, public burden for the direct SFH programs
will be contained in Part 3550, the proposed Handbook and existing FmHA
Instructions. RHS intends to establish a new consolidated information
collection docket for Part 3550, which will contain all burden related
to the direct SFH programs.
Public Burden in the Handbook
RHS is currently developing the proposed Handbook while
aggressively analyzing all existing burden imposed upon the public to
obtain and retain SFH program assistance. A Task Force of RHS employees
at the local, state and national level has been established and is
working with the DLOS team to eliminate all unnecessary burden. This
significant effort includes input from the private sector manufacturers
of the DLOS system. The system which RHS has already purchased includes
many industry standard forms. Wherever possible, RHS intends to utilize
these industry standard forms, eliminate duplicative FmHA forms and
make full use of our new expanded automation capabilities. For example,
most forms which a current RHS borrower must complete can be system
generated and contain all relevant system information such as the
borrower's account number, address, property description, real estate
taxes, insurance, income data, etc., thereby reducing unnecessary
burden imposed on our customers. This will reduce the time it takes the
public to complete required information, reduce the need to stock forms
throughout Rural Economic and Community Development (RECD) offices, and
result in cost savings to the public. RHS is confident that existing
information collection dockets can be reduced.
The proposed Handbook will be available for public comment with
regard only to its information collection requirements on or about July
1, 1996. RHS will publish a Notice in the Federal Register, with a 60-
day comment period, when the Handbook is available and its specific
information collection requirements.
Public Burden in Part 3550
At this time, the Agency is requesting OMB clearance of the
following burden:
Form FmHA 1940-43, ``Notice of Right To Cancel'': Federal
law requires that all parties entering into a transaction which results
in a mortgage on their present home be notified of and given the right
to cancel the transaction. Form FmHA 1940-43 provides the means for
such a transaction to be canceled by the potential borrower. This form
has been used by FmHA for many years, but was inadvertently omitted
from previous paperwork burden packages. In order to meet our legal
responsibilities and ensure that all potential borrowers are properly
notified of their rights, this form has been included in this
regulation. This form will now be generated electronically through the
DLOS system.
Form RECD 3550-1, ``Borrower's Certification and
Authorization.'' This is an industry standard form on which an
applicant certifies that all information furnished in connection with
the loan transaction is true and correct, and provides authorization
from the applicant for the release and verification of any information
contained in the loan application. This form will prove to be a time-
saver for the applicant as well as the Agency, and will allow for the
elimination of several existing FmHA forms when DLOS is implemented
nationwide.
Form RECD 3550-2, ``Request for Verification of Gift/Gift
Letter.'' This will be an automated form which will assist the
applicant in providing required information should the applicant plan
to receive monetary gifts to cover costs in connection with the loan,
i.e. loan closing costs. Currently, the applicant must either provide
some type of documentation or use an informal statement prepared by the
RHS field office staff. The burden on the applicant to provide some
type of documentation will be alleviated because this form will be
system generated and require minimal work for the applicant.
Form RECD 3550-4, ``Employment Certification/Payment
Assistance. This form will serve as a supplement to Form RECD 1944-14,
``Payment Assistance/ Deferred Mortgage Assistance Agreement.'' In
conjunction with the execution of Form RECD 1944-14, borrowers will
sign this form verifying that they will notify RHS when they change or
obtain employment.
Form RECD 3550-6, ``Notice to Borrower of Special Flood
Hazard and Federal Disaster Assistance.'' This is an industry standard
form. When applicable, the system will automatically generate this form
which will notify the applicant that the property being financed is
located in a flood hazard area. The form will require the signature of
the applicant.
Form RECD 3550-7, ``Mortgage Loan Commitment.'' This is an
industry standard form, will be system generated and notifies the
applicant of loan approval and stipulates any special conditions of the
loan approval. The applicant signs the form agreeing to the terms set
forth in the commitment.
Form RECD 3550-9, ``Initial Escrow Account Disclosure
Statement.'' This is an industry standard form, is system generated and
provides an applicant/borrower with a breakdown of his or her escrow
payments.
Form RECD 3550-10, ``Condominium Rider,'' and Form RECD
3550-11, ``Planned Unit Development Rider,'' will be used only for the
few loans the Agency provides on condominiums or planned unit
developments (PUDs). These automated forms will be used as a supplement
to the mortgage or deed of trust to specifically define condominium and
PUD covenants. The borrower's signature will be required.
Form RECD 3550-12, ``Subsidy Repayment Agreement,'' is a
new form which replaces Exhibit A, ``Subsidy Repayment Agreement,'' to
7 CFR part 1951 subpart I. Borrowers are required to repay to the
Government any subsidy received in connection with section 502 of the
Housing Act upon disposition or nonoccupancy of the security property.
This form, which is being reduced in excess of 50%, informs the
borrower of this obligation to RHS.
Standard Form (SF) 5510, ``Authorization Agreement for
Preauthorized Payments,'' is added to provide borrowers with the
convenience of having their monthly mortgage payments automatically
deducted from their bank account. This is a Standard Form widely used
throughout the financial community.
Paragraph 3550.9(b). This paragraph requires that
applicants must disclose any known relationship or association with an
RHS employee. This provision ensures impartiality in program decisions
and reduces the potential for employee conflict of interest. This
disclosure is made on Form FmHA 410-
[[Page 15402]]
4 which is part of the information collection package.
Paragraph 3550.53(g). This paragraph requires that
applicants must provide financial data to demonstrate that they have
adequate repayment ability for the requested loan. An applicant must
provide a financial statement listing all recurring monthly debts. This
information is critical to ensure prudent loan underwriting and is an
industry standard. This financial statement is included on Form FmHA
410-4 which is part of the information collection package.
Paragraphs 3550.55 and 3550.106. These paragraphs require
that all persons applying for RHS loans must file a written application
in a format specified by RHS. RHS currently utilizes Form FmHA 410-4,
an industry standard application form for this purpose. The information
in the application is critical to ensure that the applicant qualifies
for the assistance requested. Form FmHA 410-4 is part of the
information collection package.
Paragraphs 3550.55(b)(3) and 3550.106(b)(4). These
paragraphs provide RHS with the ability to periodically request that an
applicant reconfirm their interest in obtaining assistance. The request
is generally made in writing, and the applicant may call or write RHS
to reconfirm their interest. In many RHS offices, a backlog exists of
applications due to loan requests exceeding available loan funds. To
ensure the most timely and efficient processing of active applications,
RHS must periodically update an applicant's continued interest in the
program.
Paragraph 3550.55(b)(4). This paragraph provides RHS with
the opportunity to request additional information to support an
applicants loan request when RHS receives information which may
indicate that the eligibility determination may have been in error.
This information is critical to ensure applicant's are eligible for
assistance which they may be granted.
Paragraphs 3550.61 and 3550.112. These paragraphs require
that borrowers must furnish and continually maintain hazard and flood
insurance on property securing RHS loans. This is an industry standard
and is necessary to protect the borrower's and government's best
financial interests in the property.
Paragraph 3550.68. This paragraph describes the two forms
of payment subsidies available to RHS direct Section 502 borrowers.
Payment subsidies reduce the borrower's payment to a level consistent
with their income.
Payment subsidies are subject to recapture and this paragraph
requires that borrowers execute Form RECD 3550-12, ``Subsidy Repayment
Agreement,'' acknowledging they understand that subsidy must be repaid.
The agreement also provides information on how and when the subsidy
must be repaid. This is necessary to ensure that borrowers are fully
aware of their financial obligations under the program. Form RECD 3550-
12 is part of the information collection package.
Paragraphs 3550.68(e), 3550.69(c) and 3550.157(a)(3).
These paragraphs require that a borrower inform RHS whenever an adult
member of the household changes or obtains employment so that RHS can
determine whether a review of the borrower's circumstances is required.
This provision, which is required throughout the direct SFH programs,
is critical to ensure that a borrower remains eligible for the
assistance they are receiving. If the borrower's income should change,
it may affect their eligibility for decreased or increased assistance.
This requirement is accomplished when an applicant or borrower executes
Form RECD 3550-4, which is part of the information collection package.
Paragraph 3550.73(f). This paragraph requires that a
manufactured home dealer-contractor must sign a construction contract
which will cover both the unit and site development work. This is an
industry standard and protects the government and borrower's best
interests. Form FmHA 1924-6, ``Construction Contract,'' is used for
this purpose and is part of the information collection package.
Paragraph 3550.73(g). This paragraph requires that all
persons furnishing materials and labor in connection with a
construction contract must sign a release of claimants document. Again,
this is an industry standard form and documents to the homebuyer and
lender that all persons have been paid. It precludes mechanics liens
from being filed against the property and protects the best financial
interest of the homeowner and lender. Form FmHA 1924-10, ``Release of
Claimants,'' is used for this purpose and is part of the information
collection package.
Paragraph 3550.73(h). This paragraph requires that a
dealer-contractor must provide a warranty on a manufactured home.
Again, this is an industry standard and ensures the homeowner that
their new home is warranted in case of defects. The paragraph further
requires the dealer-contractor to furnish the homeowner with a copy of
all manufacturer's warranties. This would be for appliances, heating
systems, etc., and it again warrants such items from defect and
provides the homeowner with information regarding the product and who
to contact for further information. Form FmHA 1924-11, ``Builders
Warranty,'' is used for this purpose and is part of the information
collection package.
Paragraph 3550.112(d)(2). This paragraph requires when
borrowers file a claim under hazard and flood insurance, that they
notify RHS of any loss or damage to the security property. Under this
supervised credit program, RHS requires notification of insurable
losses to protect the governments financial interest in the property
and to assist our customers with any advice or counsel on ensuring that
damages are corrected in a workmanlike manner.
Paragraph 3550.113. Under the Section 504 grant program,
if a person obtains a 504 grant, and sells the property within 3 years,
the grant must be repaid. This paragraph requires grant recipients to
sign a grant agreement acknowledging this regulatory requirement. The
intent is to ensure that the recipient understands this provision and
provides the government with documentation to secure any proceeds if
the property is sold.
Paragraph 3550.158(b). This paragraph requires that
borrowers on active military duty, whose interest rates are reduced to
6% pursuant to the Soldiers and Sailors Relief Act, must notify RHS
when they are no longer in active status. The reduced interest rate is
only available to persons in active military duty. The borrower must
notify RHS when they are no longer on active status so that the
interest rate may be changed back to the rate specified in the
Promissory Note. This is to ensure that borrowers do not receive
benefits to which they are not entitled.
Paragraph 3550.159(a). This paragraph requires borrowers
who wish to lease mineral rights on security property to obtain
authorization form RHS. This is an industry standard. Lenders require
such authorization to ensure that the property will remain suitable as
a residence, and their security interests are not adversely affected.
Paragraph 3550.159(b). This paragraph requires borrowers
who wish RHS to subordinate its lien to obtain the Agency's consent.
This is an industry standard. Lenders require such authorization to
ensure that their security interests are not adversely affected.
Paragraph 3550.159(c). This paragraph requires borrowers
who wish to obtain a partial release from RHS for
[[Page 15403]]
the sale or exchange of security property or granting of a right-of-way
across the security property, must obtain approval from RHS. This is an
industry standard. Lenders require such authorization to ensure that
the property will remain suitable, and their security interests are not
adversely affected.
Paragraph 3550.159(d). This paragraph requires borrowers
who wish to lease the security property must obtain RHS consent. RHS
requires prior consent to ensure that the borrower does not receive
payment assistance to which they would no longer be eligible if they
cease to occupy the property, to know the whereabouts of the borrower,
and to ensure that the government's security interests are not
adversely affected.
Paragraph 3550.160. RHS credit is not intended to replace
or supplant private credit. Borrowers agree, a condition of obtaining
assistance, that they must refinance to other credit should it become
available. This paragraph requires that borrowers must periodically
provide RHS with financial data to ascertain their potential to secure
other credit. The borrower must complete a financial statement which
would document their income and debts. This information is used by RHS
to determine if the borrower, as required by statute, must refinance
with another lender.
Paragraph 3550 160(c)(3). This paragraph provides a
borrower, who has been requested to refinance, the opportunity to
provide RHS with additional information to document their inability to
refinance to other credit. This provision exists to give the borrower
every opportunity to dispute RHS's decision prior to their application
for other credit. Most private lenders charge application and related
fees to submit an application. This opportunity may preclude the
borrower from incurring this expense if additional information may
change the RHS decision.
Paragraph 3550.160(d). This paragraph requires that
borrowers who were requested to refinance to other credit, and are
unable to secure other financing, must provide documentation to RHS on
their inability to refinance. This is critical to ensure that the
borrower made a good faith effort to refinance and document that the
borrower cannot move to other credit.
Paragraph 3550.164(d). This paragraph requires that a
recipient of unauthorized assistance be notified in writing and given
the opportunity to provide information to alter the RHS determination
that the assistance they received was unauthorized. This provision
exists to provide the borrower with every opportunity to refute the RHS
action being taken.
Paragraph 3550.207(b). This paragraph requires that
borrowers on a moratorium (temporary stop on mortgage payments) must
provide RHS with financial information to demonstrate that the
moratorium should be continued. This is to ensure that a borrower does
not receive assistance to which they are no longer entitled.
Paragraph 3550.253. This paragraph provides guidance on
settlement of a debt by compromise or adjustment. The provisions allows
such action to be initiated by RHS or the applicant for the settlement
actions. The debtor's offer and a financial statement is required. This
is an industry standard and necessary to settle debts still owed to a
lender. Form FmHA 1956-1, ``Request for Debt Settlement,'' is used for
this purpose and is part of the information collection package.
Public Burden in Existing FmHA Regulations
As mentioned, public burden for the direct SFH programs is
currently approved in several information collection dockets. These
existing information collection dockets will be handled as follows:
7 CFR Part 1910, Subpart A--Receiving and Processing
Applications. RHS will make a technical correction to the existing
approved information collection docket (0575-0134) at the final rule
stage to transfer only the public burden for the direct Section 502 and
504 loan and grant programs to the information collection docket for 7
CFR Part 3550. Every effort will be made streamline and eliminate any
unnecessary public burden for the direct SFH programs before the
technical correction is made.
7 CFR Part 1944, Subpart A--Section 502 Rural Housing Loan
Policies, Procedures, and Authorizations. RHS will transfer the
existing approved information collection docket (0575-0059) at the
final rule stage to the information collection docket for 7 CFR Part
3550. It should be noted that RHS reduced the burden in this regulation
by 250,000 hours in October 1995.
Every effort will be made streamline and eliminate any unnecessary
public burden for the direct SFH programs before the transfer is
accomplished.
7 CFR Part 1944, Subpart J--Section 504 Rural Housing
Loans and Grants. RHS will transfer the existing approved information
collection docket (0575-0062) to the information collection docket for
7 CFR Part 3550. Every effort will be made streamline and eliminate any
unnecessary public burden for the direct SFH programs before the
transfer is accomplished.
7 CFR Part 1951, Subpart C--Offsets of Federal Payments to
FmHA Borrowers. RHS will make a technical correction to the existing
approved information collection docket (0575-0119) at the final rule
stage to transfer only the public burden for the direct Section 502 and
504 loan and grant programs to the information collection docket for 7
CFR Part 3550. Every effort will be made streamline and eliminate any
unnecessary public burden for the direct SFH programs before the
technical correction is made.
7 CFR Part 1951, Subpart F--Analyzing Credit Needs and
Graduation of Borrowers. RHS will make a technical correction to the
existing approved information collection docket (0575-0093) at the
final rule stage to transfer only the public burden for the direct
Section 502 and 504 loan and grant programs to the information
collection docket for 7 CFR Part 3550. Every effort will be made
streamline and eliminate any unnecessary public burden for the direct
SFH programs before the technical correction is made.
7 CFR Part 1951, Subpart G--Borrower Supervision,
Servicing and Collection of Single Family Housing Loan Accounts. RHS
will transfer the existing approved information collection docket
(0575-0060) to the information collection docket for 7 CFR Part 3550.
RHS will also be proposing a reduction in the existing information
collection docket. For example, with the establishment of the
centralized servicing unit borrowers past due on their payment will
receive timely and consistent servicing of their accounts. With prompt
servicing, fewer borrowers will become seriously delinquent on their
accounts thereby reducing the number of workout agreements executed by
borrowers. Every additional effort will be made streamline and
eliminate any unnecessary public burden for the direct SFH programs
before the transfer is made.
7 CFR Part 1951, Subpart M--Servicing Cases Where
Unauthorized Loan or Other Financial Assistance Was Received--Single
Family Housing. RHS will transfer the existing approved information
collection docket (0575-0105) to the information collection docket for
7 CFR Part 3550. RHS will also be proposing a reduction in the existing
information collection docket. For example, when RHS has agreed to
continue with the loan of a borrower who otherwise would not qualify
for a SFH loan either because the loan was made for an unauthorized
purpose or
[[Page 15404]]
the borrower was not eligible for financial assistance the borrower
will no longer be required to repay all of subsidy recapture up to 100%
of the proceeds available. These borrowers will now have recapture
calculated in the same manner as other SFH borrowers. Every additional
effort will be made streamline and eliminate any unnecessary public
burden for the direct SFH programs before the transfer is made.
7 CFR Part 1955, Subpart A--Liquidation of Loans Secured
by Real Estate and Acquisition of Real and Chattel Property. RHS will
make a technical correction to the existing approved information
collection docket (0575-0109) at the final rule stage to transfer only
the public burden for the direct Section 502 and 504 loan and grant
programs to the information collection docket for 7 CFR Part 3550.
Every effort will be made streamline and eliminate any unnecessary
public burden for the direct SFH programs before the technical
correction is made.
