[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Rules and Regulations]
[Pages 39452-39471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19558]
[[Page 39451]]
_______________________________________________________________________
Part VI
Department of Agriculture
_______________________________________________________________________
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency
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7 CFR Parts 1940 and 3565
Guaranteed Rural Rental Housing Program; Notice of Availability of
Funding and Requests for Proposals for Guaranteed Loans Under the
Section 538 Guaranteed Rural Rental Housing Program; Interim Final
Rule; Notice
Federal Register / Vol. 63, No. 140 / Wednesday, July 22, 1998 /
Rules and Regulations
[[Page 39452]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
Rural Business--Cooperative Service
Rural Utilities Service
Farm Service Agency
7 CFR Parts 1940 and 3565
RIN 0575-AC14
Guaranteed Rural Rental Housing Program
AGENCIES: Rural Housing Service, Rural Business--Cooperative Service,
Rural Utilities Service, Farm Service Agency, USDA.
ACTION: Interim final rule with request for comments.
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SUMMARY: The Rural Housing Service (RHS) is issuing new regulations for
the Guaranteed Rural Rental Housing Program (GRRHP). This action is
taken to implement the ``Housing Opportunity Program Extension Act of
1996.'' The program is intended to increase the supply of affordable
rural multifamily housing through partnerships between the Agency and
major lending sources, including banks, state and local housing finance
agencies, and bond issuers.
DATES: The effective date of this interim final rule is July 22, 1998.
Written comments must be received on or before September 21, 1998. The
comment period for information collection under the Paperwork Reduction
Act of 1995 continues through September 21, 1998.
ADDRESSES: Submit written comments, in duplicate, to the Chief,
Regulations and Paperwork Management Branch, Rural Housing Service,
U.S. Department of Agriculture, Stop 0743, 1400 Independence Avenue,
SW, Washington, DC 20250-0743. Also, comments may be submitted via the
Internet by addressing them to comments@rus.usda.gov'' and must
contain the word ``Housing'' in the subject line. All written comments
will be available for public inspection during regular work hours at
the above address.
FOR FURTHER INFORMATION CONTACT: Carl W. Wagner, Acting Division
Director, Multi-Family Housing Processing Division, Rural Housing
Service, USDA, STOP 0781, 1400 Independence Avenue, SW, Washington, DC
20250-0781, telephone: (202) 720-1604.
SUPPLEMENTARY INFORMATION:
Classification
This rule has been determined to be significant for the purposes of
Executive Order 12886 and therefore has been reviewed by the Office of
Management and Budget.
Discussion of Use of Interim Final Rule
The Rural Housing Service exercises its emergency authority
pursuant to section 534(c) of the Housing Act of 1949 to issue interim
regulations for the section 538 Guarantee Rural Rental Housing program.
Rural areas have been particularly impacted by a series of major
natural disasters over the past six months, including the tornado
destruction in the central and southern states. Only by providing
funding under this interim rule will critically needed multi-family
rental projects be undertaken and completed as soon as possible this
year. This is important because the Agency will give priority in
guarantee approvals provided under this interim rule for housing
developments in designated disaster areas. This will help ensure that
low and moderate-income families served by these projects will have
greater likelihood of securing safe, decent, affordable housing prior
to winter. Further, the Agency finds the interim rule a reasonable step
under the unusual circumstances since most interested parties have had
ample opportunity to comment on the section 538 program from pilots
conducted by the Agency over the past two years and since these same
parties will have ample opportunity to comment on the interim rule
prior to the publication of the final rule for Fiscal Year 1999 funding
cycle. For the same reason, good cause is shown for publication of the
rule without advance notice and opportunity for comment. However,
comments will be accepted for 60 days after publication of this interim
rule and will be considered when the rule is finalized.
Program funding levels are made public in a ``Notice of Funds
Availability'' (NOFA) published concurrently with this interim final
rule. Approximately $38 million in guaranteed loans is available in
this fiscal year. Potential applicants are encouraged to apply as soon
as possible and specifically take note of the priority to be given to
areas impacted by Presidentially-declared disasters.
Civil Justice Reform
This rule has been reviewed under Executive Order 12988, Civil
Justice Reform. In accordance with this order: (1) All state and local
laws and regulations that are in conflict with this rule will be
preempted; (2) no retroactive effect will be given to this rule; and
(3) administrative proceedings in accordance with 7 CFR part 11, must
be exhausted before bringing suit in court challenging action taken
under this rule unless those regulations specifically allow bringing
suit at an earlier time.
Programs Affected
The affected program is listed in the Catalog of Federal Domestic
Assistance under Number 10.415, Rural Rental Housing Loans.
Intergovernmental Consultation
The program is subject to Executive Order 12372 which requires
intergovernmental consultation with state and local officials.
Intergovernmental consultation has been conducted in accordance with RD
Instruction 1940-J.
Environmental Impact Statement
This document has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' It is the determination of the
Agency that this action does not constitute a major Federal action
significantly affecting the quality of the human environment and in
accordance with the National Environmental Policy Act of 1969, an
Environmental Impact Statement is not required.
Regulatory Flexibility Act
This rule has been reviewed with regard to the requirements of the
Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has
determined and certified by signature of this document that this rule
will not have a significant economic impact on a substantial number of
small entities even though this rulemaking action does involve a new
program. At current funding levels of approximately $38 million, less
than 30 applications are likely to be approved for guarantees. The
requirements for participation will not affect small entities to a
greater extent than large entities.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA),
establishes requirements for Federal Agencies to assess the effects of
their regulatory actions on State, local and tribal governments and the
private sector. Under section 202 of the UMRA, the Agency generally
must prepare a written statement, including a cost-benefit analysis,
for rules with ``Federal mandates'' that may result in expenditures to
State, local, or tribal governments, in the aggregate, or to the
private sector, of $100 million or more in any one year. When such a
statement is needed for a rule, section 205 of the UMRA generally
requires the Agency to
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identify and consider a reasonable number of regulatory alternatives
and adopt the least costly, more cost-effective, or least burdensome
alternative that achieves the objections 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.
Background
The ``Agriculture, Rural Development, Food and Drug Administration,
and Related Agencies Appropriation Act, 1996'', provided funds to the
Department to implement a multifamily mortgage guarantee program
subject to enactment of authorizing legislation. On March 28, 1996,
President Clinton signed the ``Housing Opportunity Program Extension
Act of 1996,'' which authorized the section 538 Guaranteed Rural Rental
Housing Program for the 1996 fiscal year. Appropriations acts have
extended the program through the 1998 fiscal year. The program is
intended to reach the needs of rural America by complementing the
section 515 Rural Rental Housing direct loan program. It is anticipated
that beneficiaries of the program will be rural residents with low and
moderate incomes. The rural residents will be provided rental housing
through borrowers who receive financing from lenders encouraged to
support multifamily affordable housing by the use of loan guarantees.
Participants are encouraged to utilize the section 538 program in
conjunction with other affordable housing financing and equity sources.
The Agency has developed regulations which are based on information
gathered during the implementation of the fiscal year (FY) 1996 and
1997 demonstration programs. The demonstration programs were based upon
informal listening sessions that were conducted by the Agency which
were attended by approximately fifty different stakeholders, primarily
those individuals representing mortgage bankers, federal agencies,
housing interest groups, secondary market institutions, commercial
bankers, private developers and various government regulatory agencies.
The Agency received numerous comments and suggestions that were
instructive in designing and structuring the demonstration program. The
four most significant suggestions that were instituted in the
demonstration program were: (1) use of NOFA with one point of contact,
(2) simple application package, (3) no second underwriting review, and
(4) compatibility with products already found in the secondary market.
The Agency and stakeholders were clear about using the guarantee
program to serve low and moderate-income families in strong markets.
The Agency took many of the recommendations provided by the
stakeholders for the demonstration programs, as well as for the
regulation that follows.
In the first demonstration in FY 1996, the Agency sought to explore
the optimum level of the initial guarantee fee, response to a 90
percent guarantee, and the need and receptiveness in rural markets to a
guaranteed multifamily housing loan program. In that demonstration
year, 50 proposals were received. Agency funding was sufficient for 10
proposals, two of which used tax exempt bonds permitted for the first-
year demonstration. In most proposals, a combination of leverage and
strong markets produced units that were affordable by low and moderate-
income families. An initial guarantee fee of 1 percent and a limitation
for the interest rate spread of 300 basis points (3 percent) over the
30 year bond rate were accepted in the marketplace. Of the proposals
that are now built and renting, the rate of occupancy is above average,
evidencing the need and demand for this housing in rural America.
In the FY 1997 demonstration, the Agency reduced the interest rate
spread to 200 basis points (2 percent) and added a one-half percent
annual renewal fee to the guarantee fee. Tax exempt bonds were not
permitted for the FY 97 demonstration. It was also clear the
demonstration program was completely viable without the use of tax
exempt bonds. The Agency received 20 proposals and funded 16. The
reduced number of proposals was determined to be the result of a late
notice, short turnaround time for submission of the proposals, lack of
formal regulations, and some confusion as to the availability of the
program in States that received approval of a proposal the first year.
In all other regards, though, the fact that feasible projects were
developed on such short notice illustrated a strong interest and need
for the program.
While the Agency is soliciting comments on all provisions of the
regulation, the Agency is specifically looking for comments on the
following areas:
(1) Occupancy Requirements
The Agency is capping rents (including any tenant-paid utilities)
at 30 percent of 115 percent of the area median income (the maximum
rent that can be charged and still have the unit affordable to a
moderate income family). However, to assure longer-term affordability
to moderate-income tenants, the Agency also requires the average rents
for all units to not exceed 30 percent of 100 percent of area median
income. This should be easily accomplished since many proposals include
Low-Income Housing Tax Credits that would restrict tenant eligibility
to those at 60 percent of median income or below. The Agency is
specifically looking for comments on the following: Does this rule
unduly restrict borrower participation in the program? Is it a
practical step to assure long term affordability to intended low and
moderate-income families? Does it affect the ability of developers to
acquire other financing, or to rehabilitate complexes in the out years?
Is this preferable to requiring tenant certifications to assure the
complex is serving low-and moderate-income families?
(2) Competitive Process and Selection Criteria
The regulations are developed for a fully funded program where
funding authority would be sufficient to meet demand. Therefore, the
regulations do not include selection criteria and give the Agency
Administrator the discretion to establish such criteria in NOFA that
entails a competitive process. The Agency intends to review the
potential demand for the program annually and use a competitive process
when it appears that demand outweighs available funding.
Purpose and Program Summary
The program has been designed to increase the availability of
affordable multifamily housing through partnerships between the Agency
and lending sources, as well as state and local housing finance
agencies and bond issuers. Qualified lenders will be authorized to
originate, underwrite, and close loans for multifamily housing projects
to be guaranteed under this program. Projects may be for new
construction or acquisition with substantial rehabilitation. The Agency
will guarantee such loans upon review of the lender's underwriting
package, appraisal report, appropriate certifications, project
information, and satisfactory completion of the appropriate level of
environmental
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review by the Agency. Lenders will be responsible for loan
underwriting, management and servicing associated with these projects.
The lender will be expected to provide servicing or contract for
servicing of each loan it underwrites. In turn, RHS will guarantee the
lender's loan up to 90 percent of total development cost and commits to
pay up to a maximum of 90 percent of the outstanding principal and
interest balance of such loan in the case of default of the loan and
filing of a claim. In no event will the Agency pay more than 90 percent
of the original principal amount. This means that the Agency will have
a risk exposure under the GRRHP of approximately 80 percent of the
total development cost. Any losses would be split on a pro-rata split
between the lender and the Agency from the first dollar lost.
Program applicability and funding will be announced by NOFA
published in the Federal Register. When program funding levels exceed
$100 million, funds are allocated to states based on the following
criteria: (1) State's percentage of National rural population, 2)
State's percentage of the National number of rural households between
50 and 115 percent of the area median income, and (3) State's
percentage of National average cost per unit. These criteria for
allocation of funds to the states are consistent with other Agency
housing programs. The criteria will enable the Agency to allocate funds
based on a state's population and available households with income
sufficient to meet the proposed rents, and to adjust the allocation for
per unit new construction cost. The purpose of having a cost factor is
to assure units produced reflect criteria for need, especially for high
cost states. Eighty percent of the weight will be divided equally
between population and income and 20 percent based on cost. When the
funding levels are under $100 million, funds will all be held in a
National office reserve and made available administratively in
accordance with the NOFA and program regulations.
Subpart A--General Provisions
This subpart includes the purpose and legislative authority for
GRRHP, definitions of terms found in the regulation, the general
provisions and federal requirements applicable to the program, and the
authority to issue a competitive NOFA in the event demand exceeds
available funding. Key policies of this subpart are:
Section 3565.5 Ranking and Selection Criteria
The Agency intends to guarantee proposals that provide housing to
the areas of greatest need. While a variety of financing packages is
possible, the demand in the eligible market areas will determine the
economic and market feasibility of the proposed development. In the
event demand is projected to exceed available funds, the Agency
reserves the option to establish selection criteria in an annual NOFA.
