95-26553. Single Family Rural Housing Loans  

  • [Federal Register Volume 60, Number 208 (Friday, October 27, 1995)]
    [Rules and Regulations]
    [Pages 55112-55147]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 95-26553]
    
    
    
    
    [[Page 55111]]
    
    _______________________________________________________________________
    
    Part III
    
    
    
    
    
    Department of Agriculture
    
    
    
    
    
    _______________________________________________________________________
    Rural Housing and Community Development Service
    
    Rural Business and Cooperative Development Service
    
    Rural Utilities Service
    
    Consolidated Farm Service Agency
    _______________________________________________________________________
    
    
    
    7 CFR Parts 1900, 1910, 1924, et al.
    
    
    
    Single Family Rural Housing Loans: Final Rule
    
    Federal Register / Vol. 60, No. 208 / Friday, October 27, 1995 / 
    Rules and Regulations
    
    [[Page 55112]]
    
    
    DEPARTMENT OF AGRICULTURE
    
    Rural Housing and Community Development Service
    Rural Business and Cooperative Development Service
    Rural Utilities Service
    Consolidated Farm Service Agency
    
    7 CFR Parts 1900, 1910, 1924, 1940, 1944, 1950, 1951, 1955, and 
    1965
    
    RIN 0575-AB16 and RIN 0575-AA35
    
    
    Single Family Rural Housing Loans
    
    AGENCIES: Rural Housing and Community Development Service, Rural 
    Business and Cooperative Development Service, Rural Utilities Service, 
    and Consolidated Farm Service Agency; USDA.
    
    ACTION: Final rule.
    
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    SUMMARY: The Rural Housing and Community Development Service (RHCDS) is 
    amending the regulations on Single Family Rural Housing Loans. Under 
    the reorganization of the Department of Agriculture, RHCDS is the 
    successor to the former Farmers Home Administration (FmHA) for the 
    administration of rural housing (RH) programs under title V of the 
    Housing Act of 1949. References to RHCDS will also include actions of 
    FmHA prior to the reorganization. Regulations regarding Receiving and 
    Processing Applications, Borrower Supervision, Servicing, and 
    Collection of Single Family Housing Loan Accounts, and Security 
    Servicing for Single Family Rural Housing Loans are also impacted by 
    the proposed revisions. This action is taken to implement the 
    provisions of section 315 of the Housing and Community Development Act 
    of 1987, Pub. L. 100-242, to improve the delivery of the program to the 
    public, provide for the orderly processing of loan applications, reduce 
    workload of RHCDS field staffs, and to conform the RH direct loan 
    program under section 502 of the Housing Act of 1949 with the 
    Guaranteed Rural Housing Loan program and industry standards.
    
    EFFECTIVE DATE: October 27, 1995.
    
    FOR FURTHER INFORMATION CONTACT: Betsy McDaniel, Senior Loan 
    Specialist, Rural Housing and Community Development Service, USDA, Room 
    5346-S, South Agriculture Building, 14th and Independence SW, 
    Washington, DC 20250, Telephone (202) 720-1486.
    
    SUPPLEMENTARY INFORMATION:
    
    Executive Order 12866
    
        This rule has been reviewed under Executive Order 12866 and the 
    Office of Management and Budget has determined that this is a 
    ``significant regulatory action.'' The rule provides significant 
    changes which are customer friendly and have reduced the paperwork 
    burden. Additionally, the cost of the program is reduced as a direct 
    result of changing the method of subsidy determination. Size and cost 
    containment restrictions on properties have been removed to allow 
    applicants to chose a dwelling that meets their needs within their 
    repayment ability. The result of this rule serves to limit the rate of 
    subsidy and encourage the applicant to purchase a modestly priced 
    property within their repayment ability.
    
    Regulatory Flexibility Act
    
        This final rule has been reviewed with respect to the Regulatory 
    Flexibility Act (5 U.S.C. 601-612). The undersigned has determined that 
    this action will not have a significant economic impact on a 
    substantial number of small entities since the regulatory changes 
    affect RHCDS processing of section 502 loans and individual applicant 
    eligibility for the program.
    
    Environmental Impact Statement
    
        This document has been reviewed in accordance with 7 CFR part 1940, 
    subpart G, ``Environmental Program.'' It is the determination of RHCDS 
    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 1949, Pub. L. 
    91-190, an Environmental Impact Statement is not required.
    
    Programs Affected
    
        This program is listed in the Catalog of Federal Domestic 
    Assistance under No. 10.410, Low Income Housing Loans.
    
    Intergovernmental Consultation
    
        For the reason set forth in the final rule related notice to 7 CFR 
    part 3015, subpart V, 48 FR 29115, June 24, 1983, this program is 
    excluded from the scope of Executive Order 12372 which requires 
    intergovernmental consultation with state and local officials.
    
    Civil Justice Reform
    
        This final rule has been reviewed under Executive Order 12778, 
    Civil Justice Reform. In accordance with this rule: (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)pursuant to the Department of Agriculture Reorganization Act of 
    1994, Public Law 103-354 (October 13, 1994), administrative appeal 
    proceedings must be exhausted before bringing suit in court challenging 
    actions taken under this rule unless those regulations specifically 
    allow bringing suit at an earlier time.
    