7 CFR Part 1955, Subpart B--Management of Property. RHS
will make a technical correction to the existing approved information
collection docket (0575-0110) at the final rule stage to transfer only
the public burden for the direct Section 502 and 504 loan and grant
programs to the information collection docket for 7 CFR Part 3550.
Every effort will be made streamline and eliminate any unnecessary
public burden for the direct SFH programs before the technical
correction is made.
7 CFR Part 1956, Subpart B--Debt Settlement--Farmer
Programs and Housing. RHS will make a technical correction to the
existing approved information collection docket (0575-0118) at the
final rule stage to transfer only the public burden for the direct
Section 502 and 504 loan and grant programs to the information
collection docket for 7 CFR Part 3550. Every effort will be made
streamline and eliminate any unnecessary public burden for the direct
SFH programs before the technical correction is made.
Estimate of Burden: Public reporting burden for this collection of
information is estimated to range from 5 minutes to 3 hours response.
Respondents: Applicants seeking financial assistance through RHS to
purchase adequate housing in rural America and borrowers who have
received such assistance.
Estimated Number of Respondents: 822,570.
Estimated Number of Responses per Respondent: 1.5.
Estimated Total Annual Burden on Respondents: 217,195.
The complete text of the subject regulations is published herein
for public review and comment. Additional copies of the proposed
regulations or copies of the referenced forms may be obtained from the
Director, Regulations and Paperwork Management Division, at (202) 720-
9725. 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 the 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.
Comments must be received on or before June 7, 1996, to be assured
of consideration. All responses to this notice will be summarized,
included in the request for OMB approval, and will become a matter of
public record. Comments should be submitted to the Desk Officer for
Agriculture, Office of Information and Regulatory Affairs, Office of
Management and Budget, Washington, D.C. 20503 and to the Director,
Regulations and Paperwork Management Division, U.S. Department of
Agriculture, RECD, Ag. Box 0743, Washington, DC 20250. A comment to OMB
is best assured of having its full effect if OMB receives it within 30
days of publication of this rule.
List of Subjects in 7 CFR Part 3550
Accounting, Administrative practice and procedure, Conflicts of
interests, Environmental impact statements, Equal credit opportunity,
Fair housing, Grant programs--Housing and Community Development, Loan
programs--Housing and community development, Low and moderate income
housing, Manufactured homes, Reporting and recordkeeping requirements,
Rural areas, Subsidies.
Therefore, chapter XXXV, title 7, Code of Federal Regulations is
added to read as follows:
CHAPTER XXXV--RURAL HOUSING SERVICE, UNITED STATES DEPARTMENT OF
AGRICULTURE
PART 3550--SINGLE FAMILY HOUSING
Subpart A--General
Sec.
3550.1 Applicability.
3550.2 Purpose.
3550.3 Equal opportunity and fair housing.
3550.4 Reviews and appeals.
3550.5 Environmental requirements.
3550.6 State law or state supplement.
3550.7 Demonstration programs.
3550.8 Exception authority.
3550.9 Conflict of interest.
3550.10 Definitions.
3550.11-3550.50 [Reserved]
Subpart B--Section 502 Origination
3550.51 Program objectives.
3550.52 Loan purposes.
3550.53 Borrower eligibility requirements.
3550.54 Calculation of income and assets.
3550.55 Applications.
3550.56 Site requirements.
3550.57 Dwelling requirements.
3550.58 Ownership requirements.
3550.59 Security requirements.
3550.60 Escrow account.
3550.61 Insurance.
3550.62 Appraisals.
3550.63 Maximum loan amount.
3550.64 Down payment.
3550.65 Loan-to-value ratio.
3550.66 Interest rate.
3550.67 Repayment period.
3550.68 Payment subsidies.
3550.69 Deferred mortgage payments.
3550.70 Conditional commitments.
3550.71 Special requirements for condominiums.
3550.72 Community land trusts.
3550.73 Manufactured homes.
3550.74 Nonprogram loans.
3550.75-3550.100 [Reserved]
Subpart C--Section 504 Origination
3550.101 Program objectives.
3550.102 Grant and loan purposes.
3550.103 Construction standards and requirements.
3550.104 Maximum loan and grant.
3550.105 Eligibility requirements.
3550.106 Applications.
3550.107 Ownership requirements.
3550.108 Loan rates and terms.
3550.109 Security requirements (loans only).
3550.110 Appraisals.
3550.111 Escrow account.
3550.112 Insurance (loans only).
3550.113 Repayment agreement (grants only).
3550.114-3550.150 [Reserved]
Subpart D--Regular Servicing
3550.151 Servicing goals.
3550.152 Loan payments.
3550.153 Fees and charges.
3550.154 Inspections.
3550.155 Escrow account.
3550.156 Borrower obligations.
3550.157 Payment subsidy.
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3550.158 Active military duty.
3550.159 Borrower actions requiring RHS approval.
3550.160 Refinancing with private credit.
3550.161 Final payment.
3550.162 Recapture.
3550.163 Transfer of security and assumption of indebtedness.
3550.164 Unauthorized assistance.
3550.165-3550.200 [Reserved]
Subpart E--Special Servicing
3550.201 Purpose of special servicing actions.
3550.202 Past due accounts.
3550.203 General servicing actions.
3550.204 Payment assistance.
3550.205 Work-out agreements.
3550.206 Protective advances.
3550.207 Payment moratorium.
3550.208 Reamortization using promissory note interest rate.
3550.209 [Reserved]
3550.210 Offsets.
3550.211 Liquidation.
3550.212-3550.250 [Reserved]
Subpart F--Post-Servicing Actions
3550.251 Property management and disposition.
3550.252 Debt settlement policies.
3550.253 Settlement of a debt by compromise or adjustment.
3550.254-3550.300 [Reserved]
Authority: 5 U.S.C. 301 and 42 U.S.C. 1480.
Subpart A--General
Sec. 3550.1 Applicability.
This part sets forth policies for the direct single family housing
loan programs operated by the Rural Housing Service (RHS) of the U.S.
Department of Agriculture. It addresses the requirements of sections
502 and 504 of the Housing Act of 1949, as amended, and includes
policies regarding both origination and servicing. Procedures for
implementing the regulations in this part can be found in program
handbooks, available in any Rural Economic Community Development (RECD)
office. The provision on the expenditure of any funds under this part
is contingent upon the availability of funds to the agency.
Sec. 3550.2 Purpose.
The purpose of the RHS single family direct loan programs is to
provide low- and very low-income people who will live in rural areas
with an opportunity to own adequate but modest, decent, safe and
sanitary dwellings and related facilities. The section 502 program
offers persons that do not currently own adequate housing, and that
cannot obtain other credit, the opportunity to acquire, build,
rehabilitate, improve or relocate dwellings in rural areas. The section
504 program offers loans to homeowners who cannot obtain other credit
to repair or rehabilitate their properties. The section 504 program
also offers grants to homeowners age 62 or older who cannot obtain a
loan to correct health and safety hazards.
Sec. 3550.3 Equal opportunity and fair housing.
RHS will administer its programs fairly, and in accordance with
both the letter and the spirit of all equal opportunity and fair
housing legislation and applicable executive orders. Loans, grants,
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, physical or mental disability,
receipt of income from public assistance, 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), Executive Order 1246, and Executive Order 11063, as amended by
Executive Order 12259 as applicable. The Civil Rights Compliance
Requirements of the U.S. Department of Agriculture are spelled out in 7
CFR part 1901, subpart E.
Sec. 3550.4 Reviews and appeals.
(a) Participant rights. Whenever RHS makes a decision that will
adversely affect a participant, RHS will inform the participant that
the decision can be reviewed by the next level supervisor, and indicate
whether the decision can be appealed to the National Appeals Division
(NAD) according to the regulations set forth in 7 CFR part 11.
Nonprogram (NP) participants are not entitled to appeal rights except
with regard to denial of NP loan assistance.
(b) Non-appealable decisions. The following types of decisions are
not appealable.
(1) Decisions made by parties outside of RHS, even when those
decisions are used as a basis for RHS decisions.
(2) Decisions that do not meet the definition of an ``adverse
decision'' under 7 CFR part 11.
(3) Decisions involving parties who do not meet the definition of
``participant'' under 7 CFR part 11.
(4) Decisions with regard to subject matters not covered by 7 CFR
part 11.
(5) Interest rates as set forth in agency procedures, except
appeals alleging application of the incorrect interest rate.
(6) Refusal to request an administrative waiver permitted by
program regulations.
(7) Denials of assistance due to lack of funds.
(c) Next-level review. Any adverse decision, whether appealable or
non-appealable, may be reviewed by the next-level supervisor.
(d) NAD Review. (1) A participant may request that NAD review the
agency's findings of non-appealability. In cases where the adverse
decision is based on both appealable and non-appealable actions, the
adverse action is not appealable.
(2) A participant may request that NAD review any decision that is
appealable.
(3) NAD will review the participant's request in accordance with 7
CFR part 11.
(e) Actions pending the outcome of an appeal. (1) Assistance will
not be discontinued pending the outcome of an appeal of any adverse
decision.
(2) Real Estate Owned (REO) properties will not be held off the
market pending appeal of a decision to deny credit.
Sec. 3550.5 Environmental requirements.
(a) Policy. RHS will consider environmental quality as equal with
economic, social, and other relevant factors in program development and
decision-making processes. RHS will take into account potential
environmental impacts of proposed projects by working with RHS
applicants, other federal agencies, Indian tribes, state and local
governments, and interested citizens and organizations in order to
formulate actions that advance the program goals in a manner that will
protect, enhance, and restore environmental quality.
(b) Regulatory references. Processing and servicing actions under
this part will be undertaken consistent with the requirements provided
in 7 CFR part 1940, subpart G, which addresses environmental
requirements and 7 CFR part 1924, subpart A, which addresses lead-based
paint.
Sec. 3550.6 State law or state supplement.
State and local laws and regulations may affect RHS implementation
of certain provisions of this part, for example, with respect to the
treatment of liens, construction, or environmental policies.
Supplemental guidance may be issued in the case of any conflict or
significant differences.
Sec. 3550.7 Demonstration programs.
From time to time, RHS may authorize limited demonstration
programs. The purpose of these demonstration programs is to test new
approaches to offering housing under the statutory authority granted to
the Secretary. Therefore, such
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demonstration programs may not be consistent with some of the
provisions contained in this part. However, any program requirements
that are statutory will remain in effect. Demonstration programs will
be clearly identified as such.
Sec. 3550.8 Exception authority.
A State Director may request and the Administrator or designee may
make an exception to any requirement or provision of this part or
address any omission of this part that is consistent with the
applicable statute if 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. 3550.9 Conflict of interest.
(a) Objective. It is the objective of RHS to maintain the highest
standards of honesty, integrity, and impartiality by employees. To
reduce the potential for employee conflict of interest, all processing,
approval, servicing or review activity will be conducted by RHS
employees who:
(1) Are not themselves the applicant.
(2) Are not members of the family or close known relatives of the
applicant.
(3) Do not have an immediate working relationship with the
applicant, the employee related to the applicant, or the employee who
would normally conduct the activity.
(4) Do not have a business or close personal association with the
applicant.
(b) Applicant responsibility. The applicant must disclose any known
relationship or association with a RHS employee when such information
is requested.
(c) RHS employee responsibility. A RHS employee must disclose any
known relationship or association with an applicant, regardless of
whether the relationship or association is known to others. Loans may
not be used by RHS employees and loan closing agents, or members of
their families to purchase REO property, security property from a
borrower, or security property at a foreclosure sale.
Sec. 3550.10 Definitions.
Acceleration. Demand for immediate repayment of the entire balance
of a debt if the security instruments are breached or other conditions
for repayment occur.
Adjusted annual income. Used to determine whether an applicant is
income-eligible. Adjusted income provides for deductions to account for
varying household circumstances and expenses. See Sec. 3550.54 of
subpart B of this part for a complete description of adjusted income.
Adjustment. An agreement by RHS to release a debtor from liability
upon receipt of a reduced amount paid as an initial lump sum and
periodic additional payments over a period of up to 5 years.
Amortized payment. Equal monthly payments under a fully amortized
mortgage loan which provides for the scheduled payment of interest and
principal over the term of the loan. The proportion of the principal is
reduced, and the proportion represented by the principal repayment
increases correspondingly.
Applicant. An adult member of the household who will be responsible
for repayment of the loan.
Assumption. The procedure whereby the transferee becomes liable for
all or part of the debt of the transferor.
Borrower. A recipient who is indebted to RHS under the section 502
or 504 programs.
Cancellation. A decision by RHS to cease collection activities and
release the debtor from personal liability for any remaining amounts
owed.
Co-signer. An individual or an entity that joins in the execution
of a promissory note to compensate for any deficiency in the
applicant's repayment ability. The co-signer becomes jointly liable to
comply with the terms of the promissory note in the event of the
borrower's default, but is not entitled to any interest in the security
or borrower rights.
Compromise. An agreement by RHS to release a debtor from liability
upon receipt of a specified lump sum that is less than the total amount
due.
Conditional commitment. A determination by RHS that a proposed
dwelling will qualify as a program-eligible property. The conditional
commitment does not reserve funds, nor does it ensure that a program-
eligible applicant will be available to buy the dwelling.
Cross-collateralized loan. A situation in which a single property
secures both Rural Housing Service and Farm Service Agency loans.
Custodial property. Borrower-owned real property that serves as
security for a RHS loan that has been taken into possession by RHS to
protect the government's interest.
Daily simple interest. A method of establishing borrower payments
based on daily interest charged on the outstanding principal balance of
the loan. Principal is reduced by the amount of payment in excess of
the accrued interest.
Dealer-contractor. A person, firm, partnership, or corporation in
the business of selling and servicing manufactured homes and developing
sites for manufactured homes. A person, firm, partnership, or
corporation not capable of providing the complete service is not
eligible to be a ``dealer-contractor.''
Debt instrument. A collective term encompassing obligating
documents for a loan, including any applicable promissory note,
assumption agreement, or grant agreement.
Deferred mortgage payments. A subsidy available to eligible, very
low-income borrowers of up to 25% of their principal and interest
payments at 1% for up to 15 years. The deferred amounts are due on
sale.
Deficient housing. A dwelling that lacks complete plumbing; lacks
adequate heating; is dilapidated or structurally unsound; or has an
overcrowding situation that will be corrected with loan funds.
Elderly family. An elderly family consists of one of the following:
(1) A person who is the head, spouse, or sole member of a family
and who is 62 years of age or older, or who is disabled, and is an
applicant or borrower; or
(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) In the case of a family where the deceased borrower, or spouse,
was at least 62 years old or disabled, the surviving household member
shall continue to be classified as an ``elderly family'' for the
purpose of determining adjusted income even though the surviving
members may not meet the definition of elderly family on their own,
provided:
(i) They occupied the dwelling with the deceased family member at
the time of the death;
(ii) If one of the surviving family members is the spouse of the
deceased family member, the surviving family shall be classified as an
elderly family only until the remarriage of the surviving spouse; and
(iii) At the time of the death of the deceased family member, the
dwelling was financed under Title V of the Housing Act of 1949.
Escrow account. An account maintained by RHS 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.
Existing dwelling or unit. A dwelling or unit which is: more than 1
year old; or less than 1 year old but the dwelling
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is not covered by an approved 10-year warranty plan.
False information. Information that the recipient knew or should
have known was incorrect at the time it was provided.
Full-time student. A person who carries at least the minimum number
of credit hours considered to be full-time by their college or
vocational school.
Hazard. A condition of the property which jeopardizes the health or
safety of the occupants or members of the community, but which does not
make it unfit for habitation. (See also the definition of major hazard
in this section.)
HUD. The U.S. Department of Housing and Urban Development.
Inaccurate information. Incorrect information inadvertently
provided by a recipient without intent to obtain benefits fraudulently.
Indian reservation. All land located within the limits of any
Indian reservation under the jurisdiction of the United States
notwithstanding the issuance of any patent and including rights-of-way
running through the reservation; trust or restricted land located
within the boundaries of a former reservation of a federally recognized
Indian tribe in the State of Oklahoma; or all Indian allotments, the
titles to which have not been extinguished if such allotments are
subject to the jurisdiction of a federally recognized Indian tribe.
Interest credit. A subsidy that reduces the effective interest rate
of a loan. (See Sec. 3550.68(d) of subpart B of this part.) Since
October 27, 1995, new subsidies have been provided through payment
assistance.
Junior lien. A security instrument or a judgment against the
security property to which the RHS debt instrument is superior.
Legal alien. For the purposes of this part, legal alien refers to
any person lawfully admitted to the country who meets the criteria in
section 214 of the Housing and Community Development Act of 1980, 42
U.S.C. 1436a.
Leveraged loan. A loan or grant from a non-RHS source closed
simultaneously with a RHS loan or grant.
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 greater than the very low-income
limit, but that does not exceed the HUD established low-income limit
(generally 80% of median income adjusted for household size) for the
county or Metropolitan Statistical Area where the property is or will
be located.
Major hazard. A condition so severe that it makes the property
unfit for habitation. (See also the definition of hazard in this
section.)
Manufactured home. A structure which is built to Federally
Manufactured Home Construction and Safety Standard (FMHCSS) and RHS
Thermal Performance Standards (TPS) of 7 CFR part 1924, subpart A. It
is transportable in one or more sections, which in the traveling mode
is 10-body feet or more in width, and when erected on site is 400 or
more square feet, 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. Permanent foundations are required.
Market value. The value of the property as determined by a current
appraisal.
Mobile home. A manufactured unit often referred to as a
``trailer,'' designed to be used as a dwelling, but built prior to the
enactment of Public Law 96-399 (October 8, 1980).