This flexibility permits the Agency to create and modify the criteria
to assure that facilities with guaranteed loans are geographically
dispersed and ensure that the high need areas are served. Criteria used
in the demonstration programs and under consideration may include the
following:
(1) Partnering and Leveraging
In order to develop the maximum number of housing units and promote
partnerships with states, local communities, and other partners with
similar housing goals, participation loans and leveraging are
encouraged.
(2) Priority Based On Interest Rate
Priority will be provided to the proposals that set the lowest
interest rate spread (difference between the 30-year Treasury Bill rate
and the note rate). However, the program will permit proposals that
require up to 200 basis points (2 percent) over the 30 year Treasury
Bill rate.
(3) Preference for Proposals in a Colonia, Tribal Land or EZ/EC
Community or State Identified Place.
Those proposals to be developed in a colonia, tribal land, or EZ/EC
community,or in a place identified in the State consolidated plan or
State needs assessment as a high need community for multifamily
housing, will receive preference.
(4) Geographic Diversity
Priority will be given for smaller rural communities versus larger
rural communities.
(5) Commitment to Maintain Low-and Moderate-Income Occupancy
Preference will be given for commitments by the applicant to
maintain occupancy throughout the term of the loan for neediest (based
on income) of the target population, with a priority at initial
occupancy for low-income families.
(6) Preference for Family Proposals
Proposals addressing a need for family units with large bedroom
mixes (3-5 bedrooms) will receive preference.
(7) Administrator's discretion
The Agency reserves the Administrator's discretion to effectively
use funding to best explore program structure and effectiveness
consistent with the best interests of the Government.
Section 3565.6 Exclusion of Tax-exempt Debt
Tax-exempt financing is not eligible for a loan guarantee in this
program. However, the Agency has structured the program to be
compatible with other affordable housing programs such as the Low
Income Housing Tax Credit, taxable bonds, HOME Investment Partnerships
Program (HOME) funds, and other State or locally funded tenant
assistance or grants. Reviewers will note that regulations addressing
eligibility of lenders, lien position, and minimum reporting to the
Agency are intended to foster compatibility with the secondary market
and other lenders' standards.
Subpart B--Guarantee Requirements
This subpart describes loans eligible for guarantee, extent of the
guarantee and the guarantee fees. This subpart includes the
transferability of the guarantee and the procedures the Agency will
follow in the event the guarantee is reduced, suspended, or terminated.
Key policies of this subpart are:
Section 3565.51 Eligible Loans and Advances
The Agency will guarantee a permanent loan or a combination
construction and permanent loan. The Agency will not guarantee a
construction loan that will not be converted into a permanent loan with
an Agency guarantee. The construction loan may not exceed 12 months.
The Agency will guarantee construction contracts (not to exceed 90
percent of the work in place) which have credit enhancements, such as
an acceptable irrevocable letter of credit or pledge of collateral or
both, to protect the government's guarantee. The Agency believes that
providing construction guarantees will foster greater participation in
the program, especially in many rural areas which suffer from a lack of
available mortgage credit.
Section 3565.52 Extent of Guarantee
The Agency will guarantee repayment of an amount not to exceed 90
percent of the total unpaid principal and
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interest of the loan but, in all cases, not more than 90 percent of the
original principal amount. Any losses would be based on a pro-rata
sharing of the risk between the Agency and the lender. For example:
assume the total development cost is $1,000,000, with the original loan
principal amount being 90 percent of the total development cost or
$900,000. The Agency guarantees 90 percent of $900,000, providing a
maximum guarantee equal to $810,000. If this loan were liquidated and
the property sold for $600,000, the claim would be for $270,000
($900,000-$600,000=$300,000 x 90 percent = $270,000). The lender's
loss would be $30,000.
Section 3565.53 Guarantee Fees
At the time of issuance of a loan guarantee under this program, the
Agency will collect an initial guarantee fee equal to 100 basis points
(1 percent) of the guaranteed principal obligation of the loan from the
lender. The Agency will also collect an annual servicing fee of 50
basis points (\1/2\ percent) based on the outstanding principal and
interest of the guarantee portion of the loan on the first and each
subsequent anniversary of the loan as long as the guarantee remains
outstanding. These fees are fairly standard in the industry. They were
used under the section 538 demonstration programs and found to be
acceptable. They also significantly reduce the cost of the program.
Subpart C--Lender Requirements
This subpart provides the Agency policy on types of lenders and
their eligibility requirements for participation in the program. Lender
review and approval for participation in the program is covered in this
subpart. A lender must be eligible and approved to participate in the
program. This subpart also covers a lender's ongoing eligibility
requirements and responsibilities.
Sec. 3565.101 Responsibility of lenders
A participating lender must originate and service a guaranteed loan
in accordance with the regulation and program requirements throughout
the life of a loan or guarantee, whichever is less. In exceptional
circumstances the Agency, in its sole discretion, may permit the
transfer of servicing from the originating lender to a servicer.
Section 3565.102 Lender Eligibility
Those lenders currently approved and considered eligible by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, the Federal Home Loan Bank Members, or the Department of
Housing and Urban Development for guaranteed loan programs supporting
multifamily housing are included as eligible lenders for this program.
In addition, State Housing Finance Agencies (HFAs) are also considered
eligible to participate in the program provided they demonstrate they
have the ability to underwrite, originate, process, close, service,
manage, and dispose of multifamily housing loans in a prudent manner.
Other lenders have the opportunity to enter into a correspondent bank
relationship with approved lenders in order to participate in the
program. The Agency is striving to have as broad a pool of eligible
lenders as possible.
Section 3565.103 Approval Requirements
To become an approved lender, eligible lenders (see Sec. 3565.102)
must meet a set of requirements for ongoing participation in the
program. The Agency will establish and maintain a ``list of approved
lenders.'' The Agency will establish threshold requirements for
becoming an approved lender and then require annual certification to
show compliance with the continuing requirements for retaining the
status of approved lender. The Agency ``approved lender'' list and
review procedures meet the legislative requirements without placing
unnecessary burden on the lenders participating or wanting to
participate in the program.
The Agency is also considering requiring that approved lenders have
computer systems that comply with year 2000 technology. The Agency is
specifically interested in comments on such an eligibility requirement,
the potential vulnerability to the servicing of a guaranteed portfolio
with systems that are not year 2000 compliant, the potential
vulnerability to the Agency, and the requirement's impact on lenders
participation in the program.
Subpart D--Borrower Eligibility Requirements
This subpart contains the basic eligibility and loan underwriting
requirements for loans on which an Agency guarantee is requested. It
also contains identity of interest requirements, limitations for
borrowers, as well as required certifications. These reinforce the
Agency's intention not to re-underwrite the loan when borrower
thresholds are met. Subparts H and I of this part outline the Agency's
broad oversight responsibilities of the lender, the borrower and the
project.
Subpart E--Loan Requirements
This subpart provides the Agency's direction to the lender in
evaluating loans for compatibility with GRRHP. Also provided in this
subpart are acceptable loan rates and terms. Key policies of this
subpart are:
Section 3565.202 Tenant Eligibility and Section 3565.203 Restrictions
on rents.
The Agency recognizes that many of the proposals seeking a
guarantee under this program may have alternate financing sources that
will be more restrictive in terms of income limits for eligible
tenants. The law establishes a mandate to serve low and moderate-income
families. Therefore, the rent cap for initial occupancy corresponds to
the maximum ``affordable'' rent (based on legislated standard of 30
percent of income for rent and utilities) for moderate-income families.
After initial occupancy, a tenant's income may exceed these limits;
however, the Agency plans to restrict the average rents, including
utilities, for the overall project to no more than 30 percent of 100
percent of area median income for the term of the loan. This is
intended to assure broader marketability and longer occupancy by low-
and moderate-income families. Lenders will be required to provide an
annual rent certification, and the Agency intends to monitor rents.
Section 3565.204 Maximum Loan Amount
The enabling legislation mandates that the maximum loan amount
eligible for guarantee involve a principal amount (including initial
service charges, appraisal, inspection, and other reasonable fees) not
to exceed 97 percent of the development costs of the housing and
related facilities or the value of the housing and facilities
(whichever is less) for a borrower that is a nonprofit organization or
an agency or body of any State or local government. For a borrower that
is a for-profit entity, the principal amount eligible for guarantee may
be up to 90 percent of the development costs of the housing and related
facilities or the value of the housing and facilities (whichever is
less). In order to contain costs and keep project units modest in
design and amenities, the Agency has set a cap for such part of the
property as may be attributable to dwelling use equal to the applicable
maximum per unit dollar amount limitations under section 207(c) of the
National Housing Act, which has built-in flexibility for high and low
cost markets.
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As with other multifamily housing programs, loans are subject to a
review conducted in conjunction with the applicable tax credit
administration entity to determine if the proposal is in conformance
with the Agency's subsidy layering requirements under its rural rental
housing direct loan program (see 7 CFR 1944.213). The Agency will not
guarantee a loan which is for more than the minimum amount of
assistance necessary to make the complex financially feasible.
Section 3565.207 Form of Lien
The enabling legislation mandates that loans guaranteed under this
program shall be secured by a first mortgage on the housing and related
facilities for which the loan is made, or be secured by a parity lien
in the case where the loan upon which the Agency guarantee is requested
is not the primary funding source.
Section 3565.208 Maximum Loan Term
The enabling legislation mandates that loans must be completely
amortized by periodic payments for a term not to exceed 40 years. A
fixed rate of interest must be agreed upon by the borrower and the
lender that does not exceed the maximum allowable rate established by
the Administrator.
Section 3565.210 Maximum Interest Rate
The maximum allowable rate will be set in the annual NOFA as a
number of basis points over the 30-year Treasury Bond Rate as published
in the ``Wall Street Journal'' as of the business day previous to the
business day the rate is set. Priority may be given to proposals that
have rates lower than the maximum, with the lowest number of basis
points receiving the highest priority.
Section 3565.211 Interest Credit
The law provides that, for at least 20 percent of the loans made
under this program, the Agency shall provide the borrower with
assistance in the form of interest credits to the extent necessary to
reduce the rate of interest to the Applicable Federal Rate (AFR), as
such term is used in section 42(I)(2)(D) of the Internal Revenue Code
of 1986. For the FY 1997 demonstration program, the AFR was 6.25
percent. The Agency intends to limit use of this authority to no more
than a guarantee of $1.5 million per complex in order to maximize
available budget authority and assist more rural residents. This policy
is also necessary for program management and budgeting of the interest
credit available in any fiscal year.
Section 3565.214 Release of Liability
The legislation imposes a restriction of non-assumability by a
party other than the original borrower when any portion of the
principal obligation or interest remains outstanding with a GRRHP loan.
The borrower may not be relieved of liability with respect to the loan,
notwithstanding the transfer of property for which the loan was made.
Loans guaranteed under this program may be made on a recourse or non-
recourse basis. The lender should make the decision about whether to
make a recourse or non-recourse loan.
Subpart F--Property Requirements
The guidance in the section provides direction for the lender and
the borrower on property requirements and contains the Agency's overall
policy on housing design and standards. Flexibility is provided to meet
needs of the rural communities in which the housing is to be located.
Key policies of this subpart are:
Section 3565.251 Eligible Property
The Agency is required to guarantee loans on units located in rural
areas as defined in 7 CFR 3550.10. Each State Director is responsible
for designating the rural area for his or her state and providing such
information to the public upon request. The definition of a rural area,
in part, is one that is located in a place of 10,000 population or
less; or a place of 20,000 population or less that is not associated
with a Metropolitan Statistical Area. The Agency's direct rural rental
housing program's requirements on prioritizing and designating most
needy places are not applicable to the guarantee program.
Section 3565.252 Housing Types
Complexes may contain modular or manufactured units, that are
attached, detached, semi-detached, row houses, or multifamily
structures. The Agency proposes to guarantee proposals for new
construction or acquisition with rehabilitation of at least $15,000 per
unit. Refinancing of existing housing and indebtedness is not an
authorized purpose. The portion of the guaranteed funds for acquisition
with rehabilitation is limited to 25 percent of the program authority.
The Agency's objective, consistent with the enabling legislation, is to
expand the housing stock. New construction is typically more cost
effective in both the short and long term.
Subpart G--Processing Requirements
This subpart establishes the loan origination, underwriting and
appraisal standards, as well as the allowable fees, processing steps,
guarantee process, and closing requirements. The requirements for
lender loan processing and project servicing, management and
disposition are clearly listed in this subpart. Key policies of this
subpart are:
Section 3565.303 Issuance of Loan Guarantee
In order to reduce the Agency risk and encourage the lender and
borrower to provide the necessary housing as quickly as possible, the
Agency will only issue the loan guarantee when a final certificate of
occupancy and an acceptable level of occupancy has been reached. The
Agency will require the lender, as part of the guarantee package for
the permanent loan, to certify that the appropriate occupancy has been
reached and that the final certificate of occupancy has been issued.
Subpart H--Project Management
This subpart contains the required project management thresholds.