    Paperwork Reduction Act
    
        The information collection requirements contained in this 
    regulation have been approved by the Office of Management and Budget 
    (OMB) under the provisions of 44 U.S.C. chapter 35 and have been 
    assigned OMB control 0575-0059 in accordance with the Paperwork 
    Reduction Act of 1980. The collection requirements have been reduced as 
    a result of reducing the need for Form FmHA 1944-3, Budget and/or 
    Financial Statement for loanmaking decisions relating to the 
    applicant's repayment ability. The Agency is now relying on the use of 
    ratios for determining repayment ability. The total reduction in burden 
    is 247,000 hours, or 19 percent as a direct result of the changes in 
    this rule. These results are in keeping with the National Performance 
    Review goal of reducing burden imposed on the public by Government 
    programs. This final rule does not impose any new information 
    collection or recordkeeping requirement in addition to those approved 
    by OMB.
    
    Regulatory Reform: Less Burdensome or More Efficient Alternatives
    
        The Department of Agriculture is committed to carrying out its 
    statutory and regulatory mandates in a manner that best serves the 
    public interest. Therefore, where legal discretion permits, the 
    Department actively seeks to promulgate regulations that promote 
    economic growth, create jobs, are minimally burdensome and are easy for 
    the public to understand, use or comply with. In short, the Department 
    is committed to issuing regulations that maximize the net benefits to 
    society and minimize costs imposed by those regulations. The Department 
    has utilized comments and suggestions from the public to develop this 
    regulation in accordance with these principles.
    
    Background
    
        Section 534 of the Housing Act of 1949 requires that all rules and 
    regulations issued pursuant to that Act will be effective 30 days from 
    the publication date. The one exception is for a rule or regulation 
    issued on an emergency basis. This action is effective 
    
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    immediately. The justification for the immediate effectiveness of this 
    regulation is based on the administrative problems and expense to 
    operate the program which will arise if the funding for the Fiscal Year 
    1996 single family housing loan program is commenced under the old part 
    1944, subpart A, regulation and shortly after the beginning of the 
    fiscal year a complete and inconsistent revision becomes effective, 
    with the new requirements and new provisions. Secondly, the Agency's 
    budget for Fiscal Year 1996 was submitted in anticipation that the 
    revised regulation would become effective on October 1, 1995. The 
    revised regulation reduces the cost of the program by decreasing the 
    subsidy and therefore makes more money available for additional loans 
    from the appropriated funds to assist low-income families. The most 
    effective way to avoid undue expense of operating the program and 
    inconsistencies is to apply the new rule to all loans made during the 
    new fiscal year. For the same reasons the Agency finds that good cause 
    exists for an immediate effective date under section 553 of the 
    Administrative Procedure Act.
        This final rule incorporates two proposed rules and includes issues 
    and comments from both. Both proposed rules are being finalized in this 
    single final rule. The proposed rule published in the Federal Register 
    (60 FR 25629) on May 12, 1995, provided for a 60-day comment period 
    which ended on July 11, 1995. This proposed rule was a complete 
    revision of the entire regulation and incorporates the appropriate 
    changes from the first proposed rule published in the Federal Register 
    (58 FR 507) on January 6, 1993. The Agency wishes to thank all of the 
    commenters who responded to the proposed rules. The comments were 
    helpful in formulating this final rule.
    