Moderate-income. An adjusted income greater than the low-income
limit, but that does not exceed the low-income limit by more than
$5,500.
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 (unless an exception is
approved by RHS). In addition, the property must not be designed for
income-producing activities nor have an in-ground swimming pool.
Moratorium. A period of up to two years during which scheduled
payments for principal and interest, or principal, interest and
deposits to the escrow accounts are not required, but are subject to
repayment at a later date.
Mortgage. A form of security instrument or lien on real property
including a real estate mortgage or a deed of trust.
Net family assets. Are considered in the calculation of annual
income. See Sec. 3550.54 of subpart B of this part for a complete
description.
Net recovery value. The appraised value of the security property
minus anticipated liquidation expenses as determined by RHS.
New dwelling. A dwelling to be constructed or that is less than 1
year old and is covered by an approved 10-year warranty plan as
described in subpart A of part 1924 of this title.
Nonprogram (NP) property. Property that does not meet the program
eligibility requirements outlined in Sec. 3550.56 and Sec. 3550.57 of
subpart B of this part.
Nonprogram (NP) terms. Credit terms available from RHS when the
applicant or property is not program-eligible.
Offset. Deductions from a borrower's federal retirement benefits,
salary, income tax refund, or payments from other federal agencies to
the borrower to pay a debt owed to RHS. Deductions from retirement
benefits and salary only apply to current and former federal employees.
Participant. For the purpose of appeals, a participant is any
individual or entity who has applied for, or whose right to participate
in or receive a payment, loan, or other benefit is affected by a RHS
decision, in accordance with 7 CFR part 11.
Payment assistance. Subsidy used beginning October 27, 1995, to
reduce mortgage payments. (See Sec. 3550.68(c) of subpart B of this
part.)
Payment subsidy. A general term which refers to either payment
assistance or interest credit.
Person with disability. Any person who has a physical or mental
impairment that substantially limits one or more major life activities,
has a record of such an impairment, or is regarded as having such an
impairment. As used in this definition, the phrase:
(1) Physical or mental impairment includes--
(i) Any physiological disorder or condition, cosmetic
disfigurement, or anatomical loss affecting one or more of the
following body systems: neurological; musculoskeletal; special sense
organs; respiratory, including speech organs; cardiovascular;
reproductive; digestive; genitourinary; hemic and lymphatic; skin; and
endocrine; or
(ii) Any mental or psychological disorder, such as mental
retardation organic brain syndrome, emotional or mental illness, and
specific learning disabilities. The term ``physical or mental
impairment'' includes, but is not limited to, such diseases and
conditions as orthopedic, visual, speech, and hearing impairments,
cerebral palsy, epilepsy, muscular dystrophy, multiple sclerosis,
cancer, heart disease, diabetes, mental retardation, emotional illness,
HIV disease (whether symptomatic or
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asymptomatic), and drug addiction and alcoholism.
(2) Major life activities include functions such as caring for
one's self, performing manual tasks, walking, seeing, hearing,
speaking, breathing, learning, and working.
(3) Has a record of such an impairment means has a history of, or
has been misclassified as having, a mental or physical impairment that
substantially limits one or more major life activities.
(4) Is regarded as having an impairment means--
(i) Has a physical or mental impairment that does not substantially
limit major life activities but is treated by the agency as
constituting such a limitation;
(ii) Has a physical or mental impairment that substantially limits
major life activities only as a result of the attitudes of others
toward such impairment; or
(iii) Has none of the impairments defined in paragraph (1) of this
definition but is treated by the agency as having such an impairment.
PITI ratio. The amount paid by the borrower for principal,
interest, taxes, and insurance, divided by repayment income.
Primary loan. The oldest RHS loan on the property.
Prior lien. A security instrument or a judgment against the
security property that is superior to the RHS debt instrument.
Program-eligible applicant. Person meeting the eligibility
requirements described in Sec. 3550.53 of subpart B of this part.
Program-eligible property. A property eligible to be financed under
this part, as determined by the criteria listed in Sec. Sec. 3550.56
through 3550.59 of subpart B of this part.
Program terms. Credit terms that are available only to program-
eligible applicants for program-eligible properties.
Property. The land, dwelling, and related facilities for which the
applicant will use RHS assistance.
Protective advances. Costs incurred to protect the security
interest of the government which are charged to the borrower's account.
Real estate taxes. Taxes and the annual portion of assessments
estimated to be due and payable on the property, reduced by any
available tax exemption.
Recapture amount. An amount of subsidy to be repaid by the borrower
upon disposition or nonoccupancy.
RECD. Rural Economic Community Development, a mission area within
the Department of Agriculture which includes the Rural Housing Service.
REO. Property for which RHS holds title.
Repayment income. Used to determine whether an applicant has the
ability to make monthly loan payments. Repayment income includes
amounts excluded for the purpose of adjusted annual income. See
Sec. 3550.54 of subpart B of this part for a complete description.
RHS. The Rural Housing Service of the U.S. Department of
Agriculture, or its successor agency, formerly the Rural Housing and
Community Development Service (RHCDS), a successor agency to the
Farmers Home Administration (FmHA).
RHS interest rate. The current unsubsidized interest rate offered
by RHS, available in any RECD office.
Rural area: A rural area is:
(1) Open country which is not part of or associated with an urban
area.
(2) Any town, village, city or place, including the immediate
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, and
(A) Is not contained within a Metropolitan Statistical Area, and
(B) Has a serious lack of mortgage credit for low- and moderate-
income households as determined by the Secretary of Agriculture and
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.
Scheduled payment. The monthly or annual installment on a
promissory note plus escrow (if required), as modified by any payment
subsidy agreement, delinquency workout agreement, or other documented
agreements between RHS and the borrower.
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 satisfy
the debt.
Security property. All the property that serves as collateral for a
RHS loan.
Total debt ratio. The amount paid by the borrower for principal,
interest, taxes, insurance and any continuing obligations, divided by
the repayment income.
Unauthorized assistance. Any loan, payment subsidy, deferred
mortgage payment, or grant for which there was no regulatory
authorization or for which the recipient was not eligible.
Unsecured loan. A loan evidenced only by the borrower's promissory
note.
Value appreciation. The current market value of an RHS financed
property minus: the unpaid balance of the RHS debt; reasonable selling
expenses (if any); and the original equity (if any) of the borrower.
Very low-income. An adjusted income that does not exceed the HUD-
established very low income limit (generally 50% of median income
adjusted for household size) for the county or the Metropolitan
Statistical Area where the property is or will be located.
Veterans preference. A priority extended to any person applying for
a loan or grant under this part who has been honorably discharged,
including clemency discharges, or released from the active forces of
the United States Army, Navy, Air Force, Marine Corps, or Coast Guard,
who served on active duty in such forces:
(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; or
(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.
Secs. 3550.11-3550.50 [Reserved]
Subpart B-Section 502 Origination
Sec. 3550.51 Program objectives.
Section 502 of the Housing Act of 1949 authorizes the Rural Housing
Service (RHS) to provide financing to help low- and very low-income
persons who cannot obtain credit from other sources obtain adequate
housing in rural areas. Resources for the section 502 program are
limited, and therefore, applicants are encouraged to use section 502
funds in conjunction with funding
[[Page 15409]]
or financing from other sources, if possible. Sections 3550.52 through
3550.73 of this subpart set forth the requirements for originating
loans or program terms. Section 3550.74 of this subpart describes the
differences for origination of loans on nonprogram terms.
Sec. 3550.52- Loan purposes.
Section 502 funds may be used to buy, build, rehabilitate, improve,
or relocate an eligible dwelling and provide related facilities for use
by the borrower as a permanent residence. In limited circumstances
section 502 funds may be used to refinance existing debt.
(a) Purchases from existing RHS borrowers. To purchase a property
currently financed by a RHS loan, the new borrower must assume the
existing RHS indebtedness. Section 502 funds may be used to provide
additional financing or make repairs. Loan funds also may be used to
permit a remaining borrower to purchase the equity of a departing co-
borrower.
(b) Refinancing non-RHS loans. Debt from an existing non-RHS loan
may be refinanced if the existing debt is secured by a lien against the
property, RHS will have a first lien position on the security property
after refinancing, and:
(1) In the case of loans for existing dwellings, if:
(i) Due to circumstances beyond the applicant's control, the
applicant is in danger of losing the property, and
(ii) The debt is over $5,000 and was incurred for eligible program
purposes prior to loan application or was a protective advance made by
the mortgagee for items covered by the loan to be refinanced, including
accrued interest, insurance premiums, real estate tax advances, or
preliminary foreclosure costs.
(2) In the case of loans for a building site without a dwelling,
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) The RHS loan will include funds to construct an appropriate
dwelling on the site for the applicant's use.
(3) Debts incurred after the date of RHS loan application but
before closing may be refinanced if the costs are incurred for eligible
loan purposes and any construction work conforms to the standards
specified in this part.
(c) Refinancing RHS debt. Under limited circumstances, an existing
RHS loan may be refinanced in accordance with Sec. 3550.203 of subpart
E of this part.
(d) Eligible costs. Improvements financed with loan funds must be
on land which, after closing, is part of the security property. In
addition to acquisition, construction, repairs, or the cost of
relocating a dwelling, loan funds may be used to pay for:
(1) Reasonable expenses related to obtaining the loan, including
legal fees, architectural and engineering fees, technical fees, title
clearance fees, and loan closing fees; appraisal, surveying,
environmental, and tax monitoring services; and personal liability
insurance fees for Mutual Self-Help borrowers.
(2) The cost of providing 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 for utilities such as water, sewer,
electricity, and gas for which the borrower is liable and which are not
paid from other funds.
(4) Reasonable lender charges and fees if the RHS loan is being
made in combination with a leveraged loan.
(5) 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 and property insurance premiums.
(6) Fees to public and private nonprofit organizations that are tax
exempt under the Internal Revenue Code for the development and
packaging of loan applications, except for loans related to the
purchase of a RHS Real Estate Owned (REO) property.
(e) Loan restrictions. Loan funds may not be used to:
(1) Refinance debts on a manufactured home.
(2) Purchase or improve income-producing land or buildings to be
used principally for income-producing purposes.
(3) Pay fees, commissions, or charges to for-profit entities
related to loan packaging or referral of prospective applicants to RHS.
Sec. 3550.53- Borrower eligibility requirements.
(a) Income eligibility. The adjusted income of an applicant must
not exceed the applicable low-income limit for the area, adjusted for
household size (available in any Rural Economic Community Development
(RECD) office). Section 3550.54 of this subpart provides a detailed
discussion of the calculation of adjusted income.
(b) Citizenship status. The applicant must be a natural person
(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, or a noncitizen who qualifies as
a legal alien as defined in Sec. 3550.10 of subpart A of this part.
(c) Primary residence. Applicants must agree to and have the
ability to occupy the dwelling on a permanent basis.
(1) Because of the probability of transfer, loans will not be
approved for military personnel on active duty unless the applicant
will be discharged within a reasonable period of time.
(2) Because of the probability of moves after graduation, loans
will not be approved for a full-time student unless the applicant
intends to make the home a permanent residence and there are reasonable
prospects that employment will be available in the area after
graduation.
(3) In either case, if the home is being constructed or renovated
an adult member of the household must be available to make inspections
and authorize progress payments as the dwelling is being constructed.
(d) Eligibility of current homeowners. (1) Current homeowners with
a non-RHS loan may receive RHS loan funds to refinance an existing loan
under the conditions outlined in Sec. 3550.52(b) of this subpart, or to
purchase a new dwelling if the current dwelling cannot reasonably be
brought up to local code requirements.
(2) Current homeowners with a RHS loan may receive additional loan
funds to repair the dwelling.
(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. Applications from applicants who have
been suspended or debarred from participation in federal programs will
be
[[Page 15410]]
handled in accordance with FmHA Instruction 1940-M, available in any
RECD office.
(g) Repayment ability. Applicants must demonstrate adequate
repayment ability.
(1) A very low-income applicant is considered to have 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 monthly debts does not exceed 38 percent of the
applicant's repayment income.
(2) A low-income applicant is considered to have repayment ability
when the monthly amount required for payment of PITI does not exceed 33
percent of the applicant's repayment income, and the monthly amount
required to pay PITI plus recurring monthly debts does not exceed 38
percent of repayment income.
(3) Repayment ratios may exceed the percentages specified in
paragraphs (g)(1) and (g)(2) of this section if the applicant has
demonstrated an ability to meet higher debt obligations, or if RHS
determines, based on other compensating factors, that the household has
a higher repayment ability.
(h) Credit qualifications. Applicants must be unable to secure the
necessary credit from other sources upon terms and conditions that the
applicant could reasonably be expected to fulfill. Applicants must have
a credit history that indicates reasonable ability and willingness to
meet debt obligations. An outstanding judgment obtained by the United
States in a federal court, other than the United States Tax Court,
demonstrates an unacceptable credit history.
(1) Indicators of unacceptable credit include:
(i) Incidents of more than two debt payments more than 30 days late
within the last 12 months.
(ii) Loss of security due to a foreclosure if the foreclosure has
been completed within the last 36 months.
(iii) An outstanding Internal Revenue Service (IRS) tax lien or any
other outstanding tax liens with no satisfactory arrangement for
payment.
(iv) 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
paragraphs (h)(2)(ii) and (h)(2)(iii) of this section.
(v) Two or more rent payments paid 30 or more days late within the
last two years, or within the last year if the applicant has
experienced no other credit problems in the past two years. This may be
waived if the RHS loan will reduce shelter costs significantly and
contribute to an improved repayment ability.
(vi) 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 six months.
(vii) Non-agency debts written off within the last 36 months.
(viii) Agency debts that were debt settled, or are being considered
for debt settlement.
(2) The following will not be considered indicators of unacceptable
credit:
(i) Lack of a credit history.
(ii) 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 meeting obligations when due for the 12
months prior to the date of application.
(iii) A judgment satisfied more than 12 months before the date of
application, or foreclosure with no monetary loss that was completed
more than 12 months before the date of application.
(3) When an application is rejected because of unacceptable credit,
the applicant will be informed of the reason and source of information.
(4) Co-signers. If an applicant does not meet the repayment ability
requirements, the applicant can have another party join the application
as a co-signer.
(5) Additional applicants. If an applicant does not meet the
repayment ability requirements, the applicant can have other household
members join the application.
Sec. 3550.54- Calculation of income and assets.
(a) Annual income. Annual income is the full amount of income all
adult household members living on the financed property are expected to
receive over the next 12 months from the sources listed in paragraphs
(a)(1) through (a)(8) of this section. Income from the sources listed
in paragraphs (c) and (d) of this section is excluded from the
calculation of annual income. Annual income is the base from which
adjusted income and repayment income are calculated. The following is a
complete list of the sources of income that may contribute to annual
income.
(1) The gross amount, before any payroll deductions, of wages and
salaries, overtime pay, commissions, fees, tips, bonuses, and other
compensations for personal services. If a cost of living allowance or a
proposed increase in income is expected to take place on or before loan
approval, loan closing, or the effective date of the payment assistance
agreement, it will be included as income.
(2) The net income from the operation of a farm, business, or
profession. The following provisions apply:
(i) Expenditures for business or farm expansion, capital
improvements, or payments of principal on capital indebtedness shall
not be used as deductions in determining income. A deduction is allowed
in the manner prescribed by Internal Revenue Service (IRS) regulations
only for interest paid in amortizing capital indebtedness.
(ii) Farm and nonfarm business losses are considered ``0'' in
determining annual income.
(iii) A deduction, based on straight line depreciation, is allowed
in the manner prescribed by IRS regulations for the exhaustion, wear
and tear, and obsolescence of depreciable property used in the
operation of a trade, farm, or business by a member of the household.
The deduction must be based on an itemized schedule showing the amount
of straight line depreciation.
(iv) Any withdrawal of cash or assets from the operation of a farm,
business, or profession will be included in income, except to the
extent the withdrawal is reimbursement of cash or assets invested in
the operation by a member of the household.
(v) A deduction is allowed for verified business expenses, such as
lodging, meals, and fuel, for business trips made by salaried employees
who must meet these expenses without reimbursement.
(vi) Housing related expenses for the property being financed such
as mortgage interest, real estate taxes, and insurance, which may be
claimed as business expense deductions for income tax purposes, will
not be deducted from annual income.
(3) Interest, dividends, and other net income of any kind from real
or personal property, including:
(i) The share received by adult members of the household from
income distributed from a trust fund.
(ii) Any withdrawal of cash or assets from an investment except to
the extent the withdrawal is reimbursement of cash or assets invested
by a member of the household.
(iii) Where the household has net family assets in excess of
$5,000, the greater of the actual income derived from all net family
assets or a percentage of the value of such assets
[[Page 15411]]
based on the current passbook savings rate, as determined by RHS.
(4) The full amount of periodic payments received from Social
Security (including Social Security received by adults on behalf of
minors or by minors intended for their own support), annuities,
insurance policies, retirement funds, pensions, disability or death
benefits, and other similar types of periodic receipts. Amounts
received from the United States Government which are attributable to
underpayment of benefits for one or more prior months shall be excluded
in the calculation of annual income as provided in 42 U.S.C.
1382b(a)(7).
(5) Payments in lieu of earnings, such as unemployment and
disability compensation, worker's compensation, and severance pay.
(6) Public assistance, unless exempted by federal statute.
(7) Periodic allowances, such as:
(i) Alimony and child support awarded in a divorce decree or
separation agreement, unless the applicant certifies the payments are
not received, and the applicant provides documentation to RHS that a
reasonable effort has been made to collect the payments through the
official entity responsible for enforcing such payments; or
(ii) Recurring monetary gifts or contributions from someone who is
not a member of the household.