Key policies are:
Section 3565.351 Project Management
The enabling legislation requires the Agency to provide tenant
protection. The Agency currently has regulations for tenant protection
under the direct program and intends to provide tenants in units
financed with a loan guarantee the same protections already contained
in 7 CFR part 1944, subpart L. The borrower must inform tenants in
writing of these rights.
Section 3565.352 Preservation of Affordable Housing
Enabling legislation requires the placement of ``use restrictions''
on the property so that the housing remains available for initial
occupancy by low-and moderate-income households for the original term
of the guaranteed loan. This requirement will be included in a deed
restriction or other instrument acceptable to the Agency.
Subpart I--Servicing Requirements
The minimum requirements for servicing responsibilities are listed
in this subpart. The Agency has divided the servicing into the lender's
responsibilities and the borrower's responsibilities. While the Agency
intends to maintain prudent oversight responsibility for the program,
the rules attempt to balance the need for quality servicing while
providing a reasonable impact on the lender. Key policies of this
subpart are:
[[Page 39457]]
Section 3565.401 Servicing Objectives
The following four servicing objectives provide the foundation for
all of the servicing on the guaranteed loan.
(1) Protecting the interests of tenants,
(2) Preserving the value of the loan and real estate,
(3) Avoiding or limiting potential loss to the lender and Agency,
and
(4) Furthering program objectives.
Subpart J--Assignment, Conveyance and Claims
This subpart reflects the Agency's intent to make this product
compatible with the other products that exist on the secondary market.
The enabling legislation is silent on most of the areas under this
subpart. Therefore, the Agency looked to guarantee programs of other
Federal and government sponsored entities for guidance and models.
Advice and recommendations in this area are welcome. Key policies of
this subpart are:
Section 3565.453 Disposition of the Property
The lender is responsible for liquidation of the security in most
cases prior to filing a claim for payment under the guarantee.
Foreclosure action will be taken by the lender, under state law. The
Agency provides direction in this subpart to the lender in coordinating
the liquidation of the security with the Agency.
Section 3565.455 Alternative Disposition Methods
The Agency authorizes alternative methods for disposition of the
security, such as assignment or conveyance to the Agency, but these
methods may be used at the Agency's sole discretion. At this time, the
Agency would view these methods as unusual for disposition of the
security.
Section 3565.456 Filing a Claim
The Agency will look to the lender to dispose of the property
before filing a final claim for the guaranteed portion of allowable
losses. This is consistent with other guarantee programs and industry
standards.
Also included within this document is an amendment to 7 CFR part
1940, subpart L which establishes the formula for allocation of funds
to Rural Development State Offices.
Paperwork Reduction Act
The reporting requirements contained in this regulation have
received temporary emergency clearance by the Office of Management and
Budget (OMB) under Control Number 0575-0174. However, in accordance
with the Paperwork Reduction Act of 1995, RHS will seek standard OMB
approval of the reporting requirements contained in this regulation and
hereby opens a 60-day public comment period.
On March 28, 1996, President Clinton signed the ``Housing
Opportunity Program Extension Act of 1996.'' One of the provisions of
the Act was the authorization of the section 538 Guaranteed Rural
Rental Housing Program, adding the program to the Housing Act of 1949.
The program has been designed to increase the supply of affordable
multifamily housing through partnerships between RHS and major lending
sources, as well as State and local housing finance agencies and bond
issuers. Qualified lenders will be authorized to originate, underwrite,
and close loans for multifamily housing projects requiring new
construction or acquisition with rehabilitation of at least $15,000 per
unit.
The housing must be available for occupancy only by low or moderate
income families or persons, whose incomes at the time of initial
occupancy do not exceed 115 percent of the median income of the area.
After initial occupancy, a tenant's income may exceed these limits;
however, rents, including utilities, are restricted to no more than 30
percent of the 115 percent of area median income for the term of the
loan.
Units must be located in areas considered eligible as defined in 7
CFR 3550.10.
The Secretary is authorized under section 510(k) of the Housing Act
of 1949 to prescribe regulations to ensure that these federally funded
loans are made to eligible applicants for authorized purposes. The
lender must evaluate the eligibility, cost, benefits, feasibility, and
financial performance of the proposed project. The information
submitted by the lender to the Agency is used by the Agency to manage,
plan, evaluate, and account for Government resources. The reports are
required to ensure the proper and judicious use of public funds.
Estimate of Burden: Public reporting burden for this collection of
information is estimated to average .39 man hours per response.
Respondents: Profit and nonprofit organizations and public bodies.
Estimated Number of Respondents: 50.
Estimated Number of Responses per Respondent: 33.
Estimated Total Annual Burden on Respondents: 644.39 hours.
The subject regulation is published for public review and comment.
Additional copies of the interim rule or copies of this information
collection can be obtained from Tracy Gillin, Regulations and Paperwork
Management Branch, Support Services Division, Rural Development, at
(202) 692-0039.
Comments are invited on: (a) whether the proposed collection of
information is necessary for the proper performance of the functions of
RHS, including whether the information will have practical utility; (b)
the accuracy of RHS' 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.
All responses with regard to paperwork burden will be summarized,
included in the request for OMB approval, and will become a matter of
public record. Comments should be submitted to Tracy Gillin,
Regulations and Paperwork Management Branch, U.S. Department of
Agriculture, Rural Development, STOP 0742, 1400 Independence Ave. SW,
Washington, DC 20250-0742.
List of Subjects
7 CFR Part 1940
Administrative practice and procedure, Agriculture, Grant
programs--Housing and community development, Loan programs--
Agriculture, Rural areas.
7 CFR Part 3565
Bankruptcy, Banks, banking Civil rights, Conflict of interests,
Credit, Environmental impact statements, Fair housing, Government
procurement, Guaranteed loans, Hearing and appeal procedures, Housing
standards, Lobbying, Low and moderate income housing, Manufactured
homes, Mortgages, Real property acquisition, Surety bonding.
Therefore, chapters XVIII and XXXV, title 7, Code of Federal
Regulations are amended as follows:
[[Page 39458]]
CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT
OF AGRICULTURE
PART 1940--[Amended]
1. The authority citation for part 1940 continues to read as
follows:
Authority: 5 U.S.C. 301, 7 U.S.C. 1989, and 42 U.S.C. 1480.
2. Section 1940.560 is added to read as follows:
Sec. 1940.560 Guarantee Rural Rental Housing Program.
When funding levels are under $100,000,000, all funds will be held
in a National Office reserve and made available administratively in
accordance with the Notice of Funding Availability (NOFA) and program
regulations. When program levels are sufficient for a nationwide
program, funds are allocated based upon the following criteria and
weights.
(a) Amount available for allocations. See Sec. 1940.552(a) of this
subpart.
(b) Basic formula criteria, data source and weight. See
Sec. 1940.552(b) of this subpart .
Each factor will receive a weight respectively of 40%, 40% and 20%.
The criteria used in the basic formula are:
(1) State's percentage of National rural population,
(2) State's percentage of the National number of rural households
between 50 and 115 percent of the area median income, and
(3) State's percentage of National average cost per unit. Data
source for the first two of these criterion are based on the latest
census data available. The third criterion is based on the cost per
unit data using the applicable maximum per unit dollar amount
limitations under section 207(c) of the National Housing Act, which can
be obtained from the Department of Housing and Urban Development. The
percentage representing each criterion is multiplied by the weight
assigned and totaled to arrive at a State factor.
State Factor = (criterion No. 1 x weight of 40%)+ (criterion No. 1
x weight of 40%)+ (criterion No. 1 x weight of 20%)
(c) Basic formula allocation. See Sec. 1940.552(c).
(d) Transition formula. See Sec. 1940.552(d).
(e) Base allocation. See Sec. 1940.552(e). Jurisdictions receiving
administrative allocations do not receive base allocations.
(f) Administrative allocations. See Sec. 1940.552(f). Jurisdictions
receiving formula allocations do not receive administrative
allocations.
(g) Reserve. See Sec. 1940.552(g).
(h) Pooling of funds. See Sec. 1940.552(h).
(i) Availability of the allocation. See Sec. 1940.552(i).
(j) Suballocation by the State Director. See Sec. 1940.552(j).
(k) Other documentation. Not applicable.
CHAPTER XXXV-RURAL HOUSING SERVICE, UNITED STATES DEPARTMENT OF
AGRICULTURE
3. Part 3565 is added to read as follows:
PART 3565--Guaranteed Rural Rental Housing Program
Subpart A--General Provisions
Sec.
3565.1 Purpose.
3565.2 Applicability and authority.
3565.3 Definitions.
3565.4 Availability of assistance.
3565.5 Ranking and selection criteria.
3565.6 Exclusion of tax-exempt debt.
3565.7 Agency environmental requirements.
3565.8 Civil rights.
3565.9 Compliance with federal requirements.
3565.10 Conflict of interest.
3565.11-3565.12 [Reserved]
3565.13 Exception authority.
3565.14 Review and appeals.
3565.15 Oversight and monitoring.
3565.16 [Reserved]
3565.17 Demonstration programs.
3565.18-3565.49 [Reserved]
3565.50 OMB control number.
Subpart B--Guarantee Requirements
3565.51 Eligible loans and advances.
3565.52 Extent of the guarantee.
3565.53 Guarantee fees.
3565.54 Transferability of the guarantee.
3565.55 Participation loans.
3565.56 Suspension or termination of loan guarantee agreement.
3565.57 Modification, extension, reinstatement of loan guarantee.
3565.58-3565.99 [Reserved]
3565.100 OMB control number.
Subpart C--Lender Requirements
3565.101 Responsibility of lenders.
3565.102 Lender eligibility.
3565.103 Approval requirements.
3565.104 Application requirements.
3565.105 Lender compliance.
3565.106 Construction lender requirements.
3565.107 [Reserved]
3565.108 Responsibility for actions of agents and mortgage brokers.
3565.109 Minimum loan prohibition.
3565.110 Insolvency of lender.
3565.111 Lobbying activities.
3565.112-3565.149 [Reserved]
3565.150 OMB control number.
Subpart D--Borrower Eligibility Requirements
3565.151 Eligible borrowers.
3565.152 Control of land.
3565.153 Experience and capacity of borrower.
3565.154 Previous participation in state and federal programs.
3565.155 Identity of interest.
3565.156 Certification of compliance with federal, state, and local
laws and with Agency requirements.
3565.157-3565.199 [Reserved]
3565.200 OMB control number.
Subpart E--Loan Requirements
3565.201 General.
3565.202 Tenant eligibility.
3565.203 Restrictions on rents.
3565.204 Maximum loan amount.
3565.205 Eligible uses of loan proceeds.
3565.206 Ineligible uses of loan proceeds.
3565.207 Form of lien.
3565.208 Maximum loan term.
3565.209 Loan amortization.
3565.210 Maximum interest rate.
3565.211 Interest credit.
3565.212 Multiple guaranteed loans.
3565.213 Geographic distribution.
3565.214 Release of liability.
3565.215 Special conditions.
3565.216-3565.249 [Reserved]
3565.250 OMB control number.
Subpart F--Property Requirements
3565.251 Eligible property.
3565.252 Housing types.
3565.253 Form of ownership.
3565.254 Property standards.
3565.255 Environmental requirements.
3565.256 Architectural services.
3565.257 Procurement actions.
3565.258-3565.299 [Reserved]
3565.300 OMB control number.
Subpart G--Processing Requirements
3565.301 Loan standards.
3565.302 Allowable fees.
3565.303 Issuance of loan guarantee.
3565.304 Lender loan processing responsibilities.
3565.305 Mortgage and closing requirements.
3565.306-3565.349 [Reserved]
3565.350 OMB control number.
Subpart H--Project Management
3565.351 Project management.
3565.352 Preservation of affordable housing.
3565.353 Affirmative fair marketing.
3565.354 Fair housing accommodations.
3565.355 Changes in ownership.
3565.356-3565.399 [Reserved]
3565.400 OMB control number.
Subpart I--Servicing Requirements
3565.401 Servicing objectives.
3565.402 Servicing responsibilities.
3565.403 Special servicing.
3565.404 Transfer of mortgage servicing.
3565.405-3565.449 [Reserved]
3565.450 OMB control number.
[[Page 39459]]
Subpart J--Assignment, Conveyance, and Claims
3565.451 Preclaim requirements.
3565.452 Decision to liquidate.
3565.453 Disposition of the property.
3565.454 [Reserved]
3565.455 Alternative disposition methods.
3565.456 Filing a claim.
3565.457 Determination of claim amount.
3565.458 Withdrawal of claim.
3565.459-3565.499 [Reserved]
3565.500 OMB control number.
Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
Subpart A--General Provisions
Sec. 3565.1 Purpose.
The purpose of the Guaranteed Rural Rental Housing Program (GRRHP)
is to increase the supply of affordable rural rental housing, through
the use of loan guarantees that encourage partnerships between the
Rural Housing Service, private lenders and public agencies.
Sec. 3565.2 Applicability and authority.
The regulation prescribes the policies, authorizations, and
procedures for the guarantee of multifamily loans under section 538 of
the Housing Act of 1949.
Sec. 3565.3 Definitions.
Administrator. The Administrator of the Rural Housing Service, or
his or her designee.
Agency. The Rural Housing Service, or a successor agency.