    Proposed Rule Published on May 12, 1995
    
        This proposed rule proposed a complete revision to the regulation 
    with major changes in determining the amount of maximum dollar 
    limitation for the property financed, use of ratios to determine 
    repayment ability, changes to the calculation of payment assistance, 
    and revisions to the procedures for loan processing.
        Interested persons have been afforded an opportunity to participate 
    in the making of this rule. Due consideration has been given to the 52 
    comments received. Twenty six comments were from RHCDS or other federal 
    agency personnel. Twenty six comments were received from groups 
    representing various public and private interest groups.
        Many respondents issued strong support for the rule and requested 
    that it be published as written. Other respondents were in support of 
    the rule with particular suggested revisions. Several negative comments 
    were received opposing the use of ratios as a replacement for the use 
    of family budgets. Others supported the use of ratios with suggested 
    changes to other percentages. Other negative comments were received 
    regarding payment assistance calculations. These comments were reviewed 
    and adjustments made. Other negative comments were received on 
    restricting the loan amount so as not to exceed 85 percent of the 
    maximum dollar limitation established under section 203(b) of the 
    National Housing Act (12 U.S.C. Sec. 1709). These comments were 
    considered and changes made to allow the maximum amount under this law.
        The proposed rule used the term ``monthly obligation to income'' 
    (MOTI) defined as the principal, interest, taxes, insurance, (PITI) and 
    homeowner and other assessments, and long term obligations. This term 
    is generally not consistent with that used in the private sector and in 
    subpart D of part 1980, Guaranteed Rural Housing Program. In order to 
    be consistent, RHCDS has revised the final rule to change the term for 
    this ratio from ``MOTI'' to ``total debt'' (TD).
        Other administrative changes were made to the final rule as a 
    result of comments received. RHCDS has defined ``participation loans'' 
    and ``payment assistance'' in the definition section and has changed 
    the term ``disabled person'' to ``person with a disability.''
        Eleven comments were in favor of the use of ratios to determine 
    repayment ability in lieu of the use of family budgets. Seven of these 
    respondents felt the provisions of allowing the use of family budgets 
    in unusual circumstances is not reasonable and too inconsistent to 
    administer effectively. RHCDS concurs with these comments and has 
    removed this language and replaced it with language describing 
    compensating factors which may be used for exceptions to ratios. Family 
    budgets may be used when an applicant presents documented evidence of 
    having met housing related costs in the past six months that are equal 
    to or greater than the projected housing costs after approval of the 
    proposed loan. Several respondents felt that an applicant should 
    provide documented evidence of having met housing related costs in the 
    past 12 months. RHCDS has considered this comment and has made the 
    decision not to adopt it at this time because the proposed requirement 
    of six months provides sufficient documentation to demonstrate 
    repayment ability. A family budget may be used in conjunction with the 
    ratios in justifying the need for allowing compensating factors.
        Three respondents from high cost areas were concerned about the 
    effect the PITI and TD ratios would have on the amount of loan that can 
    be made and stated it would curtail loan making in the respondents' 
    States. RHCDS has provided for these situations by allowing the use of 
    documented evidence of having met related costs in the past 6 months 
    that are equal to or greater than the projected housing costs after 
    approval of the proposed loan.
        Ten respondents contend the changes in this rule are not conducive 
    to participation loans with other lenders, particularly with the change 
    in the way payment assistance is calculated and the use of ratios to 
    determine repayment ability. It was suggested that the ratios for 
    participation loans be increased to 33 percent for principal, interest, 
    taxes and insurance and 38 percent for total debt. RHCDS considered 
    this request and made a determination that a revision to the ratios 
    would be advantageous and justified the revision based on comments from 
    affordable lenders in the industry. The Agency decided to use ratios of 
    33 percent PITI and 38 percent TD for all loans to low-income 
    applicants (as opposed to very low-income applicants), whether such 
    loans are participation loans or are fully RHCDS funded direct section 
    502 loans. Because very low-income applicants have less flexibility in 
    covering their basic living expenses, the Agency will use a 29 percent 
    PITI ratio and a 38 percent TD ratio for all RHCDS section 502 direct 
    rural housing loans for very low-income applicants. This will assist 
    very low- and low-income applicants while allowing for a reasonable 
    percentage of income for housing payments. For participation loans the 
    PITI ratio will include the applicant's payments of principal and 
    interest on the participation loan.
        Participation loans will be obtained by those low-income families 
    with higher incomes who can better afford a higher PITI ratio of 33 
    percent. This ratio will give some flexibility to participation loans 
    charging market interest rates. Payment assistance in connection with 
    the RHCDS portion of a participation loan will always be based on the 
    equivalent interest rate matching the applicant's percent of median 
    income. The payment ``floors'' 
    