(8) All regular pay, special pay (except for persons exposed to
hostile fire), and allowances of a member of the armed forces who is
the applicant or spouse, whether or not that family member lives in the
home.
(b) Adjusted income. Adjusted income is the household's annual
income, as defined in paragraph (a) of this section, less any of the
following deductions for which the household is eligible. Adjusted
income is used to determine program eligibility for sections 502 and
504 and the amount of payment subsidy for which the household qualifies
under section 502.
(1) A deduction as determined under section 501(b)(5) of the
Housing Act of 1949, as amended, for each family member, not including
an applicant or spouse, who is under 18 years of age, 18 or older with
a disability, or a full-time student.
(2) A deduction as determined under section 501(b)(5) of the
Housing Act of 1949, as amended, for any elderly family.
(3) For non-elderly households, a deduction of expenses related to
the care of household members with disabilities that:
(i) Enable a family member to work,
(ii) Are not reimbursed from insurance or any other source, and
(iii) Are in excess of three percent of annual income.
(4) For elderly households only, a deduction of the sum of expenses
related to household members with disabilities that are necessary to
enable a family member to work and medical expenses that:
(i) Will not be reimbursed by insurance or any other source, and
(ii) Is in excess of three percent of annual income.
(5) A deduction of expenses for the care of minors 12 or under that
enable a family member to work or to further the applicant's education.
(c) Repayment income. Repayment income is used in calculating the
household's principal, interest, taxes, and insurance (PITI) and Total
Debt ratios, which, in turn, indicate repayment ability. Repayment
income is the household's annual income, as defined in paragraph (a) of
this section, plus income from any of the following additional sources.
(1) Payments received for the care of foster children or foster
adults (usually individuals with disabilities, unrelated to the
applicant, who are unable to live alone).
(2) Amounts granted specifically for, or in reimbursement of, the
cost of medical expenses.
(3) Earnings in excess of an amount determined under section
501(b)(5) of the Housing Act of 1949, as amended, for each full-time
student 18 years old or older, excluding the head of household and
spouse.
(4) Any earned income tax credit.
(5) Adoption assistance payments in excess of an amount determined
under section 501(b)(5) of the Housing Act of 1949, as amended, per
adopted child.
(6) Amounts received by the family in the form of refunds or
rebates under state or local law for property taxes paid on the
dwelling unit.
(7) 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.
(8) Any other revenue that a federal statute exempts.
(d) Income exclusions. Sources of income excluded from both annual
and repayment income include:
(1) Income of live-in aides.
(2) Income from employment of minors, including foster children.
(3) Student financial aid paid directly to the student or the
educational institution.
(e) Net family assets. (1) The value of equity in real property,
other than the dwelling or site; cash on hand; savings; checking
accounts; demand deposits; and the market value of stocks, bonds, and
other forms of capital investments, including voluntary retirement
plans that are accessible to the applicant such as individual
retirement accounts (IRAs), 401(k) plans, and Keogh accounts, as well
as amounts that can be withdrawn from other retirement and pension
funds without retiring or terminating employment, but exclude:
(i) Interests in American Indian trust 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 such as
furniture and automotive,
(iv) The assets that are a part of the business, trade, or farming
operation in the case of any member of the household who is actively
engaged in such operation, and
(v) The value of a trust fund that has been established where the
trust is not revocable by, or under the control of, any member of the
household, so long as the fund continues to be held in trust.
(2) The value of any business or household assets disposed of by a
member of the household for less than fair market value (including
disposition in trust, but not in a foreclosure or bankruptcy sale)
during the two years preceding the date of application, in excess of
the consideration received therefore. In the case of a disposition as
part of a separation or divorce settlement, the disposition shall not
be considered to be for less than fair market value if the household
member receives important consideration not measurable in dollar terms.
Sec. 3550.55 Applications.
(a) Application submissions. All persons applying for RHS loans
must file a written application in a format specified by RHS.
Applications will be accepted even when funds are not available.
(b) Agency processing of applications. (1) Incomplete applications
will be returned to the applicant specifying in writing the additional
information that is needed to make the application complete.
(2) An applicant may voluntarily withdraw an application at any
time.
(3) RHS may periodically request in writing that applicants
reconfirm their interest in obtaining a loan. RHS may withdraw the
application of any applicant who does not respond within the specified
time frame.
[[Page 15412]]
(4) Applicants who are eligible will be notified in writing. If
additional information becomes available that indicates that the
original eligibility determination may have been in error, RHS may
reconsider the application and the applicant may be required to submit
additional information.
(5) Applicants who are ineligible will be notified in writing and
provided with the specific reasons for the rejection.
(c) Funding priorities. When funding is insufficient to serve all
program-eligible applicants, applications will be considered and funded
using the funding priorities specified in this paragraph. Within
priority categories, applications will be processed and funded in the
order that the completed applications are received. In the case of
applications with equivalent priority status that are received on the
same day, preference will be extended to applicants qualifying for a
veteran's preference.
(1) First priority will be given to borrowers who request
subsequent loans to correct health and safety hazards.
(2) Second priority will be given to applicants who qualify for any
of the following preferences:
(i) Hardship circumstances including applicants living in deficient
housing for more than six months, current homeowners in danger of
losing a property through foreclosure, and other circumstances
determined by RHS on a case-by-case basis to constitute a hardship.
(ii) Loans related to the sale of an REO property.
(iii) Loans related to the transfer of an existing RHS property.
(iv) Loans for the construction of dwellings in an RHS-approved
Mutual Self-Help project.
(v) Loans that will leverage funding or financing from other
sources.
(3) Applications from applicants who do not qualify for priority
consideration in paragraphs(c)(1) or (c)(2) of this section.
Sec. 3550.56 Site requirements.
(a) Rural areas. Loans may be made only in rural areas designated
by RHS. If an area designation is changed to non-rural:
(1) New conditional commitments will be made and existing
conditional commitments will be honored only in conjunction with an
applicant for a section 502 loan who applied for assistance before the
area designation changed.
(2) REO property sales and transfers with assumption may be
processed.
(3) Subsequent loans may be made either in conjunction with a
transfer with assumption of an RHS loan, or to repair properties that
have RHS loans.
(b) Site standards. Sites must be developed in accordance with
subpart C of part 1924 of this title and any applicable standards
imposed by a state or local government.
(1) The site must not be large enough to subdivide into more than
one site under existing local zoning ordinances.
(2) The site must not include farm service buildings, though small
outbuildings such as a storage shed may be included.
Sec. 3550.57- Dwelling requirements.
(a) Modest dwelling. The property must be one 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
(unless an exception is approved by RHS). In addition, the property
must not be designed for income-producing activities nor have an in-
ground swimming pool.
(d) New dwellings. Construction must meet the requirements in
subpart A of part 1924 of this title.
(c) Existing dwellings. Existing dwellings must be structurally
sound; functionally adequate; in good repair, or to be placed in good
repair with loan funds; have adequate electrical, heating, plumbing,
water, and wastewater disposal systems; be free of termites and other
wood damaging pests and organisms; and meet the thermal performance
requirements of subpart A of part 1924 of this title.
Sec. 3550.58- Ownership requirements.
After the loan is closed, the borrower must have an acceptable
interest in the property as evidenced by one of the following.
(a) Full fee ownership. Acceptable full fee ownership is evidenced
by a fully marketable title with a deed vesting a fee interest in the
property to the borrower.
(b) Secure leasehold interest. To be acceptable a leasehold
interest must have an unexpired term that is at least 150 percent of
the term of the mortgage, unless the loan is guaranteed, in which case
the unexpired term of the lease must be at least two years longer than
the loan term. In no case may the unexpired term be less than 15 years.
(c) Life estate interest. To be acceptable a life estate interest
must provide the borrower with rights of present possession, control,
and beneficial use of the property. Generally, persons with any
remainder interests must be signatories to the mortgage. The remainder
interests need not be included in the mortgage to the extent that one
or more of the persons holding remainder interests are not legally
competent (and there is no representative who can legally consent to
the mortgage), cannot be located, or if the remainder interests are
divided among such a large number of people that it is not practical to
obtain the signatures of all of the remainder interests. In such cases,
the loan may not exceed the value of the property interests owned by
the persons executing the mortgage.
(d) Undivided interest. Generally, all legally competent co-owners
will be required to sign the mortgage. When one or more of the co-
owners are not legally competent (and there is no representative who
can legally consent to the mortgage), cannot be located, or the
ownership interests are divided among so large a number of co-owners
that it is not practical for all of their interests to be mortgaged,
their interests not exceeding 50 percent may be excluded from the
security requirements. In such cases, the loan may not exceed the value
of the property interests owned by the persons executing the mortgage.
(e) Possessory rights. Acceptable forms of ownership include
possessory rights on an American Indian reservation or state-owned land
and the interest of an American Indian in land held in severalty under
trust patents or deeds containing restrictions against alienation,
provided that land in trust or restricted status will remain in trust
or restricted status.
Sec. 3550.59- Security requirements.
Before approving any loan, RHS will impose requirements to secure
its interests.
(a) Adequate security. Generally a loan will be considered
adequately secured only when all of the following requirements are met:
(1) RHS obtains at closing a mortgage on all ownership interests in
the security property.
(2) No liens prior to the RHS mortgage exist at the time of closing
and no junior liens are likely to be taken immediately subsequent to or
at the time of closing, unless the other liens are taken as part of a
leveraging strategy. Liens junior to the RHS lien will be allowed at
loan closing if the junior lien will not interfere with the purpose or
repayment of the RHS loan and the total value of all liens on the
property is less than the property's market value.
(3) The provisions of subpart B of part 1927 of this title
regarding title clearance and the use of legal services have been
followed.
[[Page 15413]]
(4) Existing and proposed property improvements are totally on the
site and do not encroach on adjoining property.
(b) Guaranteed payment. Mortgage insurance guaranteeing payment
from a government agency or Indian tribe is adequate security.
Sec. 3550.60- Escrow account.
RHS may require that borrowers deposit into an escrow account
amounts necessary to ensure that the account will contain sufficient
funds to pay real estate taxes, hazard and flood insurance premiums,
and other related costs when they are due.
(a) At loan settlement, or upon creation of the escrow account, RHS
may require borrowers to deposit funds sufficient to pay taxes and
insurance premiums applicable to the mortgage for the period since the
last payments were made.
(b) RHS will estimate the amount of funds due on the basis of
current data and reasonable estimates of future expenditures.
(c) Escrow accounts will be administered in accordance with the
Real Estate Settlement and Procedures Act of 1974 (RESPA) and section
501(e) of the Housing Act of 1949.
Sec. 3550.61- Insurance.
(a) Borrower responsibility. Until the loan is paid in full the
borrower must furnish and continually maintain hazard and flood
insurance on property securing RHS loans, with companies, in amounts,
and on terms and conditions acceptable to RHS. Borrowers who are
required to have insurance may be required to escrow funds to ensure
payment.
(b) Amount. Essential buildings must be insured in an amount at
least equal to their depreciated replacement value.
(c) Flood insurance. Flood insurance must be obtained and
maintained for the life of the loan for all property located in a
Special Flood Hazard Area (SFHA/0 as determined by the Federal
Emergency Management Agency (FEMA). If flood insurance is not available
in a SFHA, the property is not eligible for federal financial
assistance.
(d) Losses. (1) Loss deductible clauses may not exceed $250 or one
percent of the insurance coverage, whichever is greater. The deductible
for any one building may not exceed $750.
(2) Borrowers must immediately notify RHS of any loss or damage to
insured property and collect the amount of the loss from the insurance
company.
(3) Depending on the amount of the loss, RHS may require that loss
payments be supervised. All repairs and replacements done by or under
the direction of the borrower, or by contract, will be planned,
performed, inspected, and paid for in accordance with subpart A of part
1924 of this title.
(4) When insurance funds remain after all repairs, replacements,
and other authorized disbursements have been made, the funds will be
applied in the following order:
(i) Prior liens, including delinquent property taxes.
(ii) Past-due amounts.
(iii) Protective advances due.
(iv) Applied as an extra payment if the borrower has less than 20
percent equity in the property.
(v) Released to the borrower if the borrower has 20 percent or more
equity in the property.
(5) If a loss occurs when insurance is not in force, the borrower
is responsible for making the needed repairs or replacements and
ensuring that the insurance is reinstated on the property.
(6) If the borrower is not financially able to make the repairs,
RHS may take one of the following actions:
(i) Make a subsequent loan for repairs.
(ii) Subordinate the RHS lien to permit the borrower to obtain
funds for needed repairs from another source.
(iii) Permit the borrower to obtain funds secured by a junior lien
from another source.
(iv) Make a protective advance to protect the government's
interest.
(v) Accelerate the account.
Sec. 3550.62- Appraisals.
(a) Requirement. An appraisal is required when the debt to be
secured exceeds $15,000 or whenever RHS determines that it is necessary
to establish the adequacy of the security. Other real estate that is
mortgaged as additional security will be appraised when it represents a
substantial portion of the security for the loan. Appraisals must be
made in accordance with the Uniform Standards of Professional Appraisal
Practices (USPAP) and subpart C of part 1922 of this title.
(b) Fees. RHS will charge a fee for each loan application that
requires an appraisal. The appraisal fee will be waived on appraisals
done for subsequent loans needed to make minimal, essential repairs.
Fees collected in connection with a dwelling constructed under an
approved conditional commitment will be paid to the contractor at
closing to offset the cost of the real estate appraisal that is
included in the conditional commitment fee.
Sec. 3550.63- Maximum loan amount.
A loan may not exceed the limit established by section 203(b) of
the National Housing Act, except by the amount of the RHS appraisal fee
and the required contribution to an escrow account for taxes and
insurance, unless RHS authorizes an exception.
(a) Area-wide exception. Area-wide exceptions may be granted when
RHS determines that the section 203(b) limit is too low to enable
applicants to purchase adequate housing.
(b) Individual Exceptions. Individual exceptions may be granted to
accommodate the specific needs of an applicant, such as to serve
exceptionally large households or to provide reasonable accommodation
for a household member with a disability. Any additional loan amount
approved must not exceed the amount required to address the specific
need.
Sec. 3550.64 Down payment.
Applicants are required to contribute a portion of net family
assets toward purchase of the property. Elderly families must use any
net family assets in excess of $10,000 for this purpose; non-elderly
families must use net family assets in excess of $7,500. Applicants may
contribute assets in addition to the required down payment to further
reduce the amount to be financed.
Sec. 3550.65 Loan-to-value ratio.
(a) General requirements. Except as noted in paragraph (c) of this
section, total indebtedness, including the RHS loan plus other liens,
may exceed the market value of the security property only as needed to
cover the amount of the RHS appraisal fee and the required contribution
to establish an escrow account for taxes and insurance.
(b) Loans limited to 90% of the market value. Loans for new
dwellings are limited to 90% of the market value plus the amount of the
RHS appraisal fee and the required contribution to establish an escrow
account for taxes and insurance unless:
(1) RHS has issued a conditional commitment for the property,
(2) The loan will be closed prior to the start of construction, so
that RHS can ensure that the construction conforms to subpart A of part
1924 of the title, or
(3) Documentation is provided indicating that the construction was
inspected by either the Federal Housing Administration (FHA) or
Department of Veterans Affairs (VA) and meets the requirements imposed
by either agency.
(c) Loan in excess of market value. Total indebtedness, including
the RHS loan plus other liens, may exceed the market value of the
property when:
(1) RHS makes a subsequent loan for closing costs only,
simultaneously with the sale of a REO property or a transfer.
[[Page 15414]]
The total indebtedness may exceed the lesser of the sales price or
market value of the security property by up to one percent, plus the
required contribution to establish an escrow account for taxes and
insurance.
(2) RHS makes a subsequent loan for repairs necessary to protect
the government's security interest. The excess amount may not exceed
the cost of the essential repairs, reasonable closing costs, and the
required contribution to establish an escrow account for taxes and
insurance.
(3) RHS refinances the loan of an existing RHS borrower. The excess
can be no more than is necessary to refinance the borrower's
outstanding indebtedness plus closing costs associated with the new
loan, and the required contribution to establish an escrow account for
taxes and insurance.
Sec. 3550.66 Interest rate.
Loans will be written using the RHS interest rate in effect at loan
approval or loan closing, whichever is lower. Information about current
interest rates is available in any RECD office.
Sec. 3550.67 Repayment period.
Loans will be scheduled for repayment over a period that does not
exceed the expected useful life of the property as a dwelling. The loan
repayment period will not exceed:
(a) Thirty-three years for initial and subsequent loans.
(b) Thirty-eight years for initial loans if the applicant's
adjusted annual income does not exceed 60 percent of area median and
the longer term is necessary to show repayment ability. The repayment
period of subsequent loans for these borrowers may be up to the lesser
of the remaining term or 33 years.
(c) Ten years for loans not exceeding $2,500 that are not secured
by a mortgage.
Sec. 3550.68 Payment subsidies.
RHS currently administers two types of payment subsidies. Before
October 27, 1995 RHS assistance was provided in the form of interest
credit. Since that time, subsidies have been provided in the form of
payment assistance. Payment subsidies are subject to recapture when the
borrower transfers title or ceases to occupy the property. Borrowers
must sign a subsidy repayment agreement at the time subsidy is
received.
(a) Eligibility for payment subsidies. (1) To be eligible to
receive payment subsidy, an applicant or borrower must agree to
personally occupy the property.
(2) An applicant may receive payment assistance for initial loans
or assumptions at new rates and terms if the applicant's adjusted
annual income does not exceed either the applicable low-income limit at
the time of loan approval, or the applicable moderate-income limit at
the time of loan closing. The loan for which payment assistance is
being requested must have term of at least 25 years.