Allowable claim amount. The total losses incurred by the lender, as
calculated pursuant to subpart J of this part.
Applicable Federal Rate (AFR). The interest rate set by the federal
government for federal financing programs pursuant to section 42 of the
Internal Revenue Code.
Approved lender. An eligible lender who has been authorized by the
Agency to originate and service guaranteed multifamily loans under the
program.
Assignment. The delivery by a lender to the Agency of the note and
any other security instruments securing the guaranteed loan; and any
and all liens, interest, or claims the lender may have against the
borrower.
Assistance. Financial assistance in the form of a loan guarantee or
interest credit received from the Agency.
Borrower. The individuals or entities responsible for repaying the
loans.
Claim. The presentation to the Agency of a demand for payment for
losses incurred on a loan guaranteed under the program.
Combination construction and permanent loan. The Agency may
guarantee a construction contract which has credit enhancements to
protect the Government's interest. The construction guarantee will be
converted to a permanent guarantee when construction is completed and
the requirements contained in the conditional commitment are met.
Conditional commitment. The written commitment by the Agency to
guarantee a loan subject to the stated terms and conditions.
Correspondent relationship. A contractual relationship between an
approved lender and a non-approved lender or mortgage broker in which
the correspondent performs certain origination, underwriting or
servicing functions for the approved lender.
Default. Failure by a borrower to meet any obligation or term of a
loan, grant, or regulatory agreement, or any program requirement.
Delinquency. Failure to make a timely payment under the terms of
the promissory note or regulatory agreement.
Department of Housing and Urban Development (HUD). A federal agency
which may be a partner in some of the Agency guarantees.
Due diligence. The process of evaluating real estate in the context
of a real estate transaction for the presence of contamination from
release of hazardous substances, petroleum products, or other
environmental hazards and determining what effect, if any, the
contamination has on the regulatory status or security value of the
property.
Eligible borrower. A borrower who meets the requirements of subpart
D of this part.
Eligible lender. A lender who meets the requirements of subpart C
of this part or any successor regulation.
Eligible loan. A loan that meets the requirements of subpart E of
this part or any successor regulation.
Eligible rural area. An eligible rural area is an area which meets
the requirements of part 3550 of this chapter or any successor
regulation.
Fannie Mae. A Federally chartered--publicly owned enterprise
created by Congress to purchase, sell or otherwise facilitate the
purchase or sale of mortgages in the secondary mortgage market.
Federal Home Loan Bank System. A system of member savings and
loans, banks and other lenders whose primary business is the making of
housing loans.
Final claim payment. The amount due to the lender (or the Agency)
after disposition of the collateral is complete and the proceeds from
liquidation, as well as any other claim payments, are applied against
the allowable claim amount.
Foreclosure. The process by which the ownership interest of a
borrower in a mortgaged property is extinguished and the security is
liquidated with the proceeds applied to the loan.
Freddie Mac. A Federally chartered, publicly owned enterprise
created to purchase, sell or otherwise facilitate the purchase or sale
of mortgages in the secondary mortgage market.
GRRHP. Guaranteed Rural Rental Housing Program.
Guarantee fees. The fees paid by the lender to the Agency for the
loan guarantee.
(1) An initial guarantee fee is due at the time the guarantee is
issued.
(2) An annual guarantee fee is due at the beginning of each year
that the guarantee remains in effect.
Guaranteed loan. Any loan for which the Agency provides a loan
guarantee.
Housing Finance Agency (HFA). A state or local government
instrumentality authorized to issue housing bonds or otherwise provide
financing for housing. Identity of interest. With respect to a project,
an actual or apparent financial interest of any type, that exists or
will exist among the borrower, contractor, lender, syndicator,
management agent, suppliers of materials or services, including
professional services, or vendors (including servicing and property
disposal), in any combination of relationships which may result in an
actual or perceived conflict of interest
Income eligibility. A determination that the income of a tenant at
initial occupancy does not exceed 115 percent of the area median income
as such area median income is defined by HUD or a successor agency.
Interest credit. A subsidy available to eligible borrowers that
reduces the effective interest rate of the loan to the AFR.
Land lease. A written agreement between a landowner and a borrower
for the possession and use of real property for a specified period of
time.
Lease. A contract containing the rights and obligations of a tenant
or cooperative member and a borrower, including the amount of the
monthly occupancy charge and other terms under which the tenant will
occupy the housing.
Lender. A bank or other financial institution, including a housing
finance agency, that originates or services the guaranteed loan.
Lender Agreement. The written agreement between the Agency and the
lender containing the requirements the lender must meet on a continuing
basis to participate in the program.
[[Page 39460]]
Loan. A mechanism by which a lender funds the acquisition and
development of a multifamily project. A loan in this context is secured
by a mortgage executed by the lender and borrower.
Loan guarantee. A pledge to pay part of the loss incurred by a
lender in the event of default by the borrower.
Loan guarantee agreement. The written agreement between the Agency
and the lender containing the terms and conditions of the guarantee
with respect to an individual loan.
Loan participation. A loan made by more than one lender wherein
each lender funds an individual portion of the loan.
Loan-to-value ratio. The amount of the loan divided by the
appraised market value of the project.
Maximum guarantee payment. The maximum payment by the Agency under
the guarantee agreement computed by applying the guarantee percentage
times the allowable claim amount, but not to exceed original principal
amount.
Mortgage. A written instrument evidencing or creating a lien
against real property for the purpose of providing collateral to secure
the repayment of a loan. For program purposes, this may include a deed
of trust or any similar document.
Multifamily project. A project designed with five or more living
units.
NOFA. A ``Notice of Funding Availability'' published in the Federal
Register to inform interested parties of the availability of assistance
and other non-regulatory matters pertinent to the program.
Non-monetary default. A default that does not involve the payment
of money.
Note. Any note, bond, assumption agreement, or other evidence of
indebtedness pertaining to a guaranteed loan.
Office of Inspector General (OIG). The agency of USDA established
under the Inspector General Act.
Payment effective date. For the month payment is due, the day of
the month on which payment will be effectively applied to the account
by the lender, regardless of the date payment is received.
Permanent loan. A loan that becomes effective upon Agency
acceptance of a lender certification of an acceptable minimum level of
occupancy.
Prepayment. The payment of the outstanding balance on a loan prior
to the note's maturity date.
Project. The total number of rental housing units and related
facilities subject to a guaranteed loan that are operated under one
management plan and one Regulatory Agreement.
Program requirements. Any requirements contained in any loan
document, guarantee agreement, statute, regulation, handbook, or
administrative notice.
Promissory Note. See ``Note''.
Qualified alien. For the purposes of this part, qualified alien
refers to any person lawfully admitted into the country who meets the
criteria of 42 U.S.C. 1436a.
Real Estate Owned. Denotes real estate that has been acquired by
the lender or the Agency (often known as ``inventory property'').
Recourse. The lender's right to seek satisfaction from the
borrower's personal financial resources or other resources for monetary
default.
Regulatory Agreement. The agreement that establishes the
relationship among the Agency, the lender, and the borrower; and
contains the borrower's responsibilities with respect to all aspects of
the management and operation of the project.
RHS. The Rural Housing Service within the Rural Development mission
area, or a successor agency, which administers section 538 guarantees.
Rural area. A geographic area as defined in section 520 of the
Housing Act of 1949.
Rural Development. A mission area within USDA which includes RHS,
Rural Utilities Service, and Rural Business-Cooperative Service.
Servicing. The broad scope of activities undertaken to manage the
performance of a loan throughout its term and to assure compliance with
the program requirements.
Single asset ownership. A borrower who owns only one project.
Surplus cash. The borrower's remaining funds at the project's
fiscal year end, after making all required payments, excluding required
reserves and escrows.
Tenant. The individual that holds the right to occupy a unit in
accordance with the terms of a lease executed with the project owner.
U.S. citizen. An individual who resides as a citizen in any of the
50 States, the District of Columbia, the Commonwealth of Puerto Rico,
the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the
Northern Marinas, the Federated States of Micronesia, the Republic of
Palau, or the Republic of the Marshall Islands.
USDA. The United States Department of Agriculture.
Sec. 3565.4 Availability of assistance.
The Agency's authority to enter into commitments, guarantee loans,
or provide interest credits is limited to the extent that
appropriations are available to cover the cost of the assistance. The
Agency will publish a NOFA in the Federal Register to notify interested
parties of the availability of assistance.
Sec. 3565.5 Ranking and selection criteria.
(a) Threshold criteria. Applications for loan guarantee submitted
by lenders must include a loan request for a project that meets all of
the following threshold criteria:
(1) The project must involve an owner and a development team with
qualifications and experience sufficient to carry out development,
management, and ownership responsibilities, and the owner and
development team must not be under investigation or suspension from any
government programs;
(2) The project must involve the financing of a property located in
an eligible rural area;
(3) Demonstrate a readiness, for the project to proceed, including
submission of a complete application for a loan guarantee and evidence
of financing;
(4) Demonstrate market and financial feasibility; and
(5) Include evidence that the credit risk is reasonable, taking
into account conventional lending practices, and factors related to
concentration of risk in a given market and with a given borrower.
(b) Priority projects. The Agency may, at its sole discretion, set
aside assistance for or rank projects that meet important program
goals. Assistance will include both loan guarantees and interest
credits. Priority projects must compete for set-aside funds. The Agency
will announce any assistance set aside and selection criteria in the
NOFA.
Sec. 3565.6 Exclusion of tax-exempt debt.
Consistent with Administration Policy, tax-exempt financing cannot
be used as a source of capital for the guaranteed loan.
Sec. 3565.7 Agency environmental requirements.
The Agency will take into account potential environmental impacts
of proposed projects by working with 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. Actions taken by the Agency under this subpart
are subject to an environmental review conducted in accordance with the
requirements of 7 CFR part 1940, subpart G or any successor
regulations.
[[Page 39461]]
Sec. 3565.8 Civil rights.
(a) All actions taken by the Agency, or on behalf of the Agency, by
a lender or borrower, will be conducted without regard to race, color,
religion, sex, familial status, marital status, national origin, age,
or disability, pursuant to 7 CFR part 15 (1998). This includes any
actions in the sale, rental or advertising of the dwellings; in the
provision of brokerage services; or in making available residential
real estate transactions involving Agency assistance. See the Fair
Housing Act, as amended, 42 U.S.C. 3601-3619 (1994); see also the Equal
Credit Opportunity Act, 42 U.S.C. 1691-1691(f) (1994 and Supp. I,
1995). It is unlawful for a lender or borrower participating in the
program to:
(1) Refuse to make accommodations in rules, policies, practices, or
services if such accommodations are necessary to provide a person with
a disability an opportunity to use or continue to use a dwelling unit
and all public and common use areas; and
(2) Refuse to allow an individual with a disability to make
reasonable modifications to a unit at his or her expense, if such
modifications may be necessary to afford the individual full enjoyment
of the unit.
(b) Any resident or prospective resident seeking occupancy or use
of a unit, property or related facility for which a loan guarantee has
been provided, and who believes that he or she is being discriminated
against may file a complaint with the lender, the Agency or the
Department of Housing and Urban Development. A written complaint should
be sent to the Secretary of Agriculture or of the Department of Housing
and Urban Development in Washington, DC.
(c) Lenders and borrowers that fail to comply with the requirements
of title VIII of the Civil Rights Act of 1968, as amended (the Fair
Housing Act), are liable for those sanctions authorized by law.
Sec. 3565.9 Compliance with federal requirements.
The Agency and the lender are responsible for ensuring that the
application is in compliance with all applicable federal requirements,
including the following specific statutory requirements:
(a) Intergovernmental review. 7 CFR part 3015, subpart V,
``Intergovernmental Review of Department of Agriculture Programs and
Activities'', or successor regulation, including the Agency
supplemental administrative instruction, RD Instruction 1940-J
(available in any Rural Development Office).
(b) National flood insurance. The National Flood Insurance Act of
1968, as amended by the Flood Disaster Protection Act of 1973; the
National Flood Insurance Reform Act of 1994; and 7 CFR part 1806,
subpart B, or successor regulation.
(c) Clean Air Act and Water Pollution Control Act Requirements. For
any contract, all applicable standards, orders or requirements issued
under section 306 of the Clean Air Act; section 508 of the Clean Water
Act; Executive Order 11738; and EPA regulations at part 32, of title
40.
(d) Historic preservation requirements. The provisions of 7 CFR
part 1901, subpart F or successor regulation.
(e) Section 504 of the Rehabilitation Act of 1973; the Fair Housing
Act; and the Americans with Disabilities Act.
(f) Lead-based paint requirements. The provisions of 7 CFR part
1924, subpart A, or successor regulation.
Sec. 3565.10 Conflict of interest.
(a) Objective. It is the objective within the Rural Development
mission area to maintain the highest standards of honesty, integrity,
and impartiality by employees.
(b) Rural Development requirement. To reduce the potential for
employee conflict of interest, all Rural Development activities will be
conducted in accordance with 7 CFR part 1900, subpart D, or successor
regulation by Rural Development employees who:
(1) Are not themselves a beneficiary;
(2) Are not family members or known relatives of any beneficiary;
and
(3) Do not have any business or personal relationship with any
beneficiary or any employee of a beneficiary.