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    will not be considered because in most cases the applicant will be 
    exceeding the ``floors'' when including the participation loan. The 
    change in ratios has been adopted in the final rule. Applicants 
    receiving a participation loan are not eligible for deferred mortgage 
    assistance.
        Payment assistance subsidy is based the greater of either an 
    equivalent interest rate based on the applicant's percentage of median 
    income or on a minimum ``floor'' percentage of the applicant's adjusted 
    income for principal, interest, taxes, and insurance. Other shelter 
    costs such as utilities and maintenance, are not included as part of 
    the calculation of subsidy. The Agency, in revising the regulation to 
    streamline the process and model the regulations after industry 
    practices, decided, like private industry, that other shelter costs are 
    paid by the applicant over and above the PITI and TD expenses.
        Twenty comments were received on the calculation of payment 
    assistance and the use of ``floors,'' which are the minimum percentages 
    of adjusted family income for PITI. Ten respondents were completely in 
    favor with the change as proposed. Several respondents had conducted 
    their own studies based on data supplied from various section 502 user 
    organizations in different geographic locations. The other respondents 
    opposing the change used these studies as their basis for opposition. 
    The studies showed that the impact was most severe for those with 
    income between 50.01 and 65 percent of median. These respondents 
    advised the use of step increases for the percentages of adjusted 
    family income at 22, 23, 24, 25, and 26 percent. Their study showed 
    that some applicants/borrowers will pay more than 30 percent for total 
    shelter costs which includes PITI, utilities and maintenance.
        RHCDS has considered these comments and has determined there is 
    merit to making a change in the determination of payment assistance for 
    the 50.01 to 65 percent of median income category mentioned in the 
    preceding paragraph. The abrupt jump from 22 to 26 percent of adjusted 
    family income could cause undue hardship to these applicants and 
    borrowers and could possibly result in increased delinquency and 
    foreclosure rates. RHCDS has adopted the use of an additional ``floor'' 
    of 24 percent of adjusted family income for applicants falling above 50 
    and at or below 65 percent of median income.
        Twenty nine comments were received on restricting the loan amount 
    so as not to exceed 85 percent of the maximum dollar limitation 
    established under section 203(b) of the National Housing Act (12 U.S.C. 
    Sec. 1709). The majority of respondents felt 85 percent was too 
    restrictive for their local market and would only provide financing for 
    existing homes in their communities. The respondents were concerned 
    that RHCDS financing could not be provided for new construction based 
    on this cap. Several respondents were concerned that RHCDS would not be 
    providing decent, safe and sanitary housing for eligible applicants as 
    a result of this change. One respondent stated this change would 
    effectively stop the program delivery in the respondents' particular 
    community because there is no existing housing meeting decent, safe, 
    and sanitary requirements falling at or below the prescribed loan 
    maximum. All of these respondents wanted the cap to be set at 100 
    percent of the maximum dollar limitation established under section 
    203(b) of the National Housing Act (12 U.S.C. Sec. 1709). Several 
    respondents stated that the maximum dollar limitation established under 
    section 203(b) is defined as modest housing by HUD and the section 502 
    Guaranteed Rural Housing program and that to limit this amount for the 
    direct program is without reason and unfounded.
        The Agency has considered these comments and has made the decision 
    to increase the amount to the full amount of the maximum dollar 
    limitation established under section 203(b). This decision was made 
    because in most cases the limiting factor in the amount of the loan 
    will be the affordability issue based on the percentage of the 
    applicant's income as determined by the ratios. Loan amounts will be 
    limited by the applicant's income and this change should not increase 
    the cost of the program overall. There are provisions for exceptions to 
    this limitation by the Administrator in rare circumstances.
        Another respondent was concerned that 85 percent is too high in the 
    respondent's community and will present opportunities for unnecessarily 
    high loan amounts. RHCDS, in making this change, considered this 
    possibility but has determined it will not affect the majority of 
    applicants because of the use of ratios to determine repayment ability. 
    An approved applicant will be presented a ``Certificate of 
    Eligibility'' which states the amount of loan the applicant qualifies 
    for based on current income and debt information. An applicant will be 
    able to select a property that best suits the applicant's needs based 
    on the applicant's resources.
        Three respondents were concerned that RHCDS employees will no 
    longer do inspections of existing properties to determine repairs 
    needed to make a house financed structurally sound and functionally 
    adequate. Another respondent was concerned that a third party 
    inspection would cause undue hardship on the buyer and seller to pay. 
    Third party inspections are not required and RHCDS will continue to 
    inspect the property if a third party disinterested party has not done 
    an inspection to determine if there is adequate security for the loan; 
    however, the buyer has always had the right to obtain his or her own 
    inspections to protect the buyer's interests.
        We received nine comments from natural gas distributors applauding 
    the elimination of ``prohibited features'' in the existing 7 CFR 
    Sec. 1944.16(e) particularly the prohibition in paragraph (6) ``Central 
    air conditioning systems separate and apart from heat pumps.'' The 
    natural gas industry has felt for a long time that this regulation was 
    biased in the favor of electric space and water heating and has 
    resulted in higher heating costs for consumers.
        Two respondents were in favor of including loan packaging fees as 
    an eligible loan purpose; however, they were both concerned with 
    allowing State Directors discretion to determine what is reasonable 
    within their jurisdiction. They continued by stating that in the past 
    some State Directors and housing staffs opposed packaging fees. RHCDS 
    believes the sections 1944.3(a)(17)(ii)(A), (B), and (C) give adequate 
    guidance to allow geographic flexibility. RHCDS has added a sentence to 
    Sec. 1944.3(a)(17)(iii) to prohibit the amount from exceeding the 
    amount prescribed in exhibit B of subpart B of part 1944.
        One respondent commented that the RHCDS requirements for lending on 
    manufactured homes are too restrictive and that any HUD approved unit 
    should be accepted. No significant changes were proposed to be made to 
    the existing regulations regarding manufactured housing. The 
    requirements currently are, and have been since the inception of this 
    authority, that the new unit must be built to the Federal Manufactured 
    Home Construction and Safety Standards (FMHCSS) and RHCDS thermal 
    requirements. FMHCSS standards are commonly known as the HUD standards 
    for the construction, design, and performance of a manufactured home 
    which meets the needs of the public including the need for quality, 
    durability, and safety.
        Eleven comments were received on the subject of deferred mortgage 
    assistance. Two respondents stated that 
    