(3) A borrower receiving a payment subsidy on an initial loan may
receive a payment subsidy on a subsequent loan if the borrower's income
does not exceed the moderate-income limit.
(4) A borrower not receiving a payment subsidy is eligible for
payment assistance if the borrower's adjusted annual income does not
exceed the applicable moderate-income limit.
(5) A payment subsidy may be granted when a loan is assumed on the
terms of the promissory note only if the original loan was approved on
or after August 1, 1968.
(b) Conversion from interest credit to payment assistance. A
borrower currently receiving interest credit will continue to receive
it for the initial loan and for any subsequent loan for as long as the
borrower is eligible and remains on interest credit. A borrower who has
never received interest credit, or who has stopped receiving interest
credit and at a later date again qualifies for a payment subsidy, will
receive payment assistance.
(c) Calculation of payment assistance. The amount of payment
assistance is the difference between the installment due on the
promissory note and the greater of the payment amortized at the
equivalent interest rate or the payment calculated based on the
required floor payment.
(1) The floor payment is a minimum percentage of adjusted annual
income that the borrower must pay for PITI as follows:
(i) Very low-income borrowers must pay a minimum of 22 percent;
(ii) Low-income borrowers with adjusted annual income below 65
percent of median income must pay a minimum of 24 percent; and
(iii) Low-income borrowers with adjusted annual incomes between 65
and 80 percent of median income must pay a minimum of 26 percent.
(2) The equivalent interest rate is determined by a comparison of
the borrower's adjusted annual income to the median income for the area
in which the security property is located. The following chart is used
to determine the equivalent interest rate paid by applicants eligible
for payment assistance.
Percentage of Median Income Equivalent Interest Rate
When the applicant's adjusted income is:
Equal to or more than (percent): BUT less than: THEN the equivalent interest rate is
(percent)*
00 50.01% of median income 1
50.01 55% of median income 2
55 60% of median income 3
60 65% of median income 4
65 70% of median income 5
70 75% of median income 6
75 80.01% of median income 6.5
80.01 50% of median income 7.5
90 100% of median income 8.5
100 110% of median income 9
110 or more than median income 9.5
* Or note rate, whichever is less; in no case will the equivalent interest rate be less than one percent.
(d) Calculation of interest credit. The amount of interest credit
granted is the difference between the sum of the annual installments
due at the promissory note interest rate and the greater of:
(1) 20 percent of the borrower's adjusted annual income less the
cost of real estate taxes and insurance, or
(2) The amount the borrower would pay if the loan were amortized at
an interest rate of one percent.
(e) Annual review. The borrower's income will be reviewed annually
to determine whether the borrower is eligible for continued payment
subsidy. The borrower must notify RHS whenever an adult member of the
[[Page 15415]]
household changes or obtains employment so that RHS can determine
whether a review of the borrower's circumstances is required.
Sec. 3550.69- Deferred mortgage payments.
For qualified borrowers, RHS may defer up to 25 percent of the
monthly principal and interest payment at one percent for up to 15
years. Assistance may be granted only at initial loan closing and is
reviewed annually. Deferred mortgage payments are subject to recapture
when the borrower transfers title or ceases to occupy the property.
(a) Eligibility. In order to qualify for deferred mortgage
payments, all of the following must be true:
(1) The applicant's adjusted income, at the time of initial loan
approval, does not exceed the applicable very low-income limits.
(2) The loan term is 38 years, or 30 years for a manufactured home.
(3) The applicant qualifies for an equivalent interest rate of one
percent.
(4) The applicant's payments for principal and interest, calculated
at a one percent interest rate for the maximum allowable term, plus
estimated costs for taxes and insurance exceeds:
(i) For applicants receiving payment assistance, 29 percent of the
applicant's repayment income by more than $10 per month, or
(ii) For applicants receiving interest credit, 20 percent of
adjusted income by more than $10 per month.
(b) Amount and terms. (1) The amount of the mortgage payment to be
deferred will be the difference between the applicant's payment for
principal and interest, calculated at one percent interest for the
maximum allowable term, plus estimated costs for taxes and insurance
and:
(i) For applicants receiving payment assistance, 29 percent of the
applicant's repayment income.
(ii) For applicants receiving interest credit, 20 percent of
adjusted income.
(2) Deferred mortgage payment agreements will be effective for a 12
month period.
(3) Deferred mortgage assistance may be continued for up to 15
years after loan closing. Once a borrower becomes ineligible for
deferred mortgage assistance, the borrower can never again receive
deferred mortgage assistance, even if income decreases at a later date.
(c) Annual review. The borrower's income, taxes, and insurance will
be reviewed annually to determine eligibility for continued deferred
mortgage assistance. The borrower must notify RHS whenever an adult
member of the household changes or obtains employment so that RHS can
determine whether a review of the borrower's circumstances is required.
Adjustments to deferred mortgage assistance will be effective as of the
date of income change.
Sec. 3550.70 Conditional commitments.
A conditional commitment is a determination by RHS that a dwelling
to be offered for sale will be acceptable for purchase by a qualified
RHS loan applicant if it is built or rehabilitated in accordance with
RHS-approved plans, specifications, and regulations and priced within
the applicable HUD section 203(b) limit. The conditional commitment
does not reserve funds, does not guarantee funding, nor does it ensure
that an eligible loan applicant will be available to buy the dwelling.
(a) Eligibility. To be eligible to request a conditional
commitment, the builder, dealer-contractor, or seller must:
(1) Have an adequate ownership interest in the property, as defined
in Sec. 3550.58 of this subpart, prior to the beginning of any planned
construction;
(2) Have the experience and ability to complete any proposed work
in a competent and professional manner;
(3) Have the legal capacity to enter into the required agreements;
(4) Be financially responsible and have the ability to finance or
obtain financing for any proposed construction or rehabilitation.
Anyone who receives five or more conditional commitments during a 12-
month period must obtain RHS approval of an affirmative marketing plan;
(5) Comply with the requirements of subpart E of part 1901 of this
title and all applicable laws, regulations, and Executive Orders
relating to equal opportunity.
(b) Limitations. Conditional commitments for new or substantially
rehabilitated dwellings will not be issued after construction has
started. RHS may limit the total number of conditional commitments
issued in any locality based on market demand.
(c) Commitment period. A conditional commitment will be valid for
12 months from the date of issuance. The commitment may be extended for
up to an additional six months if there are unexpected delays in
construction caused by such factors as bad weather, materials
shortages, or marketing difficulties. Conditional commitments may be
canceled if construction does not begin within 60 days after the
commitment is issued.
(d) Conditional commitments involving packaging of applications. A
conditional commitment may be made to a seller, builder, or dealer-
contractor who packages an RHS loan application for a prospective
purchaser. In cases where the dwelling is pre-sold and is to be
constructed for sale to a specific eligible applicant, all of the
following conditions must be met:
(1) The conditional commitment will not be approved until the RHS
loan has been approved;
(2) Construction will not begin until loan funds are obligated for
the loan. Exceptions may be made when it appears likely that funding
will be forthcoming and as long as the RHS lien priority is not
jeopardized. The sales agreement must indicate that the loan has been
approved but not funded and must provide that if the loan is not closed
within 90 days of the date of approval, the contractor may terminate
the sales agreement and sell the property to another party. If the
sales agreement is terminated, the conditional commitment will be
honored for another eligible loan applicant for the remaining period of
the commitment.
(3) The RHS loan will be closed only after the dwelling is
constructed or the required rehabilitation completed and final
inspection has been made.
(e) Fees. An application for a conditional commitment must include
payment of the conditional commitment fee. The fee will be refunded if
for any reason preliminary inspection of the property or investigation
of the conditional commitment applicant indicates that a conditional
commitment will not be issued. Application fees will not be refunded
for any property on which the required appraisal has been made.
(f) Failure of conditional commitment applicant or dwelling to
qualify. The conditional commitment applicant will be informed if the
conditional commitment is denied. Conditional commitments will be
cancelled if the property does not meet program requirements,
(g) Changes in plans, specifications, or commitment price. The
holder of the conditional commitment must request approval for changes
in plans, specifications, and commitment price. RHS may approve the
changes if the following requirements are met:
(1) The property price does not exceed the maximum loan limit, and
increases in costs are due to factors beyond the control of the
commitment holder;
(2) The property is still eligible and has not been optioned by a
RHS applicant;
(3) The requested changes are justifiable and appropriate.
[[Page 15416]]
(h) Builder's warranty. The builder or seller, as appropriate, must
execute either a RHS-approved ``Builder's Warranty,'' or provide a 10-
year insured warranty when construction is completed or the loan is
closed.
Sec. 3550.71 Special requirements for condominiums.
RHS loans may be made for condominium units under the following
conditions:
(a) Approval. The unit is in a project approved or accepted by HUD,
the Federal National Mortgage Association (Fannie Mae), or the Federal
Home Loan Mortgage Corporation (Freddie Mac).
(b) Compliance with statutes. The condominium project complies with
the requirements of the condominium enabling statute and all other
applicable laws. Any right of first refusal in the condominium
documents will not impair the rights of RHS to:
(1) Foreclose or take title to a condominium unit pursuant to the
remedies in the mortgage;
(2) Accept a deed or assignment in lieu of foreclosure in the event
of default by a mortgagor; and
(3) Sell or lease a unit acquired by RHS.
(c) If RHS obtains title to a condominium unit pursuant to the
remedies in its mortgage or through foreclosure, RHS will not be liable
for more than 3 months of the unit's unpaid regularly budgeted dues or
charges accrued before acquisition of the title to the unit by RHS. The
homeowners association's lien priority may not include costs of
collecting unpaid dues.
(d) In case of condemnation or substantial loss to the units or
common elements of the condominium project, unless at least two-thirds
of the first mortgagees or unit owners of the individual condominium
units have given their consent, the homeowners association may not:
(1) By act or omission seek to abandon or terminate the condominium
project;
(2) Change the pro rata interest or obligations of any condominium
unit in order to levy assessments or charges, allocate distribution of
hazard insurance proceeds or condemnation awards, or determine the pro
rata share of ownership of each condominium unit in the common
elements;
(3) Partition or subdivide any condominium unit;
(4) Seek to abandon, partition, subdivide, encumber, sell, or
transfer the common elements by act or omission; (the granting of
easements for public utilities or other public purposes consistent with
the intended use of the common elements by the condominium project is
not a transfer within the meaning of this clause); or
(5) Use hazard insurance proceeds for losses to any condominium
property (whether units or common elements) for other than the repair,
replacement, or reconstruction of the condominium property.
(e) All taxes, assessments, and charges that may become liens prior
to the first mortgage under local law relate only to the individual
condominium units and not to the condominium project as a whole.
(f) No provision of the condominium documents gives a condominium
unit owner or any other party priority over any rights of RHS as first
or second mortgagee of the condominium unit pursuant to its mortgage in
the case of a payment to the unit owner of insurance proceeds or
condemnation awards for losses to or taking of condominium units or
common elements.
(g) If the condominium project is on a leasehold the underlying
lease provides adequate security of tenure.
(h) At least 70 percent of the units have been sold. Multiple
purchases of condominium units by one owner are counted as one sale
when determining if the sales requirement has been met.
(i) No more than 15 percent of the unit owners are more than 1
month delinquent in payment of homeowners association's dues or
assessments at the time the RHS loan is closed.
Sec. 3550.72 Community land trusts.
Eligible dwellings located on land owned by a community land trust
may be financed under section 502 if:
(a) The loan meets all the requirements of this subpart, and
(b) Any restrictions, imposed by the community land trust on the
property or applicant are:
(1) Reviewed and accepted by RHS before loan closing, and
(2) Automatically and permanently terminated upon foreclosure or
acceptance by RHS of a deed-in-lieu of foreclosure.
Sec. 3550.73 Manufactured homes.
With the exception of the restrictions and additional requirements
contained in this section, section 502 loans on manufactured homes are
subject to the same conditions as all other section 502 loans.
(a) Loan purposes. RHS may finance the following when a real estate
mortgage covers both the unit and the site:
(1) An eligible new unit for an eligible site owned by the
applicant.
(2) An eligible new unit and an eligible site.
(3) Site development work in accordance with subpart A of part 1924
of this title.
(4) Subsequent loans for equity or repair with a transfer or credit
sale, or a subsequent loan for repair of a unit if the unit is
currently financed with a section 502 loan.
(5) Transportation and set-up costs if an eligible new unit is
financed.
(b) Loan restrictions. RHS may not use loan funds to finance:
(1) An existing unit and site unless it is already financed with a
section 502 loan or is a RHS REO property.
(2) The purchase of a site without also financing the unit.
(3) Existing debts owed by the applicant.
(4) Alteration or remodeling of the unit after the initial loan is
made.
(5) Furniture, including movable articles of personal property such
as drapes, beds, bedding, chairs, sofas, divans, lamps, tables,
televisions, radios, stereo sets, and other similar items of personal
property. Furniture does not include wall-to-wall carpeting,
refrigerators, ovens, ranges, washing machines, clothes dryers, heating
or cooling equipment, or other similar items.
(6) Repairs not associated with transfer or credit sale, or a unit
currently financed with a section 502 RH loan.
(c) Dealer-contractors. No loans will be made on a manufactured
home sold by any entity that is not an approved dealer-contractor.
(d) Loan term. The maximum term of a loan on a manufactured home is
30 years.
(e) Construction and development. Unit construction, site
development and set-up must conform to the FMHCSS and subpart A of part
1924 of this title. Development under the mutual self-help and borrower
construction methods is not permitted for manufactured homes.
(f) Contract requirements. The dealer-contractor must sign a
construction contract, as specified in Sec. 1924.6 of subpart A of part
1924 of this title which will cover both the unit and site development
work. The use of multi-contracts is prohibited. A dealer-contractor may
use subcontractors if the dealer-contractor is solely responsible for
all work under the contract. Payment for all work will be in accordance
with subpart A of part 1924 of this title, except no payment will be
made for materials or property stored on site (e.g., payment for a unit
will be made only after it is permanently attached to the foundation).
(g) Lien release requirements. All persons furnishing materials or
labor in connection with the contract must sign
[[Page 15417]]
a Release by Claimants document, as specified in Sec. 1924.6 of subpart
A of part 1924 of this title, except the manufacturer of the unit. The
manufacturer of the unit must furnish an executed manufacturer's
certificate of origin that the unit is free and clear of all legal
encumbrances. The use of a Release by Claimants document is optional in
a State if the State Director has issued a State Supplement not
requiring its use. However, in all States the certificate of origin is
required.
(h) Warranty requirements. A dealer-contractor must provide a
warranty in accordance with the provisions of Sec. 1924.12 of subpart A
of part 1924 of this title. The warranty must identify the unit by
serial number. The dealer-contractor must certify that the unit
substantially complies with the plans and specifications and 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 dealer-contractor will also furnish the applicant
with a copy of all manufacturer's warranties.
Sec. 3550.74 Nonprogram loans.
RHS may provide credit on nonprogram (NP) terms to allow applicants
to assume existing RHS debt on new rates and terms. If additional funds
are required to purchase the property, the applicant must obtain them
from another source. NP terms may be extended to applicants who do not
qualify for program credit, or for properties that do not qualify as
program properties, when it is in the best interest of the government.
NP loans are originated and serviced according to the requirements for
program loans except as indicated in this subpart.
(a) NP loan purpose. NP loans may be offered to expedite:
(1) Sale of a REO property.
(2) Assumption of an existing program loan.
(3) Conversion of a program loan that has received unauthorized
assistance.
(4) Continuation of a loan on a portion of a security property when
the remainder is being transferred and the RHS debt is not paid in
full.
(b) Rates and terms. (1) Term:
(i) For an applicant who intends to occupy the property, the term
will not exceed 30 years.
(ii) For other applicants, the term will not exceed 10 years. If
more favorable terms are necessary to facilitate the sale, the loan may
be amortized over a period of up to 20 years with payment in full due
not later than 10 years from the date of closing.
(iii) An applicant with a NP loan under paragraph (b)(1)(i) of this
section who wishes to retain the property and purchase a new property
with RHS credit must purchase the second property according to the
terms of paragraph (b)(1)(ii) of this section, even if the new property
will serve as the applicant's principal residence.
(2) NP loans are written at the RHS interest rate in effect at the
time of loan approval.
(3) NP borrowers are not eligible for program benefits such as
payment assistance, deferred mortgage assistance, or a moratorium.
(c) Additional requirements. (1) NP applicants other than public
bodies and nonprofit organizations must pay a nonrefundable application
fee.
(2) NP applicants must make a down payment based on purchase price
in the case of credit sales, or, in the case of assumptions, on the
lower of market value of the property or debt incurred. The downpayment
will also be based upon whether the applicant intends to personally
occupy the property or use it for other purposes.
(3) NP applicants cannot finance loan closing costs.
(4) Loans will be secured only by the property purchased.
(5) RHS may require a NP applicant to pay a one-time tax service
fee to cover the cost of monitoring the property's tax status.
(d) Reduced restrictions. (1) NP applicants need not be unable to
obtain other credit in order to receive a NP loan and are not required
to refinance with private credit when they are able to do so.
(2) NP applicants are not required to occupy the property.
(3) NP applicants are not subject to leasing restrictions.
(4) Liquidation may be delayed for up to 90 days to permit a NP
borrower to liquidate voluntarily.
(e) Waiver of fees. When the purpose of the loan is the conversion
of a program loan that has received unauthorized assistance or
continuation of a loan on a portion of a security property when the
remainder is being transferred, the application fee, down payment, and
appraisal fee may be waived.
Sec. Sec. 3550.75-3550.100 [Reserved]
Subpart C--Section 504 Origination
Sec. 3550.101- Program objectives.