(c) Rural Development employee responsibility. Rural Development
employees must disclose any known relationship or association with a
lender or borrower or their agents, regardless of whether the
relationship or association is known to others. Rural Development
employees or members of their families may not purchase a Real Estate
Owned property, security property from a borrower, or security property
at a foreclosure sale.
(d) Loan closing agent responsibility. Loan closing agents (or
members of their families) who have been involved with a particular
property are precluded from purchasing such properties.
(e) Lender and borrower responsibility. Lenders, borrowers, and
their agents must identify any known relationship or association with a
Rural Development employee.
Secs. 3565.11-3565.12 [Reserved].
Sec. 3565.13 Exception authority.
An Agency official may request and the Administrator or designee
may make an exception to any requirement or provision, or address any
omission of this part if the Administrator determines that application
of the requirement or provision, or failure to take action, would
adversely affect the government's interest or the program objectives.
Sec. 3565.14 Review and appeals.
Whenever RHS makes a decision that is adverse to a lender or a
borrower, RHS will provide written notice of such adverse decision and
of the right to a USDA National Appeals Division hearing in accordance
with 7 CFR part 11 or successor regulations. The lender or borrower may
request an informal review with the decision maker and the use of
available alternative dispute resolution or mediation programs as a
means of resolution of the adverse decision. Any adverse decision,
whether appealable or non-appealable may also be reviewed by the next
level RHS supervisor. Adverse decisions affecting project tenants or
applicants for tenancy will be handled in accordance with 7 CFR part
1944, subpart L or successor regulations.
Sec. 3565.15 Oversight and monitoring.
The lender, borrower, and all parties involved in any manner with
any guarantee under this program must cooperate fully with all
oversight and monitoring efforts of the Agency, Office of Inspector
General, the U.S. General Accounting Office, and the U.S. Department of
Justice or their representatives including making available any records
concerning this transaction. This includes the annual eligibility audit
and any other oversight or monitoring activities. If the Agency
implements a requirement for an electronic transfer of information, the
lender and borrower must cooperate fully.
Sec. 3565.16 [Reserved]
Sec. 3565.17 Demonstration programs.
To test ways to expand the availability or enhance the
effectiveness of the guarantee program, or for similar purposes, the
Agency may, from time to time, propose demonstration programs that use
loan guarantees or interest credit. Toward this end, the Agency may
enter into special partnerships with lenders, financial intermediaries,
or others to carry out one or more elements
[[Page 39462]]
of a demonstration program. Demonstration programs will be publicized
by notices in the Federal Register.
Secs. 3565.18-3565.49 [Reserved]
Sec. 3565.50 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart B--Guarantee Requirements
Sec. 3565.51 Eligible loans and advances.
Upon approval of an application from an approved lender, the Agency
will commit to providing a guarantee for a permanent loan or a
combination construction and permanent loan, subject to the
availability of funds. The Agency will not guarantee a construction
loan that is not a combination construction and permanent loan.
Sec. 3565.52 Extent of the guarantee.
A guarantee of a permanent loan will be made once the project has
attained a minimum level of acceptable occupancy as determined by the
lender with Agency concurrence. The required occupancy level must be
reached before the commitment for a loan guarantee, including any
extensions, expires. For combination construction and permanent loans,
the Agency will guarantee advances during the construction loan period
(which can not exceed 12 months). The guarantee of construction loan
advances will convert to a permanent loan guarantee once the required
level of occupancy has been reached.
(a) Maximum guarantee amount. The maximum guarantee for a permanent
loan will be 90 percent of the unpaid principal and interest of the
loan. The Agency liability under any guarantee will decrease or
increase, in proportion to any increase or decrease in the amount of
the unpaid portion of the loan, up to the maximum amount specified in
the guarantee document. The Agency will guarantee construction
contracts not to exceed 90 percent of the work in place which have
credit enhancements to protect the Government's guarantee. Acceptable
credit enhancements include:
(1) Surety bonding or performance and payment bonding are the
preferred credit enhancement;
(2) An irrevocable letter of credit acceptable to the Agency; and
(3) A pledge by the lender of acceptable collateral.
(b) Lesser guarantee amount. The Agency may provide a lesser
guarantee based upon its evaluation of the credit quality of the loan.
(c) Cancellation or reduction to the guarantee amount. In cases of
fraud, misrepresentation, abuse, negligence, or failure to follow the
terms of the guarantee or the note, the Agency may cancel the
guarantee.
Sec. 3565.53 Guarantee fees.
As a condition of receiving a loan guarantee, the Agency will
charge the following guarantee fees to the lender.
(a) Initial guarantee fee. The Agency will charge an initial
guarantee fee equal to 100 basis points (1 percent) of the principal
amount of the loan. The fee will be collected at the time of
commitment.
(b) Annual guarantee fee. An annual guarantee fee of at least 50
basis points (one-half percent) of the outstanding principal amount of
the loan will be charged each year or portion of a year that the
guarantee is in effect. Each calendar year, this fee will be collected
in advance, beginning on the first anniversary of the loan.
(c) Surcharge for guarantees on construction advances. The Agency
may, at its sole discretion, charge an additional fee on the portion of
the loan advanced during construction. This fee will be charged in
advance at the start of construction and will be announced in NOFA
before loan approval.
Sec. 3565.54 Transferability of the guarantee.
A lender must receive the Agency's approval prior to any sale or
transfer of the loan guarantee.
Sec. 3565.55 Participation loans.
Loans involving multiple lenders are eligible for a guarantee when
one of the lenders is an approved lender and agrees to act as the lead
lender with responsibility for the loan under the loan guarantee
agreement.
Sec. 3565.56 Suspension or termination of loan guarantee agreement.
A guarantee agreement will terminate when one of the following
actions occurs: (In accordance with subpart H of this part, use
restrictions on the property will remain if the following actions take
place prior to the term of the loan and RHS determines the restrictions
apply.)
(a) Voluntary termination. A lender and borrower voluntarily
request the termination of the loan guarantee.
(b) Agency withdrawal of guarantee. The Agency withdraws the loan
guarantee in the event of fraud, misrepresentation, abuse, negligence,
or failure to meet the program requirements.
(c) Mortgage pay-off. The loan is paid.
(d) Settlement of claim. Final settlement of the claim.
Sec. 3565.57 Modification, extension, reinstatement of loan guarantee.
To protect its interest or further the objectives of the program,
the Agency may, at its sole discretion, modify, extend, or reinstate a
loan guarantee. In making this decision the Agency will consider
potential losses under the program, impact on the tenants and the
public reaction that may be received regarding the action. Further, the
Agency may authorize a guarantee on a new loan that is originated as a
part of a workout agreement.
Secs. 3565.58-3565.99 [Reserved]
Sec. 3565.100 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart C--Lender Requirements
Sec. 3565.101 Responsibility of lenders.
A participating lender must originate and service a guaranteed loan
in accordance with the regulation and program requirements throughout
the life of a loan or guarantee, whichever is less. When it is in the
best interests of the Agency, the Agency may permit the transfer of
servicing from the originating lender to a servicer.
Sec. 3565.102 Lender eligibility.
An eligible lender must be a licensed business entity or HFA in
good standing in the state or states where it conducts business; be
approved by the Agency; and meet at least one of the criteria contained
below. Lenders who are not eligible may participate in the program if
they maintain a correspondent relationship with a lender who is
eligible. An eligible lender must:
(a) Meet the qualifications of, and be approved by, the Secretary
of HUD to make multifamily housing loans that are to be insured under
the National Housing Act;
(b) Meet the qualifications and be approved by Fannie Mae or
Freddie Mac to make multifamily housing loans that are to be sold to
such corporations;
(c) Be a state or local HFA, or a member of the Federal Home Loan
Bank system, with a demonstrated ability to underwrite, originate,
process, close,
[[Page 39463]]
service, manage, and dispose of multifamily housing loans in a prudent
manner;
(d) Be a lender who meets the requirements for Agency approval
contained in this subpart and has a demonstrated ability to underwrite,
originate, process, close, service, manage, and dispose of multifamily
housing loans in a prudent manner; or
(e) Be a lender who meets the following requirements in addition to
the other requirements of this subpart and of subpart I of this part:
(1) Have qualified staff to perform multifamily housing servicing
and asset management;
(2) Have facilities and systems that support servicing and asset
management functions; and
(3) Have documented procedures for carrying out servicing and asset
management responsibilities.
Sec. 3565.103 Approval requirements.
The Agency will establish and maintain a ``list of approved
lenders''. To be an approved lender, eligible lenders must meet the
following requirements and maintain them on a continuing basis at a
level consistent with the nature and size of their portfolio of
guaranteed loans.
(a) Commitment. A lender must have a commitment for a guaranteed
loan or an agreement to purchase a guaranteed loan.
(b) Audited statement. A lender must provide the Agency with an
annual audited financial statement conducted in accordance with
generally accepted government auditing standards.
(c) Previous participation. A lender may not be delinquent on a
federal debt or have an outstanding finding of deficiency in a federal
housing program.
(d) Ongoing requirements. A lender must meet the following
requirements at initial application and on a continuing basis
thereafter:
(1) Overall financial strength, including capital, liquidity, and
loan loss reserves, to have an acceptable level of financial soundness
as determined by a lender rating service (such as Sheshunoff, Inc.); or
to be an approved Fannie Mae, Freddie Mac or HUD Federal Housing
Administration multifamily lender; or, if a state housing finance
agency, to have a top tier rating by a rating agency (such as Standard
and Poor's Corporation);
(2) Bonding and insurance to cover business related losses,
including directors and officers insurance, business income loss
insurance, and bonding to secure cash management operations;
(3) A minimum of two years experience in originating and servicing
multifamily loans;
(4) A positive record of past performance when participating in RHS
or other federal loan programs;
(5) Adequate staffing and training to perform the program
obligations; the head underwriter must have 3 years of experience and
all staff must receive annual multifamily training;
(6) Demonstrated overall financial stability of the business over
the past five years;
(7) Evidence of reasonable and prudent business practices for
management of the program; and
(8) No negative information on Dunn & Bradstreet or similar type
report.
Sec. 3565.104 Application requirements.
Eligible lenders must submit a lender approval application, in a
format prescribed by the Agency. The lender approval application
submission must occur at the time the lender submits its first
application for a loan guarantee, or its first application to purchase
a guaranteed loan. The application must include documentation of lender
compliance with Sec. 3565.103. A non-refundable application fee will be
charged for each review of a lender's application. The amount of the
fee will be announced in NOFA.
Sec. 3565.105 Lender compliance.
A lender will remain an approved lender unless terminated by the
Agency. To maintain approval, the lender must comply with the following
requirements.
(a) Maintain eligibility in accordance with Sec. Sec. 3565.102 and
3565.103;
(b) Comply with all applicable statutes, regulations, and
procedures;
(c) Inform the Agency of any material change in the lender's
staffing, policies and procedures, or corporate structure;
(d) Cooperate fully with all program or Agency monitoring and
auditing policies and procedures, including the Agency's annual audit
of approved lenders; and
(e) Maintain active participation in the multifamily guaranteed
loan program by initiating a new loan guarantee or holding a loan
guaranteed under this program.
Sec. 3565.106 Construction lender requirements.
A lender making a construction loan, as part of a combination
construction and permanent loan, must demonstrate an ability to
originate and service construction loans, in addition to meeting the
other requirements of this subpart.
Sec. 3565.107 [Reserved].
Sec. 3565.108 Responsibility for actions of agents and mortgage
brokers.
An approved lender is responsible for the actions of its agents and
mortgage brokers.
Sec. 3565.109 Minimum loan prohibition.
A lender must not establish a minimum loan amount for loans under
this program.
Sec. 3565.110 Insolvency of lender.
The Agency may require a lender to transfer a guaranteed loan or
loans to another approved lender prior to a determination of insolvency
by the lender. If the lender fails to transfer a loan when required,
the guarantee will be considered null and void.
Sec. 3565.111 Lobbying activities.
An approved lender must comply with RD Instruction 1940-Q
(available in any Rural Development Office) regarding lobbying
activities.
Secs. 3565.112-3565.149 [Reserved]
Sec. 3565.150 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart D--Borrower Eligibility Requirements
Sec. 3565.151 Eligible borrowers.
Guaranteed loans must be made to an eligible borrower whose
intention is to provide and maintain rural rental housing. The
ownership entity must be a valid entity in good standing under the laws
of the jurisdiction in which it is organized. Eligible borrowers shall
include individuals, corporations, state or local public agencies or an
instrumentality thereof, partnerships, limited liability companies,
trusts, Indian tribes, or any organization deemed eligible by the
Agency. Eligible borrowers must be U.S. citizens or permanent legal
residents; a U.S. owned corporation, or a limited liability company, or
partnership in which the principals are U.S. citizens or permanent
legal residents.
Sec. 3565.152 Control of land.