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    the program is unreliable, difficult to interpret and puts the 
    recipient in a worse position at the end of 15 years. They both 
    recommended removing the entire section and eliminating deferred 
    mortgage assistance. The deferred mortgage program provides a means of 
    getting a home for applicants who would not otherwise qualify, however, 
    it is correct that in many cases the borrower will owe a great deal on 
    the property when it is sold due to interest credit recapture. This 
    results from the tremendous reduction in interest received while making 
    deferred payments. While RHCDS admits this assistance is potentially 
    burdensome, there is a need for this type of assistance for very low-
    income applicants. At this time the section will not be eliminated.
        Several respondents were concerned with the wording which allows 
    deferred mortgage assistance to continue to a qualified borrower 
    provided it is renewed without interruption. The intent of section 
    502(g) of the Housing Act of 1949 is to make this assistance available 
    to qualified applicants at loan closing. RHCDS has determined that 
    deferred mortgage assistance can be continued uninterrupted for up to 
    15 years. The purpose of deferred mortgage assistance is for very low-
    income applicants to obtain a loan initially. There are other servicing 
    options available to borrowers whose deferred mortgage assistance has 
    expired or whose income made them no longer eligible.
        Two comments were received on the calculation of annual income. One 
    respondent agreed with the use of historical data based on the previous 
    12 months or the last fiscal year when a projection could not logically 
    be made. This decision by RHCDS is consistent with the private lending 
    community.
        Another respondent was concerned in Sec. 1944.5(b) that persons 
    seeking, but unable to find employment would have to use projected 
    income from former employment. The intent of this paragraph is to 
    prevent excluding income from employers that historically lay off 
    seasonal employees and then rehire them at a later date. Annual family 
    income should include projected income from this type of situation if 
    the applicant or coapplicant has a recent history of this type of 
    employment. An example of this would be a factory that seasonally shuts 
    down production and lays employees off. These employees are later 
    rehired to continue in the same job. If there is recent history of an 
    applicant's employment at this factory, then this income should be 
    included based on historical information unless the applicant provides 
    a statement that the person does not intend to resume employment in the 
    foreseeable future or during the terms of the payment assistance 
    agreement.
        Two comments were received regarding credit history review, 
    specifically related to collection accounts. The first respondent felt 
    Sec. 1944.9(f)(1)(ix) was too liberal in allowing an applicant to have 
    collection accounts which were paid in full within 3 months prior to 
    application. The respondent stated the limit should be increased to at 
    least 6 months. RHCDS has considered this comment and has made the 
    determination that the regulation as proposed provides a sufficient 
    time period for satisfying unresolved collection accounts.
        The second respondent agreed with the changes made to Sec. 1944.9 
    to make credit history requirements more reasonable; however, the 
    respondent wanted clarification on Sec. 1944.9(f)(1)(viii). Upon review 
    by RHCDS, it was noted that under certain circumstances this section 
    and the following section seemed to be incompatible. A decision was 
    made to eliminate this sentence entirely and renumber the paragraphs of 
    this section. Another respondent wanted clarification on when 
    bankruptcy will not indicate unacceptable credit history. The Agency 
    considered this and adopted the respondent's proposed language in 
    Sec. 1944.9(f)(2)(ii). Another respondent wanted clarification on 
    Sec. 1944.9(f)(2)(iii) regarding the timeframe for satisfied judgments. 
    Clarification was made in this section that a judgment satisfied more 
    than 12 months before the date of application would not be considered 
    unacceptable credit history.
        One respondent commented that if RHCDS intends to emulate the 
    private industry then Sec. 1944.8(a)(2) should be changed to require an 
    applicant to be employed at one place of employment for at least 12 
    months prior to submitting the application. RHCDS does not require 
    income to be obtained only from employment. Additionally, commercial 
    residential mortgage lenders do not require 12 month employment history 
    with one employer prior to application. Each case must be evaluated to 
    determine if the situation was beyond the applicant's control or if the 
    change in employment was to better the applicant's situation. Also, an 
    applicant who did not have any break in employment and paid all bills 
    when due demonstrates an adequate, dependable income.
        Two comments were received regarding the use of section 502 funds 
    to refinance existing mortgages for applicants. These comments fully 
    supported the removal of the provision that a debt has to be delinquent 
    to be eligible for refinancing.
        One respondent commented that the wording in Sec. 1944.17(a)(2) was 
    confusing and could be misconstrued in relation to participation loans. 
    It was suggested that the wording be changed to clarify the maximum 
    loan amount when there is a senior loan. The Agency has considered this 
    suggestion but has determined that the wording provides the necessary 
    language to convey the maximum loan amount when there is a lien in a 
    senior position to the RHCDS debt.
        Two respondents commented that to change the language in the 
    application processing section to ``rejected'' in Sec. 1944.27(d)(2) is 
    not customer-friendly. The use of the word ``withdrawn'' was suggested 
    as an alternative. The Agency has considered this change and has 
    adopted it in the final rule. A similar suggestion was made in 
    Sec. 1944.27(f) to change the wording from ``the borrower/applicant 
    will submit to a personal interview with RHCDS'' to ``RHCDS will 
    conduct a personal interview with an applicant.'' This suggested 
    language was incorporated in the final rule.
        Comments were received regarding net family assets. A respondent 
    commented on the statement in the preamble of the proposed rule where 
    the Agency allowed that the provision of a net family asset limit for 
    receiving payment assistance is removed. The respondent commented that 
    the Agency still defines net family assets. The Agency will continue to 
    include as income either the actual derived income from all family 
    assets or a percentage of the value of such assets based on the current 
    passbook savings rate. Another respondent wanted more examples on 
    inclusions to net family assets. The Agency considered this and 
    determined that the broad description already defining net family 
    assets is the most appropriate method of description for interpretation 
    on a nationwide basis.
        In the preamble to the proposed rule the Agency requested comments 
    on the idea of implementing a 20-year balloon payment using the 33 or 
    38 year amortization period. This concept was not included as part of 
    the proposed rule other than in the preamble. Of the nine comments 
    received, the comments were evenly split between support and opposition 
    to this proposal. RHCDS has chosen not to implement the 20-year balloon 
    payment provision at this time.
        Three comments were received regarding rates and terms as written 
    in the proposed rule. Two respondents were concerned about the 
    provision 
    