This subpart sets forth policies for administering loans and grants
under section 504(a) of Title V of the Housing Act of 1949. Section 504
loans and grants are intended to help very low-income owner-occupants
in rural areas repair their properties.
Sec. 3550.102- Grant and loan purposes.
Dwellings repaired with section 504 funds must be modest.
(a) Grant funds. Grant funds may be used only to pay costs for
repairs and improvements which will remove identified health and safety
hazards or to repair or remodel dwellings to make them accessible and
useable for household members with disabilities. Unused grant funds
must be returned to RHS.
(b) Loan funds. Loan funds may be used to make general repairs and
improvements to properties, in addition to the removal of health and
safety standards, as long as the dwelling remains modest in size and
design.
(c) Eligibility of mobile and manufactured homes. Necessary repairs
may be made to mobile or manufactured homes provided:
(1) The applicant owns the home and site and has occupied the home
prior to filing an application with Rural Housing Service (RHS), and
(2) The mobile or manufactured home is on a permanent foundation or
will be put on a permanent foundation with section 504 funds.
(d) Eligible costs. In addition to construction costs to make
necessary repairs and improvements, loan and grant funds may be used
for:
(1) Reasonable connection fees, assessments, or the pro rata
installation costs for required utilities, if not funded by another
source.
(2) Reasonable expenses related to obtaining the loan or grant,
including legal fees, surveys, title clearance, loan closing,
architectural and engineering services, environmental reviews, tax
monitoring, or other technical services.
(3) 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, if applicable.
(4) Fees to public and private nonprofit organizations that are tax
exempt under the Internal Revenue Code for the development and
packaging of applications.
(e) Limitations on uses of loan or grant funds. Section 504 funds
may not be used to:
(1) Assist in the construction of a new dwelling.
(2) Make repairs to a dwelling of such poor condition that when the
repairs are completed, the dwelling will continue to be a major hazard.
[[Page 15418]]
(3) Move a mobile home or manufactured home from one site to
another.
(4) Pay for off-site improvements except for the necessary
installation costs for utilities.
(5) Refinance any debt or obligation of the applicant incurred
before the date of application, except for the installation and
assessment costs of utilities.
Sec. 3550.103 Construction standards and requirements.
(a) Post-repair condition. Dwellings repaired with section 504
funds need not be brought to the agency development standards or
thermal performance standards of subpart A of part 1924 of this title,
nor must all existing hazards be removed. However, the dwelling may not
continue to have major health or safety hazards.
(b) Construction standards. All work must be completed in
accordance with local construction codes and standards. When
potentially hazardous equipment or materials are being installed, all
materials and installations must be in accordance with the applicable
standards in subpart A of part 1924 of this title.
Sec. 3550.104- aximum loan and grant.
(a) Maximum loan permitted. The sum of all outstanding section 504
loans to one borrower or on one dwelling may not exceed $20,000.
(1) Transferees assuming a section 504 loan are limited to the
difference between the unpaid principal balance of the debt assumed and
$20,000.
(2) For a secured loan, the total of all debts on the secured
property may not exceed the value of the security, except by the amount
of any required contributions to an escrow account for taxes and
insurance.
(b) Maximum loan based upon ability to pay. The maximum loan is
limited to the principal balance that can be supported given the amount
the applicant has available, as determined by RHS, to repay a loan at 1
percent interest with a 20 year term.
(c) Maximum grant. The lifetime total of the grant assistance to
any owner-occupant is $7,500.
Sec. 3550.105 Eligibility requirements.
To be eligible, applicants must meet the following requirements:
(a) Owner-occupant. Applicants must own, as described in
Sec. 3550.107 of this subpart, and occupy the dwelling.
(b) Age (grant applicants only). To be eligible for grant
assistance, an applicant must be 62 years of age or older.
(c) Income eligibility. At the time of loan or grant approval, the
adjusted income of an applicant must not exceed the applicable very
low-income limit adjusted for household size (available in any Rural
Economic Community Development (RECD) office). Section 3550.54 of
subpart B of this part provides a detailed discussion of the
calculation of adjusted income.
(d) Citizenship status. The applicant must be a U.S. citizen or a
non-citizen who qualifies as a legal alien, as defined in Sec. 3550.10
of subpart A of this part.
(e) Need and use of personal resources. Applicants must be unable
to obtain financial assistance at reasonable terms and conditions from
non-RHS credit or grant sources and lack the personal resources to meet
their needs. Applicants must use assets in excess of $7,500 for loan or
grant purposes before assistance will be provided. The definition of
assets for this purpose is net family assets as described in
Sec. 3550.54 of subpart B of this part, less the value of the dwelling
and a minimum adequate site.
(f) Credit qualifications. Applicants must be unable to secure the
necessary credit from other sources upon terms and conditions that the
applicant could reasonably be expected to fulfill. Applicants must have
a credit history that indicates reasonable ability and willingness to
meet debt obligations. An outstanding judgment obtained by the United
States in a federal court, other than the United States Tax Court
demonstrates an unacceptable credit history.
(1) Indicators of unacceptable credit include:
(i) Incidents of more than two debt payments being more than 30
days late within the last 12 months.
(ii) Loss of security due to a foreclosure if the foreclosure has
been completed within the last 36 months.
(iii) An outstanding Internal Revenue Service (IRS) tax lien or any
other outstanding tax liens with no satisfactory arrangement for
payment.
(iv) 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
paragraphs (f)(2)(ii) and (f)(2)(iii) of this section.
(v) Two or more rent payments paid 30 or more days late within the
last two years, or within the last year if the applicant has
experienced no other credit problems in the past two years. This
requirement may be waived if the RHS loan will reduce shelter costs
significantly and contribute to an improved repayment ability.
(vi) 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 six months.
(vii) Non-agency debts written off within the last 36 months.
(viii) Agency debts that were debt settled, or are being considered
for debt settlement.
(2) The following will not be considered indicators of unacceptable
credit:
(i) Lack of a credit history.
(ii) 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.
(iii) A judgment satisfied more than 12 months before the date of
application, or foreclosure with no monetary loss that was completed
more than 12 months before the date of application.
(3) When an application is rejected because of unacceptable credit,
the applicant will be informed of the reason and source of information.
(g) Suspension or debarment. Applications from applicants who have
been suspended or debarred from participation in federal programs will
be handled in accordance with FmHA Instruction 1940-M, available in any
RECD office.
Sec. 3550.106 Applications.
(a) Application submissions. All persons applying for section 504
loans or grants must file a complete written application in a format
specified by RHS. Applications will be accepted even when funds are not
available.
(b) Application processing. (1) Applications for assistance to
remove health and safety hazards will receive priority for funding.
(2) Incomplete applications will be returned to the applicant
specifying in writing the additional information that is needed to make
the application complete.
(3) An applicant may voluntarily withdraw an application at any
time.
(4) RHS may periodically request in writing that applicants
reconfirm their interest in obtaining a loan or grant. RHS will
withdraw the application of any applicant who does not respond within
the specified timeframe.
(5) Applicants who are eligible will be notified in writing. If
additional information becomes available which indicates the original
eligibility determination may have been made in error or that
circumstances have
[[Page 15419]]
changed, RHS may reconsider the application.
(6) Applicants who are ineligible will be notified in writing and
provided with the specific reasons for the rejection.
Sec. 3550.107- Ownership requirements.
The applicant must have an acceptable ownership interest in the
property.
(a) Full fee ownership. Acceptable full fee ownership is evidenced
by a fully marketable title with a deed vesting a fee interest in the
property to the applicant.
(b) Secure leasehold interest. A written lease is required. For
loans, the unexpired portion of the lease must not be less than two
years beyond the term of the promissory note. For grants, the remaining
lease period must be at least five years.
(c) Land purchase contract. A land purchase contract is acceptable
if the applicant is current on all payments, and there is a reasonable
likelihood that the applicant will be able to continue meeting the
financial obligations of the contract.
(d) Undivided interest in the property. An undivided interest is
acceptable if there is no reason to believe that the applicant's
position as an owner-occupant will be jeopardized as a result of the
improvements to be made, and:
(1) In the case of unsecured loans or grants, if any co-owners
living or planning to live in the dwelling sign the repayment
agreement.
(2) In the case of a secured loan, when one or more of the co-
owners are not legally competent (and there is no representative who
can legally consent to the mortgage), cannot be located, or the
ownership interests are divided among so large a number of co-owners
that it is not practical for all of their interests to be mortgaged,
their interests not exceeding 50 percent may be excluded from the
security requirements. In such cases, the loan may not exceed the value
of the property interests owned by the persons executing the mortgage.
(e) Life estate interest. To be acceptable, a life estate interest
must provide the applicant with rights of present possession, control
and beneficial use of the property. For secured loans, persons with any
remainder interests generally must be signatories to the mortgage. All
of the remainder interests need not be included in the mortgage if one
or more of the persons holding remainder interests are not legally
competent (and there is no representative who can legally consent to
the mortgage), cannot be located, or if the remainder interests are
divided among such a large number of people that it is not practical to
obtain the signatures of all of the remainder interests. In such cases,
the loan may not exceed the value of the property interests owned by
the persons executing the mortgage.
(f) Alternative evidence of ownership. If evidence, as described in
paragraphs (a) through (e) of this section is not available, RHS may
accept any of the following as evidence of ownership:
(1) Records of the local taxing authority that show the applicant
as owner and that demonstrate that real estate taxes for the property
are paid by the applicant.
(2) Affidavits by others in the community stating that the
applicant has occupied the property as the apparent owner for a period
of not less than 10 years, and is generally believed to be the owner.
(3) Any instrument, whether or not recorded, which is commonly
accepted as evidence of ownership.
Sec. 3550.108- Loan rates and terms.
(a) Interest rate. The interest rate for all section 504 loans will
be one percent.
(b) Loan term. The repayment period for the loan should generally
be as short as possible based on the applicant's repayment ability, and
may never exceed 20 years; however loans made in combination with
grants must have a term of 20 years.
Sec. 3550.109- Security requirements (loans only).
Any loan of $2,500 or more will be secured by a mortgage on the
property (or any leasehold interest or land purchase contract).
(a) RHS does not require a first lien position, but the total of
all debts on the secured property may not exceed the value of the
security, except by the amount of any required contributions to an
escrow account for taxes and insurance.
(b) Subsequent loans will be secured by a mortgage when the total
section 504 debt is $2,500 or more.
(c) Title clearance and the use of legal services in accordance
with subpart B of part 1927 are not required:
(1) For loans of $7,500 or less that are scheduled for repayment in
not more than 15 years or
(2) For subsequent loans made for minimal essential repairs
necessary to protect the government's interest.
Sec. 3550.110- Appraisals.
An appraisal of the real estate or leasehold interest is required
when security is taken and the total section 504 indebtedness will be
more than $15,000. Appraisals must be made in accordance with the
Uniform Standards of Professional Appraisal Practices (USPAP) and
subpart C of part 1922 of this title.
Sec. 3550.111- Escrow account.
RHS may require that deposit into an escrow account amounts
necessary to ensure that the account will contain sufficient funds to
pay real estate taxes, hazard and flood insurance premiums, and other
related costs when they are due.
(a) At loan settlement, or upon creation of the escrow account, RHS
may require borrowers to deposit funds sufficient to pay taxes and
insurance premiums applicable to the mortgage for the period since the
last payments were made.
(b) RHS will estimate the amount of funds due on the basis of
current data and reasonable estimates of future expenditures.
(c) Escrow accounts will be administered in accordance with the
Real Estate Settlement and Procedures Act of 1974 (RESPA) and section
501(e) of the Housing Act of 1949.
Sec. 3550.112- Insurance (loans only).
(a) Borrower responsibility. Until the loan is paid in full the
borrower must furnish and continually maintain insurance on security
property, with companies, in amounts, and on terms and conditions
acceptable to RHS.
(b) Amount. Essential buildings must be insured in an amount at
least equal to their depreciated replacement value.
(c) Flood insurance. RHS may require that flood insurance be
obtained and maintained for the life of the loan for all property
located in Special Flood Hazard Areas (SFHAs) as determined by the
Federal Emergency Management Agency (FEMA). If flood insurance is not
available in a SFHA, the property is not eligible for federal financial
assistance.
(d) Losses. (1) Loss deductible clauses may not exceed $250 or one
percent of the insurance coverage, whichever is greater. The deductible
for any one building may not exceed $750.
(2) Borrowers must immediately notify RHS of any loss or damage to
insured property and collect the amount of the loss from the insurance
company.
(3) Loss payments must be supervised. All repairs and replacements
done by or under the direction of the borrower, or by contract, will be
planned, performed, inspected, and paid for in accordance with subpart
A of part 1924 of this title.
(4) When insurance funds remain after all repairs, replacements,
and other
[[Page 15420]]
authorized disbursements have been made, the funds will be applied in
the following order:
(i) Prior liens, including delinquent property taxes.
(ii) Delinquency on the account.
(iii) Advances due for recoverable cost items.
(iv) Applied as an extra payment if the borrower has less than 20
percent equity in the property.
(v) Released to the borrower if the borrower has 20 percent or more
equity in the property.
(5) If a loss occurs when insurance is not in force, the borrower
is responsible for making the needed repairs or replacements and
ensuring that the insurance is reinstated on the property.
(6) If the borrower is not financially able to make the repairs,
RHS may take one of the following actions:
(i) Make a subsequent loan for repairs.
(ii) Subordinate the RHS lien to permit the borrower to obtain
funds for needed repairs from another source.
(iii) Permit the borrower to obtain funds secured by a junior lien
from another source.
(iv) Make a protective advance to protect the government's
interest.
(v) Accelerate the account and demand payment in full.
Sec. 3550.113- Repayment agreement (grants only).
Grant recipients are required to sign a repayment agreement which
specifies that the full amount of the grant must be repaid to the
government if the property is sold in less than 3 years from the date
of grant closing.
Secs. 3550.114-3550.150 [Reserved]
Subpart D--Regular Servicing
Sec. 3550.151- Servicing goals.
This subpart sets forth the Rural Housing Service (RHS) policies
for managing the repayment of loans made under sections 502 and 504.
Sec. 3550.152- Loan payments.
(a) Payment terms. Unless the loan documents specify other loan
repayment terms, borrowers are required to make monthly payments.
Borrowers with existing loans specifying annual payments may request
conversion to monthly payments, and must convert to a monthly payment
schedule before any subsequent loan, new payment assistance, or
servicing action that benefits the borrower is approved. Suitable forms
of payment are: check, money order, or bank draft. Cash payments will
be accepted only if accompanied by a fee to cover conversion to a money
order.
(b) Application of payments. If a borrower makes less than the full
scheduled payment, the payment is held in suspense and is not applied
to the borrower's account. When subsequent payments are received in an
amount sufficient to equal a full scheduled payment, the full amount
will be applied in the following order:
(1) Protective advances charged to the account.
(2) Accrued interest due.
(3) Principal due.
(4) Escrow for taxes and insurance.
(5) Fees or charges applied to the account.
(c) Multiple loans. When a borrower with multiple loans for the
same property makes less than the full scheduled payment on all loans,
any payment will first be applied to the amount due on the primary
loan, then applied to other loans in the order of declining principal
balance. Future remittances will be applied beginning with the oldest
unpaid installment.
(d) Application of excess payments. Borrowers can elect to make
payments in excess of the scheduled amount and designate on their
billing statements whether the extra funds are to be applied to the
principal or escrow. Extra payments do not relieve borrowers of the
obligation to make the next scheduled payment.
Sec. 3550.153- Fees and charges.
RHS may assess reasonable fees and charges including a tax service
fee, fees for late payments, and charges for checks returned for
insufficient funds.
Sec. 3550.154- Inspections.
RHS or its agent may make reasonable entries upon and inspections
of any property used as security for a RHS loan as necessary to protect
the interest of the government. RHS will give the borrower notice at
the time of or prior to an inspection.
Sec. 3550.155- Escrow account.
Escrow accounts will be administered in accordance with the Real
Estate Settlement and Procedures Act of 1974 (RESPA) and section 501(e)
of the Housing Act of 1949. When the analysis discloses a shortage, RHS
may allow the shortage to exist until the next escrow analysis, or may
adjust the borrower's monthly payment.
Sec. 3550.156- Borrower obligations.
(a) After receiving a loan from RHS, borrowers are expected to meet
a variety of obligations outlined in the loan documents. In addition to
making timely payments, these obligations include:
(1) Maintaining the security property, and
(2) Maintaining an adequately funded escrow account, or paying real
estate taxes, hazard and flood insurance, and other related costs when
due.
(b) If a borrower fails to fulfill these obligations, RHS may
obtain the needed service and charge the cost to the borrower's account
in the form of a protective advance.
Sec. 3550.157- Payment subsidy.
(a) Borrowers currently receiving payment subsidy. (1) RHS will
review annually each borrower's eligibility for continued payment
subsidy and determine the appropriate level of assistance. To be
eligible for payment subsidy renewal, the borrower must meet the
requirements of Sec. 3550.53(a), (b), and (c) of subpart B of this
part.
(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 RHS error
caused the delay, or the next due date after the renewal is approved in
all other cases. If RHS determines that a borrower has received less
than the appropriate amount of payment subsidy, the borrower's account
will be credited with the difference between the amount received and
the correct amount.
(3) The borrower must notify RHS whenever an adult member of the
household becomes employed or changes employment. The household may
also report decreases in income. If the change in the household's
income will cause the level of assistance to change by at least $10 per
month, the household's payment subsidy may be adjusted for a new 12-
month period. The new agreement will be effective the due date
following the date the borrower's information is verified by RHS.