At time of application, the lender must have evidence of site
control by the borrower (option to purchase, lease, deed or other
evidence acceptable to the Agency). At the time of loan closing, the
lender's closing docket must provide documentary evidence that the
borrower
[[Page 39464]]
owns or has a long-term lease on the land on which the housing is or
will be located. The form of ownership or the leasehold agreement must
meet Agency requirements. Notwithstanding any investment in the site,
the site may not be accepted based on the Agency's environmental
assessment.
Sec. 3565.153 Experience and capacity of borrower.
At the time of application, the lender must certify that the
borrower:
(a) Has the ability and experience to construct or rehabilitate
multifamily housing that meets the requirements established by the
Agency, the lender and the loan agreement;
(b) Has the legal and financial capacity to meet all of the
obligations of the loan; and
(c) Has the ability and experience to meet the property management
requirements established by the Agency, the lender, and the loan
agreement.
Sec. 3565.154 Previous participation in state and federal programs.
Loans to borrowers who are delinquent on a federal debt may not be
guaranteed. Furthermore, borrowers or principals thereof who have
defaulted on state or local government loans will not be eligible for a
guarantee unless the Agency determines that the default was beyond the
borrower's control, and that the identifiable reasons for the default
no longer exist. At the time of application, the lender must obtain
from the borrower a certification that the borrower is not under any
state or federal order suspending or debarring participation in state
or federal loan programs and that the borrower is not delinquent on any
non-tax obligation to the United States.
Sec. 3565.155 Identity of interest.
At the time of application, the lender must certify that it has
disclosed any and all identity of interest relationships and
preexisting conditions with respect to its relationships and that of
the borrower, or that no identity of interest relationships exists.
Identity of interest relationships include any financial or other
relationship that exists or will exist between a lender, borrower,
management agent, supplier, or any agent of any of these entities, that
could influence, give the appearance of influencing or have the
potential to influence the actions of the parties in carrying out their
responsibilities under the program. Disclosure will be in a form and
manner established by the Agency.
Sec. 3565.156 Certification of compliance with federal, state, and
local laws and with Agency requirements.
At the time of application, the lender must obtain from the
borrower a certification of compliance with all applicable federal,
state, and local laws, and with Agency requirements regarding
discrimination and equal opportunity in housing, including title VIII
of the Civil Rights Act of 1968, and the Fair Housing Amendments Act of
1988. The borrower must also certify that it is not the subject of any
federal, state, or local sanction or punitive action.
Secs. 3565.157-3565.199 [Reserved]
Sec. 3565.200 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart E--Loan Requirements
Sec. 3565.201 General.
To be eligible for a guarantee, a loan must comply with the
provisions of this subpart and be originated by an approved lender.
Sec. 3565.202 Tenant eligibility.
(a) Limits on income of tenants. The housing units subject to a
guaranteed loan must be available for occupancy only by low or
moderate-income families or individuals whose incomes at the time of
initial occupancy do not exceed 115 percent of the area median income.
After initial occupancy, a tenant's income may exceed these limits.
(b) Citizenship status. A tenant must be a United States citizen or
a noncitizen who is a qualified alien as defined in Sec. 3565.3.
Sec. 3565.203 Restrictions on rents.
The rent for any individual housing unit, including any tenant-paid
utilities, must not exceed an amount equal to 30 percent of 115 percent
of area median income, adjusted for family size. In addition, on an
annual basis, the average rent for a project, taking into account all
individual unit rents, must not exceed 30 percent of 100 percent of
area median income, adjusted for family size.
Sec. 3565.204 Maximum loan amount.
(a) Section 207(c) limits and exceptions. For that part of the
property that is attributable to dwelling use, the principal obligation
of each guaranteed loan must not exceed the applicable maximum per-unit
limitations under section 207(c) of the National Housing Act.
(b) Loan-to-value limits. (1) In the case of a borrower that is a
nonprofit organization or an agency or body of any State, local or
tribal government, each guaranteed loan must involve a principal
obligation that does not exceed the lesser of 97 percent of:
(i) The development costs of the housing and related facilities, or
(ii) The lender's determination of value not to exceed the
appraised value of the housing and facilities.
(2) In the case of a borrower that is a for-profit entity or other
entity not referred to in paragraph (b)(1) of this section, each
guaranteed loan must involve a principal obligation that does not
exceed the lesser of 90 percent of:
(i) The development costs of the housing and related facilities, or
(ii) The lender's determination of value not to exceed the
appraised value of the housing and facilities.
(3) To protect the interest of the Agency or to further the
objectives of the program, the Agency may establish lower loan-to-value
limits or further restrict the statutory maximum limits based upon its
evaluation of the credit quality of the loan.
(c) Necessary assistance review. (1) A lender requesting a loan
guarantee must review all loans to determine the appropriate amount of
assistance necessary to complete and maintain the project. The lender
shall recommend to the Agency an adjustment in the loan amount if
appropriate as a result of this review.
(2) Where the project financing combines a guaranteed loan with
Low-Income Housing Tax Credits or other Federal assistance, the project
must conform to the policies regarding necessary assistance in 7 CFR
part 1944, subpart E or successor provision.
Sec. 3565.205 Eligible uses of loan proceeds.
Eligible uses of loan proceeds must conform with standards and
conditions for housing and facilities contained in 7 CFR part 1924,
subpart A or successor provision, except that the Agency, at its sole
discretion, may approve, in advance, a higher level of amenities,
construction, and fees for projects proposed for a guaranteed loan
provided the costs and features are reasonable and customary for
similar housing in the market area.
(a) Use of loan proceeds. The proceeds of a guaranteed loan may be
used for the following purposes relating to the project.
[[Page 39465]]
(1) New construction costs of the project;
(2) Moderate or substantial rehabilitation of buildings and
acquisition costs when related to the rehabilitation of a building as
described in paragraph (b) of this section;
(3) Acquisition of existing buildings, when approved by the Agency,
for projects that serve a special housing need;
(4) Acquisition and improvement of land on which housing will be
located;
(5) Development of on-site and off-site improvements essential to
the use of the property;
(6) Development of related facilities such as community space,
recreation, storage or maintenance structures, except that any high
cost recreational facility, such as swimming pools and exercise clubs
or similar facilities, must be specifically approved in advance by the
Agency;
(7) Construction of on-site management or maintenance offices and
living quarters for operating personnel for the property being
financed;
(8) Purchase and installation of appliances and certain approved
decorating items, such as window blinds, shades, or wallpaper;
(9) Development of the surrounding grounds, including parking,
signs, landscaping and fencing;
(10) Costs associated with commercial space provided that:
(i) The project is designed primarily for residential use;
(ii) The commercial use consists of essential tenant service type
facilities, such as laundry rooms, that are not otherwise conveniently
available;
(iii) The commercial space does not exceed 10 percent of the gross
floor area of the residential units and common areas, unless a higher
level is specifically approved in writing by the Agency; and
(iv) The commercial activity is compatible with the use of the
project and that the income is not more than 10 percent of the total
annual operating income of the project.
(11) Costs for feasibility determination, loan application fees,
appraisals, environmental documentation, professional fees or other
fees determined by the Agency to be necessary to the development of the
project;
(12) Technical assistance to and by non-profit entities to assist
in the formation, development, and packaging of a project, or formation
or incorporation of a borrower entity;
(13) Education programs for a board of directors, both before and
after incorporation of a cooperative that will serve as the borrower;
(14) Construction interest accrued on the construction loan;
(15) Relocation assistance in the case of rehabilitation projects;
(16) Developers' fees; and
(17) Repaying applicant debts in the following cases:
(i) When the Agency authorizes in writing in advance the use of
loan funds to pay debts for work, materials, land purchase, or other
fees and charges before the loan is closed; or
(ii) When the Agency concurs in writing with a determination by the
lender that costs for work, fees and charges incurred prior to loan
application are integral to development of the guarantee application
and project.
(b) Rehabilitation requirements. Rehabilitation work must be
classified as either moderate or substantial as defined in exhibit K of
7 CFR part 1924, subpart A or a successor document. In all cases, the
building or project must be structurally sound, and improvements must
be necessary to meet the requirements of decent, safe, and sanitary
living units. Applications must include a structural analysis, along
with plans and specifications describing the type and amount of planned
rehabilitation. The project as rehabilitated must meet the applicable
development standards contained in 7 CFR part 1924, subpart A or a
successor regulation, as well as any applicable historic preservation
requirements. All proposed rehabilitation projects are subject to an
environmental review completed in accordance with 7 CFR part 1940,
subpart G or a successor regulation.
Sec. 3565.206 Ineligible uses of loan proceeds.
Loan proceeds must not be used for the following:
(a) Specialized equipment for training and therapy;
(b) Housing in military impact areas;
(c) Housing that serves primarily temporary and transient
residents;
(d) Nursing homes, special care facilities and institutional type
homes that require licensing as a medical care facility;
(e) Operating capital for central dining facilities or for any
items not affixed to the real estate, such as special portable
equipment, furnishings, kitchen ware, dining ware, eating utensils,
movable tables and chairs, etc.;
(f) Payment of fees, salaries and commissions or compensation to
borrowers (except developers' fees); or
(g) Refinancing of an outstanding debt, except in the case of an
existing guaranteed loan where the Agency determines that the
refinancing is in the government's interest or furthers the objectives
of the program. The term and amount of any loan for refinancing must
not exceed the maximum loan amount or term limits.
Sec. 3565.207 Form of lien.
The loan originated by the lender for a guarantee must be secured
by a first lien against the property.
Sec. 3565.208 Maximum loan term.
(a) Statutory term limit. The lender may set the term of the loan,
but in no instance may the term of a guaranteed loan exceed the lesser
of 40 years or the remaining economic life of the project.
(b) Prepayment of loans. A guaranteed loan may be prepaid in whole
or in part at the determination of the lender, and upon the lender's
written notice to the Agency at least 30 days prior to the expected
date of prepayment. The Agency will not pay any lockout or prepayment
penalty assessed by the lender. The lender must certify the following
in the notice of prepayment:
(1) The lease documents used by the borrower or its agent prohibit
the abrogation of tenant leases in the event of prepayment; and
(2) The borrower has notified tenants of the request to prepay the
loan, including notice of the prohibition against abrogation of the
lease and the policy and procedure for handling complaints regarding
compliance with the long-term use restriction as contained in subpart H
of this part.
Sec. 3565.209 Loan amortization.
Each guaranteed loan must contain provisions for the complete
amortization of the loan by periodic payments. The Agency will not
guarantee a loan that comes due before expiration of its full
amortization period, such as a balloon loan.
Sec. 3565.210 Maximum interest rate.
The interest rate for a guaranteed loan must not exceed the maximum
allowable rate specified by the Agency in NOFA. Such rate must be fixed
over the term of the loan.
Sec. 3565.211 Interest credit.
(a) Limitation. For at least 20 percent of the loans made during
each fiscal year, the Agency will provide assistance in the form of
interest credit, to the extent necessary to reduce the agreed-upon rate
of interest to the AFR as such term is used in section 42(I)(2)(D) of
the Internal Revenue Code of 1986, 26 U.S.C. 7805, Sec. 1.42-1T.
(b) Selection criteria. The Agency will select projects to receive
interest credits using any of such criteria as the Agency
[[Page 39466]]
may establish for priority projects as contained in subpart A of this
part.
Sec. 3565.212 Multiple guaranteed loans.
The Agency may guarantee more than one loan on any project if all
guaranteed loans, in the aggregate, comply with these regulations,
including without limitation:
(a) In the aggregate, loans do not exceed the maximum guaranteed
loan amount and loan-to-value limits, as contained in Sec. 3565.204;
(b) In the aggregate, loans are all to be secured equally by a
first lien as the Agency may, at its sole discretion, determine
necessary to ensure repayment of the loans; and
(c) If different lenders originate the loans, each lender has
executed an intercreditor agreement in form and substance acceptable to
the Agency; and
(d) The loans do no contain tax exempt financing.
Sec. 3565.213 Geographic distribution.
The Agency may refuse to guarantee a loan in an area where there is
undue risk due to a concentration in the market of properties subject
to a Agency guaranteed loan. The Agency will consider the credit
quality of the loan and overall market conditions in making a
determination of undue risk. If any of the Agency guaranteed loans in
the market are experiencing vacancy rates in excess of 15% and the
vacancy is due to market conditions, the Agency will invoke this
provision and not guarantee the loan.
Sec. 3565.214 Release of liability.
Notwithstanding the transfer of the property for which the loan was
made, borrowers may not be relieved of liability for a guaranteed loan
if any portion of the principal or interest or any protective advance
made on behalf of the borrower is outstanding.
Sec. 3565.215 Special conditions.
(a) Use of third party funds. As a condition of receiving a
guaranteed loan, the Agency, or the lender if designated by the Agency,
must review the terms and conditions of any secondary financing or
funding of projects, including loans, capital grants or rental
assistance.
(b) Recourse. If required by the lender, loans guaranteed under
this program may be made on a recourse or nonrecourse basis, or with
any personal or special borrower guarantees on collateralization.
Sec. Sec. 3565.216-3565.249 [Reserved]
Sec. 3565.250 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart F--Property Requirements
Sec. 3565.251 Eligible property.