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    where RHCDS will charge the lower of the two interest rates in effect 
    at the time of loan approval or loan closing. The comments were 
    concerned that lenders should have the ability to lock into a rate when 
    they have a commitment from a secondary lender. The final rule has not 
    been changed as this process is only for the RHCDS loan. A 
    participation lender will treat their portion of the loan the same as 
    any other loan they would be making. The other respondent wanted a 
    provision added for a 15-year term for loans of $7,500 or less to be 
    written with a best mortgage obtainable. The Agency considered this 
    request and has elected not to adopt this suggestion at this time so as 
    to better protect the Government's interest.
        Seven comments were received regarding the use of HUD Handbook 
    4905-1 for repairs to existing properties. All respondents were opposed 
    to using this handbook as it is rarely used by HUD anymore and 
    establishes yet another guideline which is adequately covered in 
    existing instructions. The Agency considered these comments and made 
    the decision to remove the use of this handbook and replace it with a 
    reference to subpart A of part 1924.
        A comment was received regarding the definition of household or 
    family concerning the language ``* * * all other persons who will make 
    the applicant's dwelling their primary residence for all or part of the 
    next 12 months * * *'' It was suggested that the wording be changed to 
    prevent the possibility of the borrower renting out a portion of the 
    site for the placement of a mobile home or other dwelling on the 
    property. The wording has been changed to clarify that the income from 
    the entire property financed with a section 502 loan will be included 
    in the income eligibility determination.
        Six comments were received on site requirements. Several 
    respondents commented that the paragraph under minimum adequate site, 
    Sec. 1944.11(c), would be more comprehensible if the sentences were 
    reversed. The Agency considered this request and made the suggested 
    change to the paragraph. Also changes were made to be consistent with 
    the Agency's recent change to its regulation in subpart C of part 1924 
    of title 7. One respondent was concerned with the Agency's new 
    description of minimum adequate site. The Agency determined this 
    description would reduce the administrative burden on its field offices 
    in requesting waivers for properties that exceed 1 acre. This criteria 
    for a minimum adequate site also lessens the ability of local 
    government to use zoning requirements for lot size to deter agency 
    financed single family housing.
        The Agency received a number of comments regarding the 
    unavailability of exhibit J in the published regulation regarding 
    income exempted by Federal statute. This exhibit merely restates and 
    summarizes Federal law and will not be published in the final rule; 
    however, it is available in any Rural Economic and Community 
    Development (RECD) field office. This is income which applicable 
    Federal law provides cannot be used to determine eligibility for the 
    loan or eligibility for payment assistance.
        There were eight comments on rural area determinations. Most of the 
    respondents were in favor of the more frequent reviews allowed by the 
    revision to this section. Several respondents stated that RHCDS 
    assistance should not be available in communities with populations 
    between 10,000 and 20,000 and objected to the term ``buffer'' zone. The 
    Agency has determined this type of provision is advisable to avoid 
    untenable situations where a loan would be made on one side of a street 
    and not on the other. Another respondent stated that in the 
    respondent's particular county one town is ineligible due to population 
    while another town is eligible but has Class I soils where subdivisions 
    are being developed. Pursuant to title V of the Housing Act of 1949, 
    the rural area eligibility is based on population and is unrelated to 
    soil type.
        Two respondents supported public notification when an area is being 
    changed from rural to nonrural. Further, these respondents had concerns 
    regarding applications and conditional commitments already submitted 
    for financing in these redesignated areas in the community. The Agency 
    has allowed provisions for continuing with applications in areas 
    converted from rural to nonrural that were on hand prior to the 
    redesignation, new and existing conditional commitments received prior 
    to the redesignation, inventory properties, and subsequent loans.
        One respondent wanted a provision for loans to be made for the 
    purchase of a dwelling located on land owned by a community land trust. 
    The Agency is complying with the law and has added provisions in 
    Sec. 1944.15(a)(4) and Sec. 1944.42 giving guidance on this subject.
        One respondent wanted approval for planned unit developments and 
    homeowners associations to be at the State Director level. This was the 
    intent of the proposed rule and only if there is professional 
    management employed will it be necessary to receive National Office 
    approval. The wording was changed in Sec. 1944.3(b)(16) to clarify this 
    requirement.
        One respondent was concerned that Agency personnel under 
    Sec. 1944.18(b)(2) and (3) would require mortgage insurance as security 
    on American Indian land. The Agency has stated this as an example but 
    clearly implies this is not the only form of security which will be 
    accepted. No change was made to this paragraph.
        One respondent stated that an appraisal fee should be waived when 
    RHCDS uses another lender's appraisal in conjunction with a section 502 
    participation loan. The Agency has made the decision that it will lend 
    up to $280 over the market value which includes funding for the 
    appraisal fee. The money may be used at settlement to reimburse the 
    applicant for the appraisal done by the participation lender for which 
    the applicant previously paid.
        One respondent commented that the definition of real estate taxes, 
    which provides for reducing the amount due by any tax exemption 
    available to the applicant, as too cumbersome in multi-county field 
    offices. The respondent stated that the applicant should be counseled 
    regarding the availability of tax exemptions. The Agency concurs that 
    counseling the applicant is a part of the application process but does 
    not agree that the exemption should only be used if the applicant has 
    claimed it. It is the RECD field office's responsibility to know what 
    tax exemptions are available in order to counsel applicants.
        We received three comments regarding income from minors and 
    students. The Department of Housing and Urban Development (HUD) 
    recently changed its income eligibility restrictions. The Agency has 
    made the final rule consistent with the HUD final rule which includes 
    that income over $480 from a full-time student is not included. 
    Additionally, the Agency has added Sec. 1944.5(f) to designate income 
    which will not be included in annual income nor will it be considered 
    in determining repayment ability. These are: income from live-in aides, 
    income from minors, and income for educational scholarships.
        One respondent discussed Sec. 1944.8(a)(3)(i) using 5 percent of 
    the current balance on all revolving credit cards and suggested that 
    the minimum payment on all credit cards with activity in the past 3 
    months be used. The Agency considered this comment and has decided to 
    not change this requirement at this time. Five percent of the current 
    balance is usually more than the minimum payment due and 
    