(b) Borrowers not currently receiving payment subsidy. Payment
assistance may be granted to borrowers not currently receiving payment
subsidy whose loans were approved on or after August 1, 1968 and who
meet the requirements of Sec. 3550.53(a), (b), and (c) of subpart B of
this part. In general, to receive payment assistance the term of the
loan at closing must have been at least 25 years. If an account has
been reamortized and the initial term of the loan was at least 25
years, payment assistance may be granted even though the term of the
reamortized loan is less than 25 years. Payment assistance may be
granted on a subsequent loan for repairs with a term of less than 25
years.
(c) Unauthorized assistance. When RHS determines that a borrower
has
[[Page 15421]]
received more than the appropriate amount of payment subsidy, the
account will be serviced in accordance with Sec. 3550.164 of this
subpart.
Sec. 3550.158- Active military duty.
The Soldiers and Sailors Relief Act requires that the interest rate
charged a borrower who enters full-time active military duty after a
loan is closed not exceed six percent. Active military duty does not
include participation in a military reserve or the National Guard.
(a) Amount of Assistance. If a borrower qualifies for payment
subsidy after reduction of the interest rate to six percent, the amount
of payment assistance received during the period of active military
duty will be the difference between the amount due at the Equivalent
Interest Rate and the amount due at a six percent interest rate. The
six percent interest rate will be effective with the first payment due
after RHS confirms the active military status of the borrower.
(b) Change of Active Military Status. The borrower must notify RHS
when he or she is no longer on active military duty. RHS will cancel
the six percent interest rate and resume use of the promissory note
interest rate. A new payment subsidy agreement may be processed if the
borrower is eligible.
Sec. 3550.159- Borrower actions requiring RHS approval.
(a) Mineral leases. Borrowers who wish to lease mineral rights to a
security property must request authorization from RHS. RHS may consent
to the lease of mineral rights and subordinate its liens to the
lessee's rights and interests in the mineral activity if the security
property will remain suitable as a residence and the government's
security interest will not be adversely affected. Subordination of RHS
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, RHS may consent to the lease only if the borrower
assigns 100 percent of the income from the lease to RHS to be applied
as extra payments.
(2) If the proposed activity is not likely to decrease the value of
the security property, RHS 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 assigns it to RHS to be
applied as extra payments.
(b) Subordination. RHS may subordinate its interests to permit a
borrower to defer recapture amounts and refinance the loan, or to
obtain a subsequent loan with private credit.
(1) When it is in the best interest of the government,
subordination will be permitted if:
(i) The other lender will verify that the funds will be used for
purposes for which a RHS loan could be made.
(ii) The prior lien debt will be on terms and conditions that the
borrower can reasonably be expected to meet without jeopardizing
repayment of the RHS indebtedness.
(iii) Any proposed development will be planned and performed in
accordance with subpart A of part 1924 of this title or directed by the
other lender in a manner which is consistent with that subpart.
(iv) An agreement is obtained in writing from the prior lienholder
providing that at least 30 days prior written notice will be given to
RHS before action to foreclose on the prior lien is initiated.
(2) The total amount of debt permitted when RHS subordinates its
interests depends on whether the borrower pays off the RHS loan.
(i) For situations in which the borrower is obtaining a subsequent
loan from another source and will not pay off the RHS debt, the prior
lien debt plus the unpaid balance on the loan, exclusive of the
recapture amount, will not exceed the market value of the security.
(ii) For situations in which RHS is subordinating only a deferred
recapture amount, the prior lien debt plus the deferred recapture
amount will not exceed the market value of the security.
(c) Partial release of security. RHS may consent to transactions
affecting the security, such as sale or exchange of security property
or granting of a right-of-way across the security property, and grant a
partial release provided:
(1) The compensation is:
(i) For sale of the security property, cash in an amount equal to
the value of the security being disposed of or rights granted.
(ii) For exchange of security property, another parcel of property
acquired in exchange with value equal to or greater than that being
disposed of as determined by a current appraisal.
(iii) For granting an easement or right-of-way, benefits derived
that are equal to or greater than the value of the security property
being disposed of.
(2) An appraisal must be conducted if the latest appraisal is more
than one year old or if it does not reflect market value, and the
amount of consideration exceeds $2,000. The appraisal fee will be
charged to the borrower.
(3) The security property, after the transaction is completed, will
be an adequate but modest, decent, safe, and sanitary dwelling and
related facilities.
(4) Repayment of the RHS debt will not be jeopardized.
(5) If applicable, the environmental requirements of subpart G of
part 1940 of this title must be met.
(6) When exchange of all or part of the security is involved, title
clearance must be obtained before release of the existing security.
(7) For the sale of a portion of the security payment, when payment
is received and verified, the release may be delivered.
(8) 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 RHS 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 RHS indebtedness or used for improvements to
the security property in keeping with purposes and limitations
applicable for use of RHS loan funds. Proposed development will be
planned and performed in accordance with subpart A of part 1924 of this
title and supervised to ensure that the proceeds are used as planned.
(d) Lease of security property. A borrower must furnish RHS with a
copy of any lease or proposed lease. If the lease is for a term of more
than three years or contains an option to purchase, RHS may liquidate
the loan.
Sec. 3550.160- Refinancing with private credit.
(a) Objective. RHS direct loan programs are not intended to
supplant or compete with private credit sources. Therefore, borrowers
are required to refinance RHS loans with private credit sources when
RHS determines that the borrower meets RHS criteria.
(b) Criteria for refinancing with private credit. Borrowers must
refinance with private credit when RHS determines that the borrower has
the ability to obtain other credit at reasonable rates and terms based
on their income, assets, and credit history. Reasonable rates and terms
are those commercial rates and terms that borrowers are expected to
meet when borrowing for similar purposes. Differences in interest rates
and terms between RHS and other lenders will not be an acceptable
reason for a borrower to fail to refinance with private credit if
[[Page 15422]]
the available rates and terms are within the borrower's ability to pay.
(c) Notice of requirement to refinance with private credit. The
financial status of all borrowers may be reviewed periodically to
determine their ability to refinance with private credit. A borrower's
financial status may be reviewed at any time if information becomes
available to RHS that indicates that the borrower's circumstances have
changed.
(1) A borrower undergoing review is required to supply, within 30
days of a request from RHS, sufficient financial information to enable
RHS to determine the borrower's ability to refinance with private
credit. Foreclosure action may be initiated against any borrower who
fails to respond.
(2) When RHS determines that a borrower has the ability to
refinance with private credit, the borrower will be required to
refinance within 90 days.
(3) Within 30 days after being notified of the requirement to
refinance with private credit, a borrower may contest the RHS decision
and provide additional financial information to document an inability
to refinance with private credit. If RHS agrees that the borrower is
not a candidate for refinancing with private credit, RHS will withdraw
the request.
(d) Failure to refinance with private credit. (1) If the borrower
is unable to secure private credit, the borrower must submit written
statements and documentation to RHS showing:
(i) The lenders contacted.
(ii) The amount of the loan requested by the borrower and the
amount, if any, offered by the lenders.
(iii) The rates and terms offered by the lenders or the specific
reasons why other credit is not available.
The information provided by the borrower to the lenders regarding
the purpose of the loan.
(2) If RHS determines that the borrower's submission does not
demonstrate the borrower's inability to refinance with private credit,
or if the borrower fails to submit the required information,
foreclosure may be initiated.
(e) Subordination of recapture amount. RHS may subordinate its
interest in any deferred recapture amount to permit a borrower to
refinance with private credit.
The amount to which the RHS debt will be subordinated may include:
(1) The amount required to repay the RHS debt, exclusive of
recapture,
(2) Reasonable closing costs,
(3) Up to one percent of the loan amount for loan servicing costs
if required by the lender, and
(4) The cost of any repairs or improvements to the security
property.
(f) Application for additional credit or assistance. A borrower who
has been asked to refinance with private credit will not be considered
for additional credit or assistance until the refinancing issue is
resolved unless such additional assistance is necessary to protect the
government's interest.
Sec. 3550.161- Final payment.
(a) Payment in full. Full payment of a borrower's account includes
repayment of principal and outstanding interest, unauthorized
assistance, recapture amounts, and charges made to the borrower's
account. Any supervised funds or funds remaining in a borrower's escrow
account will be applied to the borrower's account or returned to the
borrower.
(b) Release of security instruments. RHS may release security
instruments when full payment of all amounts owed has been received and
verified. If RHS and the borrower agree to settle the account for less
than the full amount owed, the security instruments may be released
when all agreed-upon amounts are received and verified. Security
instruments will not be released until any deferred recapture amount
has been paid in full.
(c) Written statements. At the borrower's request, RHS will provide
a written statement indicating the amount required to pay the account
in full. RHS may charge a fee for statements for the same account if
more than two statements are requested in any 30 day period.
(d) Suitable forms of payment. Suitable forms of payment are:
check, money order, or bank draft. Cash payments will be accepted only
if accompanied by a fee to cover conversion to a money order.
(e) Recording costs. Recording costs for the release of the
mortgage will be the responsibility of the borrower, except where state
law requires the mortgagee to record or file the satisfaction.
Sec. 3550.162- Recapture.
(a) Recapture policy. Borrowers with loans approved on or after
October 1, 1979 will be required to repay subsidy amounts received
through payment subsidy or deferred mortgage assistance. Amounts to be
recaptured are due and payable when the borrower transfers title or
ceases to occupy the property.
(b) Amount of subsidy to be recaptured. (1) The maximum amount to
be recaptured is the amount of principal reduction atrributed to
subsidy and the lesser of:
(i) The amount of subsidy received or
(ii) 50% of the difference between the value appreciation in the
property and the added value of capital improvements to the property.
(2) The value appreciation of a property with a cross-
collateralized loan is based on the market value of the dwelling and a
minimum adequate site.
(3) Interest reduced from the promissory note rate to six percent
under the Soldiers and Sailors Relief Act is not subject to recapture.
(c) Option to defer payment of recapture amounts. (1) Borrowers may
defer payment of recapture amounts if the loan, exclusive of recapture,
is paid in full, the title does not transfer, and the borrower
continues to occupy the property.
(2) The RHS mortgage securing the deferred recapture amount may be
subordinated to permit refinancing if the RHS mortgage will be
adequately secured.
(3) Borrowers may receive a discount on the recapture amount due if
the recapture amount is repaid within 30 days of refinancing or payment
of the last loan installment, and the borrower continues to occupy the
property.
(d) Borrower ceases to occupy the property. When a borrower ceases
to occupy a property:
(1) The borrower may pay the recapture amount in full or reamortize
the existing loan to include the recapture amount.
(2) If the borrower does not pay the recapture amount or consent to
reamortization within 30 days, RHS may proceed with foreclosure.
(e) Assumed loans. When a loan subject to recapture is assumed
under new rates and terms, the recapture amount may be paid in full by
the seller or included in the principal amount assumed by the buyer.
(2) When a loan is assumed under the terms of the promissory note,
recapture amounts will not be due. When the new borrower transfers
title or ceases to occupy the property, all subsidy subject to
recapture before and after the assumption is due.
(3) When a borrower has deferred payment of recapture amounts and
the RHS loan, exclusive of recapture, is paid in full, the deferred
recapture amount may be assumed by a new RHS borrower and included in
the principal amount of the new loan.
Sec. 3550.163- Transfer of security and assumption of indebtedness.
(a) General policy. RHS mortgages contain due-on-sale clauses that
generally require RHS consent before title of a security property can
be
[[Page 15423]]
transferred with an assumption of the indebtedness. If it is in the
best interest of the government, RHS will approve the transfer of title
and assumption of indebtedness on program or nonprogram (NP) terms,
depending on the transferee's eligibility and the property's
characteristics.
(b) RHS approval of assumptions. A borrower with a loan on program
terms who wishes to transfer a security property restricted by a due-
on-sale clause to a purchaser who wishes to assume the debt must
receive prior authorization from RHS. If RHS authorizes the transfer
and assumption, the account will be serviced in the purchaser's name
and the purchaser will be liable for the loan under the terms of the
security instrument.
(2) If a borrower sells a security property with a due-on-sale
clause without obtaining RHS authorization, RHS will not approve
assumption of the indebtedness, and the loan will be liquidated unless
RHS determines that it is in the government's best interest to continue
the loan. If RHS decides to continue the loan, the account will be
serviced in the original borrower's name and the original borrower will
remain liable for the loan under the terms of the security instrument.
(c) Exceptions to due-on-sale clauses. (1) Due-on-sale clauses 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.
(v) A transfer into an inter vivos trust in which the borrower does
not transfer rights of occupancy in the property.
(2) A transferee who obtains property through one of the types of
transfer listed in paragraph (c)(1) of this section:
(i) Is not required to assume the loan, and RHS is not permitted to
liquidate the loan, if the transferee continues to make scheduled
payments and meet all other obligations of the loan. A transferee who
does not assume the loan is not eligible for payment assistance or a
moratorium.
(ii) May assume the loan on the rates and terms contained in the
promissory note, with no down payment. If the account is past due at
the time an assumption is executed, the account may be brought current
by using any of the servicing methods discussed in subpart E of this
part.
(iii) May assume the loan under new rates and terms if the
transferee applies and is program-eligible.
(3) Any subsequent transfer of title, except upon death of the
inheritor or between inheritors to consolidate title, will be treated
as a sale.
(d) Requirements for an assumption. (1) Loans secured by program-
eligible properties to be assumed by program-eligible purchasers may be
assumed on program terms. Loans secured by nonprogram properties and
loans to be assumed by purchasers who are not eligible for program
terms may be assumed on nonprogram terms.
(2) The amount the transferee will assume will be either the
current market value less any prior liens and any required down
payment, or the indebtedness, whichever is less.
(3) The applicant may request that the interest rate charged by RHS
be the rate in effect either at the time of loan approval or at
closing, whichever is lower. If the applicant does not specify, the
rate in effect at the time of loan approval will be used.
(4) If additional financing is required to purchase the property or
to make repairs, RHS may approve a subsequent loan under subparts B or
C of this part.
(5) If an appraisal is required for an assumption on new terms, the
purchaser is responsible for the appraisal fee.
(6) If all or a portion of the borrower's account balance is
assumed, the borrower and co-signer, if any, will be released from
liability on the amount of the indebtedness assumed. If an account
balance remains after the assumption, RHS may pursue debt settlement in
accordance with subpart F of this part.
(7) Unless it is in the government's best interest, RHS will not
approve an assumption of a secured loan if the seller fails to repay
any unsecured RHS loan.
(8) If a loan is secured by a property with a dwelling situated on
more than a minimum adequate site and the excess property cannot be
sold separately as a minimum adequate site for another dwelling, RHS
may approve a transfer of the entire property. If the excess property
can be sold separately as a minimum adequate site, RHS will approve
assumption of only the dwelling and the minimum adequate site. If the
value of the dwelling on the minimum adequate site is less than the
amount of the outstanding RHS debt, the remaining debt will be secured
by the excess property. The outstanding debt will be converted to a NP
loan and reamortized over a period not to exceed 10 years or the final
due date of the original promissory note, whichever is sooner.
Sec. 3550.164- Unauthorized assistance.
(a) Types of unauthorized assistance. Unauthorized assistance
includes:
(1) A loan or grant made to a recipient who did not qualify for the
assistance, or made for an ineligible purpose.
(2) Subsidy in excess of $10 per month or $120 per year for which
the recipient was not eligible.
(b) Recipients who provide false information. (1) False information
is information provided by the recipient that the recipient knew was
incorrect at the time it was provided, and was provided with the intent
to obtain benefits that would not have been obtainable based upon
correct information.
(2) If false information related to recipient eligibility or the
purpose of the loan or grant results in the borrower receiving
unauthorized assistance, RHS will accelerate any loan and require
repayment of any subsidy or grant.
(3) If false information related to the amount of subsidy results
in the recipient receiving unauthorized assistance, the recipient will
be required to repay all excess subsidy received. The account may not
be reamortized to include this excessive subsidy.
(4) RHS may suspend or debar any recipient who provides false
information.
(c) Recipients who provide inaccurate information and unauthorized
assistance received as a result of RHS error. (1) Inaccurate
information is incorrect information inadvertently provided by the
recipient without intent to obtain benefits fraudulently.
(2) Recipients who provide inaccurate information related to
eligibility or the purpose of the loan or grant will be permitted to
retain the loan.
(3) The recipient will be required to repay all excess subsidy
received based on inaccurate information. If a recipient is unable to
repay the excess subsidy in a lump sum, the account may be reamortized.
(d) Repayment terms. If a recipient cannot repay the unauthorized
amount within a reasonable period, RHS may reamortize the loan. Refusal
to repay will result in acceleration of the loan.
[[Page 15424]]
Secs. 3550.165-3550.200 [Reserved]
Subpart E--Special Servicing
Sec. 3550.201 Purpose of special servicing actions.
The Rural Housing Service (RHS) may approve special servicing
actions to reduce the number of borrower failures that result in
liquidation. Borrowers who have difficulty keeping their accounts
current may be eligible for one or more available servicing options
including: payment assistance; work-out agreements that temporarily
modify payment terms; protective advances of funds for taxes, insurance
and other approved costs; payment moratoriums; and reamortization at
promissory note or new interest rates.
Sec. 3550.202 Past due accounts.
An account is past due if the full scheduled payment is not
received by the due date.
(a) Late charges. A late charge will be assessed if the full
scheduled payment is not received by the 15th day after the due date.
(b) Liquidation. The account may be liquidated without further
servicing when at least three full scheduled payments are past due or
an amount equal to at least two full scheduled payments is past due for
at least three consecutive months. In such cases RHS may pursue
voluntary liquidation and foreclosure.
Sec. 3550.203 General servicing actions.
Whenever any of the servicing actions described in this subpart
result in reamortization of the account RHS may:
(a) Require the creation and funding of an escrow account for real
estate taxes and insurance, if one does not already exist.