To be eligible for a guaranteed loan, a property must be used
primarily for residential dwelling purposes and must meet the following
requirements or the requirements of this subpart:
(a) Property location. All the property must be located in a rural
area.
(b) Minimum size of development. The property must consist of at
least five rental dwelling units.
(c) Non-contiguous sites. For a loan secured by two or more non-
contiguous parcels of land, all sites must meet each of the following
requirements:
(1) Located in one market area;
(2) Managed under one management plan with one loan agreement or
resolution for all of the sites; and
(3) Consist of single asset ownership.
(d) Compliance with Statutes. All properties must comply with the
applicable requirements in section 504 of the Rehabilitation Act of
1973, the Fair Housing Act, the Americans with Disabilities Act, and
other applicable statutes.
Sec. 3565.252 Housing types.
The property may include new construction or substantially
rehabilitated existing structures. The units may be attached, detached,
semi-detached, row houses, modular or manufactured houses, or
multifamily structures. Manufactured housing must meet Agency
requirements contained in 7 CFR part 1924, subpart A or a successor
regulation. The Agency proposes to guarantee proposals for new
construction or acquisition with rehabilitation of at least $15,000 per
unit. The portion of the guaranteed funds for acquisition with
rehabilitation is limited to 25 percent of the program authority.
Sec. 3565.253 Form of ownership.
The property must be owned in fee simple or be subject to a ground
lease or other legal right in land acceptable to the Agency.
Sec. 3565.254 Property standards.
(a) Housing quality and site and neighborhood standards. The
property must meet the site and neighborhood requirements established
by the state or locality, and those standards contained under 7 CFR
part 1924, subparts A and C or any successor regulations.
(b) Third party assessments. As part of the application for a
guaranteed loan, the lender must provide documentation of qualified
third parties' assessments of the property's physical condition and any
environmental conditions or hazards which may have a bearing on the
market value of the property. These assessments must include:
(1) An acceptable property appraisal.
(2) A Phase I Environmental Site Assessment (American Society of
Testing and Materials).
(3) A Standard Flood Hazard Determination.
(4) In the case of the purchase of an existing structure,
rehabilitation or refinancing, a physical needs assessment.
Sec. 3565.255 Environmental requirements.
Under the National Environmental Policy Act, the Agency is required
to assess the potential impact of the proposed actions on protected
environmental resources. Measures to avoid or at least mitigate adverse
impacts to protected resources may require a change in site or project
design. A site will not be approved until the Agency has completed the
environmental review in accordance with 7 CFR part 1940, subpart G or
successor regulation.
Sec. 3565.256 Architectural services.
Architectural services must be provided for the project in
accordance with 7 CFR part 1924, subpart A or successor regulation,
including plan certifications.
Sec. 3565.257 Procurement actions.
All construction procurement actions, whether by sealed bid or by
negotiation, must be conducted in a manner that provides maximum open
and free competition.
Secs. 3565.258-3565.299 [Reserved]
Sec. 3565.300 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart G--Processing Requirements
Sec. 3565.301 Loan standards.
An approved lender must originate and underwrite the loan and
appraise the subject property in accordance with prudent lending
practices and Agency criteria addressing the following factors:
(a) Borrower qualifications and creditworthiness;
[[Page 39467]]
(b) Property, vacancy, market vacancy or collection loss;
(c) Rental concessions and rent levels;
(d) Tenant demand and housing supply;
(e) Property operating and maintenance expense;
(f) Property requirements as contained in subpart F of this part;
(g) Debt coverage ratio;
(h) Operating and long-term capital requirements;
(i) Loan-to-value ratio;
(j) Return on borrower equity; and
(k) Estimated long-term marketability of the project.
Sec. 3565.302 Allowable fees.
(a) Lender fees. The lender is authorized to charge reasonable and
necessary fees in connection with a borrower's application for a
guaranteed loan.
(b) Agency fees. The Agency will charge one or more types of fees
deemed appropriate as reimbursement for reasonable and necessary costs
incurred in connection with applications received from lenders for
monitoring or annual renewal fees. These fees will be published in
NOFA. Agency fees may include, but are not limited to the following:
(1) Site Assessment and Market Analysis or preliminary feasibility
fee. A fee for review of an application for a determination of
preliminary feasibility.
(2) Application fee. A fee submitted in conjunction with the
application for a loan guarantee.
(3) Inspection fee. A fee for inspection of the property in
conjunction with a loan guarantee.
(4) Transfer fee. A fee in connection with a request for approval
of a transfer of physical assets or a change in the composition of the
ownership entity.
(5) Extension or reopening fees. A fee to extend the guarantee
commitment or to reopen an application when a commitment has expired.
Sec. 3565.303 Issuance of loan guarantee.
(a) Preliminary feasibility review. During the initial processing
of a loan, the lender may request a preliminary feasibility review by
the Agency when required loan documentation is submitted.
(b) Conditional commitment to guarantee a loan. The Agency will
issue a conditional commitment to guarantee a loan. This commitment
will be good for such time frame as the Agency deems appropriate based
on project requirements. The commitment to guarantee a loan, will
specify any conditions necessary to obtain a determination by the
Agency that all program requirements have been met. A conditional
commitment can be issued, subject to the availability of funds, after:
(1) Completion by the Agency of an environmental review in
accordance with 7 CFR part 1940, subpart G or successor regulation, and
the National Environmental Policy Act; and
(2) Selection of the proposed project for funding by the Agency in
accordance with ranking and selection criteria.
(c) Guarantee during construction. For combination construction and
permanent loans, the Agency will issue an initial guarantee to an
approved construction lender.
(1) This guarantee will be subject to the limits contained in
subpart B of this part and in the loan closing documentation.
(2) In all cases, the lender must obtain a payment and performance
bond covering contract work or acceptable credit enhancement as
discussed in Sec. 3565.52(a).
(3) The lender must verify amounts expended prior to each payment
for completed work and certify that an independent inspector has
inspected the property and found it to be in conformance with Agency
standards. The lender must provide verification that all subcontractors
have been paid and no liens have been filed against the property.
(d) Permanent loan guarantee. The guarantee on the permanent loan
will be issued once the following items have been submitted to and
approved by the Agency.
(1) An updated appraisal of the project as built;
(2) A certificate of substantial completion;
(3) A certificate of occupancy or similar evidence of local
approval ;
(4) A final inspection conducted by a qualified Agency
representative;
(5) A final cost certification in a form acceptable to the Agency;
(6) A submission to the Agency of the complete closing docket;
(7) A certification by the lender that the project has reached an
acceptable minimum level occupancy;
(8) A recordable, executed regulatory agreement.
(9) The Lender certifies that it has approved the borrower's
management plan and assures that the borrower is in compliance with
Agency standards regarding property management, contained in subparts E
and F of this part;
(10) Necessary information to complete an updated necessary
assistance review by the Agency; and
(11) Compliance with all conditions contained in the conditional
commitment for guarantee.
(e) Modification of guarantee amount after commitment. The Agency
may modify the guarantee amount or decline to issue a loan guarantee
when a lender fails to honor obligations or to fulfill representations
made under the guarantee commitment.
Sec. 3565.304 Lender loan processing responsibilities.
(a) Application. The lender will be responsible for submitting an
application for a loan guarantee in a format prescribed by the Agency.
Lenders may submit an application at the feasibility stage or when they
request a conditional commitment.
(b) Project servicing, management and disposition. Unless otherwise
permitted by the Agency, the originating lender must perform all loan
functions during the period of the guarantee. These functions include
servicing, asset management, and, if necessary, property disposition.
The lender must maintain and service the loan in accordance with the
provisions of subpart I of this part and Agency servicing procedures.
Sec. 3565.305 Mortgage and closing requirements.
It is the lender's responsibility to ensure that the loan closing
statement and required loan documents are in a form acceptable to the
Agency and included in the closing docket. The lender is responsible
for resolving any underwriting and loan closing deficiencies that are
found. The Agency's review of the lender's loan closing documentation
does not constitute a waiver of fraud, misrepresentation, or failure of
judgment by the lender.
Sec. 3565.306-3565.349 [Reserved]
Sec. 3565.350 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart H--Project Management
Sec. 3565.351 Project management.
As a condition of the guarantee, the lender must certify annually
to the Agency that the borrower is in compliance with the regulatory
agreement and program requirements with respect to all aspects of
project management.
(a) Regulatory agreement. A regulatory agreement between the
borrower and lender which will be filed in the real estate records of
the
[[Page 39468]]
appropriate jurisdiction must be executed at the time of loan closing
and contain the following covenants:
(1) That it is binding upon the borrower and any of its successors
and assigns, as well as upon the lender and any of its successors and
assigns, for the duration of the guaranteed loan;
(2) That the borrower makes all payments due under the note and to
the required escrow and reserve accounts;
(3) That the borrower maintains the project as affordable housing
in accordance with the purposes and for the duration defined in the
statute;
(4) That the borrower maintains the project in good physical and
financial condition at all times;
(5) That the borrower obtains and maintains property insurance and
any other insurance coverage required to protect the security;
(6) That the borrower maintains complete project books and
financial records, and provides the Agency and the lender with an
annual audited financial statement after the end of each fiscal year;
(7) That the borrower makes project books and records available for
review by the Office of Inspector General, Rural Development staff,
General Accounting Office, and the Department of Justice, or their
representatives or successors upon appropriate notification;
(8) That the borrower prepares and complies with the Affirmative
Fair Housing Marketing Plan and all other Fair Housing requirements;
(9) That the borrower operates as a single asset ownership entity,
unless otherwise approved by the Agency;
(10) That the borrower complies with applicable federal, state and
local laws; and
(11) That the borrower provides management satisfactory to the
lender and to the Agency and complies with an approved management plan
for the project.
(b) Management plan. The lender must approve the borrower's
management plan and assure that the borrower is in compliance with
Agency standards regarding property management, including the
requirements contained in subparts E and F of this part.
(c) Tenant protection and grievance procedures. Tenants in
properties subject to a guaranteed loan are entitled to the grievance
and appeal rights contained in 7 CFR part 1944, subpart L or successor
regulation. The borrower must inform tenants in writing of these
rights.
(d) Financial management--(1) Borrower reporting requirements. At a
minimum, the lender must obtain, on an annual basis, an audited annual
financial statement conducted in accordance with generally accepted
government auditing standards.
(2) Lender reporting requirements. The lender must review the
financial reports to assure that the property is in sound fiscal
condition and the borrower is in compliance with financial
requirements. The lender must report findings to the Agency as follows:
(i) Annual reports. The lender must submit to the Agency a copy of
the annual financial audit of the project and must report on the nature
and status of any findings. To the extent that outstanding findings or
issues remain, the lender must submit to the Agency a copy of a plan of
action for any unresolved findings.
(ii) Monthly reports. The lender must submit monthly reports to the
Agency on all loans that are either in default, delinquent, or not in
compliance with program requirements. This report must provide
information on the financial condition of each loan, the physical
condition of the property, the amount of delinquency, any other non-
compliance with program requirements and the proposed actions and
timetable to resolve the delinquency, default or non-compliance.
(3) Reserve releases. The lender is responsible for approving or
disapproving all borrower requests for release of funds from the
reserve and escrow accounts. Security deposit accounts will not be
considered a reserve or escrow account.
(4) Insurance requirements. At loan closing, the borrower will
provide the lender with documentary evidence that Agency insurance
requirements have been met. The borrower must maintain insurance in
accordance with Agency requirements until the loan is repaid and the
lender must be named as the insurance policy's beneficiary. The lender
must obtain insurance on the secured property if the borrower is unable
or unwilling to do so and charge the cost as an advance.
(5) Distribution of surplus cash. Prior to the distribution of
surplus cash to the owner, the lender must certify that the property is
in good financial and physical condition and in compliance with the
regulatory agreement. Such compliance includes payment of outstanding
obligations, debt service, and required funding of reserve and escrow
accounts.
(e) Physical maintenance. The lender must annually inspect the
property to ensure that it is in compliance with state and local codes
and program requirements. The lender must certify to the Agency that a
property is in such compliance, or report to the Agency on any non-
compliance items and proposed actions and timetable for resolution.
Failure to provide responsive corrective action can result in reduction
or cancellation of the guarantee by the Agency.
Sec. 3565.352 Preservation of affordable housing.
(a) Original purpose. During the period of the guarantee, owners
are prohibited from using the housing or related facilities for any
purpose other than an approved program purpose.
(b) Use restriction. For the original term of the guaranteed loan,
the housing must remain available for occupancy by low and moderate
income households, in accordance with subpart E of this part. This
requirement will be included in a deed restriction or other instrument
acceptable to the Agency. The restriction will apply unless the housing
is acquired by foreclosure or an instrument in lieu of foreclosure, or
the Agency waives the applicability of this requirement after
determining that each of the following three circumstances exist.
(1) There is no longer a need for low-and moderate-income housing
in the market area in which the housing is located;
(2) Housing opportunities for low-income households and minorities
will not be reduced as a result of the waiver; and
(3) Additional federal assistance will not be necessary as a result
of the waiver.
Sec. 3565.353 Affirmative fair housing marketing.