    [[Page 55117]]
    provides some means for paying off the credit card debt. However, the 
    Agency does not want to use debt which is historical and not currently 
    owed to determine the total debt ratio as this is not an equitable 
    arrangement for the applicant.
        One comment was received regarding alien status under 
    Sec. 1944.9(c) and recent changes made by the Immigration and 
    Naturalization Service (INS). It is the Agency's policy that loans will 
    only be made to United States citizens and those categories of non-
    citizens covered in Section 501(b) of the Housing Act of 1949.
        Four comments were received regarding when repairs are to be done 
    to existing houses. The proposed rule stated repairs must be done after 
    loan closing. The Agency considered the comments received and has made 
    a change to allow the buyer and the seller agree among themselves to 
    work out when and by whom the repairs will be done, and provide 
    documentation to that effect to the RECD field office. All parties 
    concerned must understand that prior to obligation of funds, there is a 
    risk in putting money into the property in case funding is not 
    available at a later date.
        Five comments were received regarding the provision that the date 
    of loan closing is the date the mortgage is recorded rather than the 
    date the note and mortgage are signed. The actual date of closing is 
    the date the mortgage is recorded and not the date the note and 
    mortgage are signed.
        Several comments were received related to loan purposes 
    (Sec. 1944.3). One respondent questioned the need for allowing housing 
    to be occupied by a farm manager, tenants, sharecroppers, or farm 
    laborers and the apparent redundancy with the Agency's Farm Labor 
    Housing regulations. The Agency has made the determination to maintain 
    this provision under loan purposes in the section 502 program.
        Several comments were received including lender's fees in 
    connection with participation loans. Respondents recommended that the 
    wording be changed to be consistent with that used in subpart D of part 
    1980. The Agency considered this recommendations and has adopted the 
    same language as in subpart D of part 1980.
        A respondent remarked that a paragraph was removed from the loan 
    restrictions section regarding an applicant having the ability to carry 
    out the required obligations of the loan, and maintaining a former 
    residence in a responsible manner. This paragraph was not deleted but 
    was moved to Sec. 1944.9(h).
        Nine comments were received regarding participation loans. The 
    general consensus was the proposed rule was silent to any provision 
    other than lender fees. The respondents remarked that for this program 
    to be successful provisions would have to be made to fund these loans 
    as a priority. The final rule has incorporated funding priority for 
    participation loans.
        Several comments were received regarding mutual self-help housing. 
    Two respondents commented that the language in Sec. 1944.38 indicates 
    only low-income applicants may build their homes by this method. The 
    words low-income have been removed as this was not the intent; the 
    program is available to both very low- and low-income applicants. 
    Several respondents supported the addition of personal liability 
    insurance for self-help borrowers as an eligible loan purpose.
        Two comments were received regarding conditional commitments. One 
    respondent stated the subtitle to Sec. 1944.45(d) was misleading and 
    did not convey the proper message for cases where the property is 
    presold to an applicant and the seller is submitting the package. The 
    Agency considered this comment and agreed that the wording was 
    misleading. The wording has been changed for clarification. Another 
    respondent questioned the reimbursement of the appraisal fee at loan 
    closing. The applicant will be charged for the appraisal and since this 
    amount is included in the conditional commitment contractor's fee, the 
    contractor should logically be reimbursed for the appraisal.
        One respondent commented that requirements for graduating borrowers 
    had been removed and should be included in the regulation as required 
    by subpart F of part 1951. The Agency considered this comment and has 
    included a paragraph on graduation requirements in Sec. 1944.44.
        Three respondents commented on the use of HUD's Credit Alert 
    Interactive Voice Response System (CAIVRS). They were all in agreement 
    that an application should be held in suspense rather than rejected 
    upon identification by CAIVRS of a delinquent Federal debt. The Agency 
    agrees applicants will have to contact the Federal agency in question 
    to resolve the delinquency and during this time the application will be 
    held in suspense.
        One commenter disagreed with the proposal to change subpart J of 
    part 1944, paragraph 1944.457 (a)(2), which increases the section 504 
    grant limit from $5,000 to $7,500. The commenter stated that very often 
    an individual applicant would be able to use $7,500 to remove health 
    and safety hazards, and this will cause the grant funds per grantee to 
    increase. The commenter was concerned that unless there is going to be 
    additional funding the Agency will not be able to assist as many 
    families with this program. The Agency does not propose to change this 
    revision because of this comment. The commenter's statement is correct, 
    and the Agency has already considered this downside. The Agency 
    believes this change is justified because inflation has increased more 
    than the additional $2,500 since the $5,000 limit was established. 
    There are more cases each year where $5,000 will not remove all the 
    health and safety hazards.
        One commenter agreed with the changes proposed in subpart J of part 
    1944, Sec. 1944.461. However, the commenter suggested that the wording 
    in (b) and (c) of that section, ``loans of $2,500 or more'' be changed 
    to ``loans that exceed $2,500'' to be consistent with section 502 
    regulations. The commenter also suggested that paragraph (b)(1) of that 
    section be changed to clarify that subsequent section 504 loans are 
    secured by a mortgage only when the subsequent and existing section 504 
    loan balance will exceed $2,500.
        The Agency cannot change this wording to ``loans that exceed 
    $2,500'' as section 504(a) of the Housing Act of 1949 exempts only 
    loans for ``less than $2,500'' from security requirements. We 
    considered changing the section 502 regulation; however, that wording 
    is simpler and would cause even more confusion than just leaving it 
    alone. However, we do agree with the spirit of the last part of the 
    commenter's suggestion and are changing the wording in paragraph (b)(1) 
    to clarify that a mortgage will be taken when the subsequent and 
    existing section 504 loan balance will be $2,500 or more.
        One commenter agreed with the changes proposed in subpart J of part 
    1944, Sec. 1944.463. However, the commenter suggested that changes be 
    made in paragraphs (d) and (e) of that section to clarify that 
    appraisals and title clearance are only required when the total section 
    504 indebtedness exceeds $7,500. The Agency agrees with the commenter 
    and the changes are being made in paragraphs (d) and (e) to clarify 
    that total section 504 indebtedness is all that is considered.
        Three comments were received regarding the proposed changes to 
    subpart G of part 1951. One comment objected to the provision stated in 
    Sec. 1951.313(e)(2)(ii) whereby payment assistance would not be renewed 
    if the borrower's income exceeded the 
    