(b) Convert the method of calculating interest for any account
being charged daily simple interest to a preamortized payment schedule.
Sec. 3550.204 Payment assistance.
Borrowers who are eligible may be offered payment assistance in
accordance with subpart B of this part. Borrowers who are not eligible
for payment assistance because the loan was approved before August 1,
1968 or the loan is an above-moderate or nonprogram loan, may refinance
the loan if:
(a) The borrower is now eligible to receive a loan with payment
assistance;
(b) Due to circumstances beyond the borrower's control, the
borrower is in danger of losing the property; and
(c) The property is program-eligible.
Sec. 3550.205 Work-out agreements.
Borrowers with past due accounts may be offered the opportunity to
avoid liquidation by entering into a written work-out agreement that
specifies a plan for bringing the account current. To receive a work-
out agreement, the following requirements apply:
(a) A borrower who currently makes annual payments but receives
monthly income must convert to monthly payments.
(b) A borrower who is able to do so will be required to pay the
past-due amount in a single payment.
(c) A borrower who is unable to pay the past-due amount in a single
payment must pay monthly all scheduled payments plus an agreed upon
additional amount that brings the account current within two years or
the remaining term of the loan, whichever is shorter.
(d) If a borrower becomes more than 30 days past due under the
terms of a work-out agreement, RHS may cancel the agreement.
Sec. 3550.206 Protective advances.
RHS may pay for fees or services and charge the cost against the
borrower's account to protect the government's interest. A protective
advance will be made only if the borrower cannot obtain a subsequent
loan.
(a) Advances for taxes and insurance. RHS may advance funds to pay
real estate taxes, hazard and flood insurance premiums, and other
related costs.
(1) Monthly payments to the escrow account will be adjusted to
ensure recovery of this advance within 12 months.
(2) A borrower without an established escrow account will be
required to establish such an account. RHS may advance amounts needed
to pay taxes and insurance due as well as to fund the borrower's
contribution to the current escrow cycle. Amounts advanced may be
reamortized or repaid by the borrower in a lump sum due with the next
scheduled installment.
(b) Advances for costs other than taxes and insurance. Advances for
costs other than real estate taxes and hazard insurance will bear
interest at the promissory note rate of the loan against which they are
being charged. Advances for borrowers with multiple loans will be
charged against the primary loan.
Sec. 3550.207 Payment moratorium.
RHS may defer for up to two years payments for either principal,
interest, and contributions to the escrow account for taxes and
insurance, or payments for only principal and interest.
(a) Borrower eligibility. For a borrower to be eligible for a
moratorium, all of the following conditions must be met:
(1) Due to circumstances beyond the borrower's control, the
borrower is temporarily unable to continue making scheduled payments
because:
(i) The borrower's repayment income fell by at least 20 percent
within the last year,
(ii) The borrower must pay unexpected and unreimbursed expenses
resulting from the illness, injury or death of the borrower or a family
member, or
(iii) The borrower must pay unexpected and unreimbursed expenses
resulting from damage to the security property in cases where adequate
hazard insurance was not available or was prohibitively expensive.
(2) The borrower occupies the dwelling, unless RHS determines that
it is uninhabitable.
(3) The borrower's account is not currently accelerated.
(b) Reviews of borrower eligibility. (1) Periodically RHS may
require the borrower to submit financial information to demonstrate
that the moratorium should be continued. The moratorium may be canceled
if:
(i) The borrower does not respond to a request for financial
information,
(ii) RHS receives information indicating that the moratorium is no
longer required, or
(iii) In the case of a moratorium granted to pay unexpected or
unreimbursed expenses, the borrower cannot show that an amount at least
equal to the deferred payments has been applied toward the expenses.
(2) At least 30 days before the moratorium is scheduled to expire,
RHS will require the borrower to provide financial information needed
to determine whether the borrower is able to resume making scheduled
monthly payments.
(c) Resumption of monthly payments. When the borrower is able to
resume scheduled monthly payments, the loan will be reamortized to
include the amount deferred during the moratorium. If the new monthly
payment, after consideration of the maximum amount of payment subsidy
available to the borrower, exceeds the borrower's repayment ability,
all or part of the interest that has accrued during the moratorium may
be forgiven.
(d) Borrowers unable to resume monthly payments. If even after all
appropriate servicing actions have been taken the borrower is unable to
resume making scheduled payments after two consecutive years of being
on a
[[Page 15425]]
moratorium, the account should be liquidated.
Sec. 3550.208 Reamortization using promissory note interest rate.
Reamortization using the promissory note interest rate may be
authorized when RHS determines that reamortization is required to
enable the borrower to meet scheduled obligations, and only if the
government lien priority is not adversely affected.
(a) Permitted uses. Reamortization at the promissory note interest
rate may be used to accomplish a variety of servicing actions,
including to:
(1) Repay unauthorized assistance.
(2) Repay principal and interest accrued and advances made during a
moratorium.
(3) Reinstate an accelerated account.
(4) Bring current an account under a work-out agreement after the
borrower has demonstrated the willingness and ability to meet the terms
of the loan and work-out agreement.
(5) Bring a delinquent account current at the time an assumption is
processed on the terms of the promissory note.
(6) Cover the remaining debt when a portion of the security
property is being transferred but the acquisition price does not cover
the outstanding debt. The remaining balance will be reamortized for a
period not to exceed 10 years or the final due date of the note being
reamortized, whichever is sooner.
(b) Payment term of reamortized loan. Except as noted in paragraph
(a)(6) of this section, the term of the reamortized loan may be
extended to the maximum standard term that was available at the time
the loan was originally made, less the number of years the loan has
been outstanding. In all cases, the term must not exceed the remaining
security life of the property. When reamortizing using the promissory
note interest rate, the loan term cannot be extended to 38 years.
Sec. 3550.209 [Reserved]
Sec. 3550.210- Offsets.
Any money that is or may become payable from the United States to
an RHS borrower may be subject to administrative, salary, or Internal
Revenue Service (IRS) offsets for the collection of a debt owed to RHS.
(a) IRS offset. RHS may take action to effect offset of claims due
RHS against tax refunds due to RHS debtors under 26 U.S.C. 6402, in
accordance with the provisions of 31 U.S.C. 3720A and 26 CFR 301.6402-
6.
(b) Salary offset. Offset of claims due to RHS by a federal
employee may be collected pursuant to the salary offset provisions in 7
CFR part 3, subpart C.
(c) Administrative offset. RHS may take action to effect
administrative offset to recover delinquent claims due to it in
accordance with the procedures in 7 CFR part 3, subpart B.
(d) Offset by other federal agencies. Funds held or payable by RHS
are not subject to offset by other federal agencies.
Sec. 3550.211- Liquidation.
(a) Policy. When RHS determines that a borrower is unable or
unwilling to meet loan obligations, RHS may liquidate the debt and, if
necessary, acquire the security property. The borrower is responsible
for all expenses associated with liquidation and acquisition. After the
security property is liquidated, RHS will credit the borrower's
account. If the account is satisfied in full, the borrower will be
released from liability. If the account is not satisfied in full, RHS
may pursue any deficiency.
(b) Tribal allotted or trust land. Liquidations involving a
security interest in tribal allotted or trust land shall only be
pursued after offering to transfer the account to an eligible tribal
member, the tribe, or the Indian Housing Authority. Forced liquidation
of RHS security interests in Indian trust lands or on tribal allotted
land will be recommended only after the State Director has determined
it is in the best interest of the Government.
(c) Acceleration and Foreclosure. If RHS determines that
foreclosure is in the best interest of the government, RHS will send an
acceleration notice to each borrower and any co-signer. If the borrower
does not pay the full account balance or meet the other terms of the
loan within 30 days of acceleration, RHS may foreclose.
(d) Canceling acceleration. In the case of an account accelerated
because the security property has been sold or transferred without RHS
consent, acceleration cannot be canceled. In all other cases, the
borrower may offer to cure a default after acceleration. RHS will not
accept an offer to cure a default after acceleration unless it is in
the government's best interest. Methods for curing the default include:
(1) Voluntary liquidation. The borrower may refinance or sell the
security property at net recovery value and apply the proceeds to the
account. Foreclosure action will not be delayed pending voluntary
liquidation unless a copy of a firm funding commitment is provided to
RHS indicating that closing will occur within 90 days. An extension of
time may be allowed to complete a transaction provided:
(i) The security property is listed with a real estate broker for
not more than the net recovery value as determined by RHS,
(ii) A sales contract has been entered into and assumption of the
RHS loan, or a loan from another lender, is pending, or
(iii) The borrower has applied to a lender for a long-term loan to
pay RHS in full.
(2) Deed in lieu of foreclosure. RHS may accept a deed in lieu of
foreclosure to convey title to the security property only after the
debt has been accelerated and when it is in the government's best
interest.
(3) Offer by third party. If a junior lienholder or co-signer makes
an offer in the amount of the net recovery value, RHS may assign the
note and mortgage.
(e) Bankruptcy. (1) When a petition in bankruptcy is filed by a
borrower after acceleration, collection actions and foreclosure actions
are suspended in accordance with the provisions of the Bankruptcy Code.
The borrower may be considered for a moratorium or for payment
assistance.
(2) RHS may accept conveyance of security property by the trustee
in bankruptcy if the Bankruptcy Court has approved the transaction, RHS
determines the conveyance is in the best interest of the government,
and RHS will acquire title free of all liens and encumbrances except
RHS liens.
(3) Whenever possible in a Chapter 7 Bankruptcy, a reaffirmation
agreement will be signed by the borrower prior to discharge, if RHS
decides to continue with the borrower.
(f) Junior lienholder foreclosure. When a junior lienholder
foreclosure does not result in payment in full of the RHS debt but the
property is sold subject to the RHS lien, RHS may liquidate the account
unless the new owner is eligible to assume the RHS debt and actually
assumes the RHS debt.
(G) Payment subsidy. If the borrower is receiving payment subsidy,
the payment subsidy agreement will not be canceled when the debt is
accelerated, but will not be renewed unless the account is reinstated.
(h) Eligibility for special servicing actions. A borrower is not
eligible for special servicing actions once the account has been
accelerated.
Secs. 3550.212-3550.250 [Reserved]
Subpart F--Post-Servicing Actions
Sec. 3550.251- Property management and disposition.
(a) Policy. Rural Housing Service (RHS) will manage custodial
property and Real Estate Owned (REO) property
[[Page 15426]]
to protect the government's interest, and may dispose of REO property
through direct sales, sealed bid, or auction. RHS will provide public
notice of all sales of REO property, and follow affirmative fair
housing marketing policies.
(b) Custodial property. RHS may take custodial possession of
security property that has been abandoned, or for other reasons
necessary to protect the government's security. After taking custodial
possession of a security property, RHS may maintain and repair the
security property as needed to protect the government's interest, pay
required real estate taxes and assessments, and secure personal
property left on the premises. Expenses will be charged to the
borrower's account. Custodial property may be leased when it is in the
government's best interest and in such cases the borrower's account
will be credited for income from the security property.
(c)-REO property. (1) When RHS takes title to a security property,
it is classified as either program or nonprogram (NP) property. A REO
property that is eligible for financing under the section 502 program,
or which could reasonably be repaired to be eligible, is classified as
program property. A REO property that cannot reasonably be repaired to
be eligible as section 502 property, and property that has been
improved to a point that it will no longer qualify as modest under
section 502, is classified as NP property.
(2) When RHS determines that a REO property to be sold is not
decent, safe and sanitary, or does not meet cost-effective energy
conservation standards, its known defects will be disclosed. The deed
by which such a REO property is conveyed will contain a covenant
restricting it from residential use until it is decent, safe and
sanitary and meets the RHS cost-effective energy conservation
standards.
(3) Property on Indian tribal allotted or trust land. REO property
which is located on Indian tribal allotted or trust land, will be sold
or otherwise disposed of only to a member of the particular tribe
having jurisdiction over the allotted or tribal land, to the tribe, or
to an Indian housing authority serving the tribe on a first come, first
served basis.
(4) Reservation of program REO properties. (i) Program REO
properties are reserved for program-eligible applicants and nonprofit
organizations or public bodies providing transitional housing during
the first 60 days after the date of the first notice of sale, and
during the first 30 days following any reduction in price or any other
change in credit terms or other sale terms. After the expiration of a
reservation period, program REO properties can be bought by any buyer.
(ii) An offer on a program REO property from a buyer who does not
qualify for a section 502 program loan may be submitted during a
reservation period, but is considered to have been received on the day
after the reservation period ends.
(iii) No offer is considered until three business days after the
date the property is offered for sale. An offer received during the
three-day holding period is not considered until the fourth day, and is
evaluated with any other offers actually received on the fourth day.
(5) Priority of offers received the same day. (i) Offers received
on the same business day are selected in the following order:
(A) Offers from program-eligible applicants, with a request for
credit on program terms. All offers are evaluated as if they were
submitted at the listed price, regardless of the offering price.
(B) Offers from nonprofits or public bodies for conversion to use
as transitional housing or for other special purposes as specified in
paragraph (d)(4) of this section.
(C) Cash offers, from highest to lowest.
(D) NP credit offers, from highest to lowest.
(ii) Acceptable offers of equal priority received on the same
business day are selected by lot.
(iii) REO properties are not held off the market pending the
outcome of an appeal of RHS rejection of a request for financing.
(6) RHS may authorize the sale of a REO property by sealed bid or
public auction when it is in the best interest of the government. RHS
will publicly solicit requests for sealed bids and publicize auctions.
If a successful bidder is unable to settle the transaction under the
terms of the offer, except for the financing contingency, any required
bid deposit may be retained by RHS. If the highest bid is lower than
the minimum acceptable bid established by RHS, or if no acceptable bids
are received, RHS may negotiate a sale without further public notice.
(d) Special purposes. (1) REO property may be purchased for
conversion to multiple family housing.
(2) When a nonprofit organization or public body notifies RHS in
writing of its intent to buy a REO property to provide transitional
housing for the homeless, RHS will stop marketing the property for up
to 30 days to give the entity an opportunity to execute a purchase
contract. The listed price may be discounted for offers on a nonprogram
REO property at any time, and on a program REO property after the 60-
day reservation period. No down payment is required, and the loan term
will be for a maximum of 30 years. Until RHS executes a sales
agreement, an offer from a program-eligible applicant will receive
priority, regardless of a nonprofit's interest in purchasing the REO
property for use as transitional housing.
(3) NP properties may be leased to a nonprofit organization or
public body to provide transitional housing for the homeless at an
annual cost of one dollar. When a REO property is to be leased as
transitional housing, RHS will make repairs needed to put the property
in decent, safe and sanitary condition. The lessee is responsible for
all future repairs and maintenance.
(4) REO property may be sold under special provisions to nonprofit
organizations or public bodies for the purpose of providing affordable
housing to very low- and low-income families. Such sales must be
consistent with section 510(e) of the Housing Act of 1949 and in the
best interests of the government.
Sec. 3550.252- Debt settlement policies.
(a) Applicability. Debt settlement procedures may be initiated to
collect any amounts due to RHS including:
(1) Balances remaining on loan accounts after all liquidation
proceeds or credits have been applied,
(2) Subsidy recapture or grant amounts due, and
(3) Unauthorized assistance due.
(b) Judgment. RHS may seek a judgment whenever a judgment might
enable RHS to collect all or a significant portion of an amount owed.
(c) Multiple loans. RHS generally does not settle debts for one
loan while other RHS loans on the same security property remain active.
(d) Co-signers and claims against estates. RHS may use any and all
remedies available under law to collect from any co-signer and from a
deceased borrower's estate.
(e) Joint debtors. Settlements will not be approved for one joint
debtor unless approved for all debtors.
(f) Reporting. RHS will report to IRS and credit reporting agencies
any debt settled through cancellation, compromise or adjustment.
(g) Settlement during legal or investigative action. Cases that are
under investigation for fiscal irregularity or have been referred to
the Office of Inspector General (OIG), the Office of the General
Counsel (OGC) or the U.S. Attorney will not be considered for debt
settlement until final action by the
[[Page 15427]]
investigating or prosecuting entity has been taken.
(h) Offsets. RHS may request offsets as described in Sec. 3550.210
of subpart E of this part to collect amounts owed.
(i) Escrow funds. At liquidation all funds held in escrow or
unapplied funds will be applied against the debt.
Sec. 3550.253 Settlement of a debt by compromise or adjustment.
Compromise or adjustment offers may be initiated by the debtor or
by RHS. RHS will approve only those compromises and adjustments that
are in the best interest of the government.
(a) Compromise. A compromise is an agreement by RHS to release a
debtor from liability upon receipt of a specified lump sum that is less
than the total amount due.
(b) Adjustments. An adjustment is an agreement by RHS to release a
debtor from liability upon receipt of a reduced amount paid as an
initial lump sum and periodic additional payments over a period of up
to five years.
(c) Timing of offers. (1) For a settlement offer to be considered,
secured debts must be fully matured under the terms of the debt
instrument or must have been accelerated by RHS.
(2) Unsecured debts owed after the sale of the security property
may be proposed for compromise or adjustment at any time. Debts that
were never secured may be proposed for compromise or adjustment when
they are due and payable.
(d) Retention of security property. The debtor may retain the
security property if the compromise payment or the initial payment made
as part of an adjustment offer is at least equal to the net recovery
value, and it is in the best interest of the government to allow the
debtor to retain the security property.
Sec. 3550.254-3550.300 [Reserved]
Dated: March 8, 1996.
Inga Smulkstys,
Acting Under Secretary, Rural Economic and Community Development.
[FR Doc. 96-8492 Filed 4-5-96; 8:45 am]
BILLING CODE 3410-07-U