As a condition of the guarantee, the lender must ensure that the
lender and borrower are in compliance with the approved Affirmative
Fair Housing Marketing Plan. This plan must be reviewed annually by the
lender to ensure that the borrower remains in compliance and to
recommend modifications, as necessary.
Sec. 3565.354 Fair housing accommodations.
The lender must ensure that the borrower is in compliance with the
applicable fair housing laws in the development of the property, the
selection of applicants for housing, and ongoing management. See
subpart A of this part.
Sec. 3565.355 Changes in ownership.
Any change in ownership, in whole or in part, must be approved by
the lender and the
Agency before such change takes effect.
[[Page 39469]]
Secs. 3565.356-3565.399 [Reserved]
Sec. 3565.400 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart I--Servicing Requirements
Sec. 3565.401 Servicing objectives.
The participating lender is responsible for servicing the
guaranteed loan throughout the term of the loan or guarantee, whichever
is less. In all cases, the lender remains responsible for liquidation
of the property in accordance with the Loan Note Agreement, unless
otherwise determined by the Agency. A lender-servicing plan must be
designed and implemented to achieve the following objectives.
(a) To preserve the value of the loan and the real estate;
(b) To avoid a loss to the lender or the Agency and to limit
exposure to potential loss;
(c) To protect the interests of the tenants; and
(d) To further program objectives.
Sec. 3565.402 Servicing responsibilities.
The lender must service the loan in accordance with this subpart
and perform the services contained in this section in a reasonable and
prudent manner. The lender is responsible for the actions of its agents
and representatives.
(a) Funds management. The lender must have a funds management
system to receive and process borrower payments, including the
following.
(1) All principal and interest (P&I) funds and guarantee fees
collected and deposited into the appropriate custodial accounts.
(2) Payments to custodial escrow accounts for taxes and insurance
premiums, assessments that might impair the security (such as ground
rent), and reserve accounts for repair and capital improvement of the
property.
(b) Asset management. The lender must ensure that the property
securing the guaranteed loan remains in good physical and financial
condition, in accordance with project management requirements contained
in subpart H of this part.
(c) Management of delinquencies and defaults. Each month the lender
must report to the Agency any delinquencies and defaults in accordance
with subpart H of this part.
Sec. 3565.403 Special servicing.
Special servicing must be initiated when regular servicing actions
are insufficient to resolve borrower default or property deficiencies.
(a) Responsibility of lender. It is the lender's responsibility
during special servicing to make a special effort to ensure that
maintenance of the property meets Agency requirements and the tenants'
rights are protected, until such time that the property is liquidated
by the lender, the loan is paid in full, or the loan is assigned to the
Agency. The lender must update the Agency monthly until the default is
cured or a claim is filed. The lender must maintain adequate records of
any and all efforts to cure the default or to foreclose.
(b) Initiating special servicing. When special servicing is
initiated, the lender must submit for Agency review a special servicing
plan that includes proposed actions to cure the deficiencies and a
timeframe for completion. The special servicing plan will specify the
proposed terms of any workout agreement recommended by the lender. The
lender must obtain Agency approval of the terms of any workout
agreement with the borrower. The workout agreement may include a loan
modification, transfer of physical assets, or partial payment of claim
and reamortization of the loan. Failure to comply with terms contained
in the executed workout agreement will be considered a default of the
guaranteed loan.
(1) Loan modification. The borrower and lender may agree to a loan
modification when such action will improve the financial viability of
the project and its operations, and when a circumstance exists that is
beyond the borrower's control. The Agency must approve in advance any
loan modification that extends the life of the loan or requires an
increase in the amount of the guarantee. All changes must be within the
requirements of section 538 of the Housing Act of 1949.
(2) Change in ownership and transfer of physical assets. A default
or delinquency may be resolved by a change of the ownership entity in
whole or in part. The Agency must approve all changes in ownership
prior to the effective date of the transfer, and may require additional
resources from the lender or borrower to resolve project deficiencies.
A change in the ownership entity, including a transfer of physical
assets, will not relieve the original borrower of liability for the
loan, pursuant to the provisions regarding release of liability
contained in subpart E of this part.
(3) Partial payment of claims. The lender may request a partial
payment of claim as a result of a loss experienced by the lender as a
means to work out a troubled loan. The Agency will accept such claim if
it determines that it is in the best interest of the government. In
applying the partial payment, the lender must assign the obligation
covered by the partial payment to the Agency, and, if required by the
Agency, reamortize the obligation using the amount of the remaining
obligation over an agreed-upon term.
(c) Claims processing. In the event of a loss, the lender must
submit claims under the guarantee in accordance with subpart J of this
part. Prior to submitting a claim, the lender must exhaust all
possibilities of collection on the loan.
(d) Displacement prevention. The actions of the lender must not
harm the property's tenants through displacement.
Sec. 3565.404 Transfer of mortgage servicing.
Transfer of servicing is prohibited unless the Agency determines
that circumstances warrant such action, the proposed lender is an
eligible lender approved by the Agency, and the transfer of servicing
is approved by the Agency in advance.
Sec. Sec. 3565.405-3565.449 [Reserved]
Sec. 3565.450 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Subpart J-Assignment, Conveyance, and Claims
Sec. 3565.451 Preclaim requirements.
(a) Lender certifications. After borrower default and before filing
a claim or assignment of the loan to the Agency, the lender must make
every reasonable and prudent effort to resolve the default. The lender
must provide the Agency with an accounting of all proposed and actual
actions taken to cure the default. The lender must certify that all
reasonable efforts to cure the default have been exhausted. Where the
lender fails to comply with the terms of the loan guarantee agreement
and the corresponding regulations and guidance with regard to
liquidating the property, the Agency, at its option, may take
possession of the security collateral and dispose of the property.
(b) Due diligence by lender. For all loan servicing actions where a
market, net recovery or liquidation value determination is required,
guaranteed lenders shall perform due diligence in
[[Page 39470]]
conjunction with the appraisal and submit it to the Agency for review.
The Phase I Environmental Site Assessment published by the American
Society of Testing and Materials is considered an acceptable format for
due diligence.
(c) Environmental review. The Agency is required to complete an
environmental review under the National Environmental Policy Act, in
accordance with 7 CFR part 1940, subpart G or a successor regulation,
prior to disposition of inventory property, if title is held by the
Agency, and prior to any authorization to the guaranteed lender to
foreclose and dispose of property, and for any other servicing action
requiring Agency approval or consent.
Sec. 3565.452 Decision to liquidate.
A decision to liquidate shall be made when it is determined that
the default cannot be cured through actions contained in Sec. 3565.403
of subpart I or it has been determined that it is in the best interest
of the Agency and the lender to liquidate.
Sec. 3565.453 Disposition of the property.
(a) Liquidation plan. The lender will, within 30 days after a
decision to liquidate, submit to the Agency in writing its proposed
detailed plan of liquidation. Upon approval by the Agency of the
liquidation plan, the lender will proceed to liquidate. At a minimum,
this plan must contain the following information:
(1) Such proof as the Agency requires to establish the lender's
ownership of the guaranteed loan promissory note and related security
instruments and a copy of the payment ledger if available which
reflects the current loan balance and accrued interest to date and the
method of computing the interest.
(2) A full and complete list of all collateral including any
personal and corporate guarantees.
(3) The recommended liquidation methods for making the maximum
collection possible on the indebtedness and the justification for such
methods, including recommended actions for:
(i) Acquiring and disposing of all collateral;
(ii) Collecting from guarantors;
(iii) Obtaining an appraisal of the collateral;
(iv) Setting the proposed date of foreclosure; and
(v) Setting the proposed date of liquidation.
(4) Necessary steps for protection of the tenants and preservation
of the collateral.
(5) Copies of the borrower's latest available financial statements.
(6) Copies of the guarantor's latest available financial
statements.
(7) An itemized list of estimated liquidation expenses expected to
be incurred along with justification for each expense.
(8) A schedule to periodically report to the Agency on the progress
of liquidation.
(9) Estimated protective advance amounts with justification.
(b) Filing an estimated loss claim. Upon Agency concurrence in the
liquidation plan and when the lender owns any or all of the guaranteed
portion of the loan, the Agency may, in accordance with program
guidance, pay an estimated loss payment based on an Agency determined
percentage of the approved estimate of the loss. The estimated loss
payment will be based in the liquidation value of the collateral. If
such payment is made, it will be applied to the outstanding principal
balance owed on the guaranteed debt. The lender will discontinue
interest accrual on the defaulted loan in accordance with Agency
procedures.
(c) Property disposition. Once the liquidation plan has Agency
approval, the lender must make every effort to liquidate the property
in a manner that will yield the highest market value consistent with
the protections afforded to tenants contained in 7 CFR part 1944,
subpart L or successor regulation. This liquidation process must be
completed within 9 months from the lender's decision to liquidate,
unless otherwise approved by the Agency.
(d) Transmitting payments and proceeds to the Agency. When the
Agency is the holder of a portion of the guaranteed loan, the lender
will transmit to the Agency its pro rata share of any payments received
from the borrower, liquidation, or other proceeds.
Sec. 3565.454 [Reserved].
Sec. 3565.455 Alternative disposition methods.
The Agency, in its sole discretion, may choose to obtain an
assignment of the loan from the lender or conveyance of title obtained
by the lender through foreclosure or a deed-in-lieu of foreclosure.
(a) Assignment. In the case of an assignment of the loan, the
assignment of the security instruments or the security must be in
written and recordable form. Completion of the assignment will occur
once the following transactions are completed to the Agency's
satisfaction.
(1) Conveyance to the Agency of all the lender's rights and
interests arising under the loan.
(2) Assignment to the Agency of all claims against the borrower or
others arising out of the loan transactions, including:
(i) All collateral agreements affecting financing, construction,
use or operation of the property; and
(ii) All insurance or surety bonds, or other guarantees, and all
claims under them.
(3) Certification that the collateral has been evaluated for the
presence of contamination from the release of hazardous substances,
petroleum products or other environmental hazards which may adversely
impact the market value of the property and the results of that
evaluation.
(b) Conveyance of title. In the case of a conveyance of title to
the property, the lender must inform the Agency in advance of how it
plans to acquire title and a timetable for doing so. The Agency will
accept the conveyance upon receipt of an assignment to the Agency of
all claims of the lender against the property and assignment of the
lender's rights to any operating funds and any reserves or escrows
established for the maintenance of the property or the payment of
property taxes and insurance.
Sec. 3565.456 Filing a claim.
Once the lender has disposed of the property or the Agency has
agreed to accept an assignment of the loan or conveyance of title to
the property, the lender may file a claim for the guaranteed portion of
allowable losses. All claim amounts must be calculated in accordance
with this subpart and be approved by the Agency.
Sec. 3565.457 Determination of claim amount.
(a) Maximum guarantee payment. The maximum guarantee payment will
not exceed the amount of guarantee percentage as contained in the
guarantee agreement (but in no event more than 90%) times the allowable
loss amount.
(b) Date of loss. The date of loss is the earliest of the date on
which the property is foreclosed or acquired or the proposed date of
foreclosure or acquisition in the liquidation plan, unless an
alternative date is approved by the Agency. Where the Agency chooses to
accept an assignment of the loan or conveyance of title, the date of
loss will be the date on which the Agency accepts assignment of the
loan or conveyance of title.
(c) Allowable claim amount. The allowable claim amount must be
calculated by:
(1) Adding to the unpaid principal and interest on the date of
loss, an amount approved by the Agency for
[[Page 39471]]
payments made by the lender for amounts due and owing on the property,
including:
(i) Property taxes and other protective advances as approved by the
Agency;
(ii) Water and sewer charges and other special assessments that are
liens prior to the guaranteed loan;
(iii) Insurance on the property;
(iv) Loan guarantee fees paid after default; and
(v) Reasonable liquidation expenses.
(2) And by deducting the following items:
(i) Any amount received by the lender on the account of the
guaranteed loan after the date of default;
(ii) Any net income received by the lender from the secured
property after the date of default; and
(iii) Any cash items retained by the lender, except any amount
representing a balance of the guaranteed loan not advanced to the
borrower. Any loan amount not advanced will be applied by the lender to
reduce the outstanding principal on the loan.
(d) Lender certification. The lender must certify that all
possibilities of collection have been exhausted and that all of the
items specified in paragraph (c) of this section have been identified
and reported to the Agency as a condition for payment of claim.
Sec. 3565.458 Withdrawal of claim.
If the lender provides timely written notice to the Agency of
withdrawal of the claim, the guarantee will continue as if the default
had not occurred if the borrower cures the default prior to foreclosure
or prior to acceptance of a deed-in-lieu of foreclosure.
Sec. Sec. 3565.459-3565.499 [Reserved]
Sec. 3565.500 OMB control number.
According to the Paperwork Reduction Act of 1995, no party is
required to respond to a collection of information unless it displays a
valid OMB control number. The valid OMB control number for this
information collection is 0575-0174.
Dated: July 16, 1998.
Inga Smulkstys
Acting Under Secretary Rural Development.
[FR Doc. 98-19558 Filed 7-21-98; 8:45 am]
BILLING CODE 3410-XV-P