    [[Page 55118]]
    moderate income limit for the area. The wording has been deleted from 
    the final rule. Another respondent was concerned that the 
    reorganization of offices would hinder the ability of RHCDS staff to 
    hold personal interviews with borrowers to renew payment assistance. 
    The Agency is aware of the reduction in staff in many areas of the 
    country; however, this provision is being left in the final rule. 
    Payment assistance renewals may be contracted out and the contractor 
    will perform the direct borrower interview; although the ultimate 
    decision on the continuation of and amount of payment assistance will 
    remain with the Agency.
        Sixteen comments were received on differing aspects of the 
    provisions governing the calculation of applicant income. One 
    respondent referred to the definition of live-in aides under section 
    1944.2(4) and requested that it be expanded. The commenter notes that, 
    in many cases, live-in aides are actually household members who have 
    gotten a divorce from their spouse in order to receive the financial 
    resources needed to provide him or her essential care services. Under 
    the regulations as currently written and present definition of terms, 
    the former spouse's/live-in aide's income would not be counted as 
    household annual income. The respondent feels that live-in aide's 
    income should be considered in determining an applicant's annual income 
    even if the aide is an ex-spouse providing essential care services. 
    RHCDS does not concur with this recommended revision. While the 
    respondent's observations may have merit, RHCDS is unable to make 
    revisions to the provisions governing the definition of live-in aide 
    and the exclusion of live-in aide's income from consideration. RHCDS is 
    required under section 501(b)(5) of the Housing Act of 1949 to use the 
    income guidelines and formulae established by HUD and the provisions in 
    question were adopted in response to recent revisions to HUD's income 
    guidelines and formulae. Another respondent referred to section 
    1944.5(d)(2)(v) and suggested that RHCDS should cite the specific 
    Internal Revenue Service (IRS) publication related to allowable 
    business expenses deductions. RHCDS does not concur with this 
    recommendation. IRS publications may change on a periodic basis due to 
    revisions to taxation legislation and/or regulatory revisions initiated 
    by that Agency and, therefore, it would be inappropriate for RHCDS to 
    cite any particular publication, as this information could easily 
    become invalidated in the future. Information about IRS publications 
    can easily be obtained from the IRS if needed.
        One commenter requested clarification of section 1944.5(e)(1), 
    which states that payments received for the care of foster children or 
    foster adults will not be included in annual income but will be 
    considered in determining repayment ability, in cases where foster care 
    payments may be the sole source of household income. This respondent 
    also considers foster care payments analogous to welfare payments and 
    feels that it is not equitable for one form of assistance to be 
    considered income while the other is not. Whether or not the 
    respondent's observations have merit, they are immaterial since RHCDS 
    is unable to make revisions to the provisions governing foster care 
    income. RHCDS is required to use the income guidelines and formulae 
    established by (HUD) and the provisions in question were adopted in 
    response to recent revisions to HUD's income guidelines and formulae.
        One comment was received recommending that RHCDS provided a 
    deduction from annual income for child support payments. Agency 
    regulations include periodic allowances such as child support payments 
    received in an applicant's household as a part of the applicant's gross 
    annual income. However, child support payments are considered a 
    financial obligation and, therefore, RHCDS does not concur that payment 
    of child support by an applicant or other adult household member to a 
    former spouse should be included in the Agency's guidelines as a 
    deductible item in determining annual adjusted income. Child support 
    payments made to an outside household are considered analogous to debts 
    from bills or other miscellaneous expenses.
        Six comments were received expressing concern about the provisions 
    under Sec. 1944.5(e)(2), which states that the income of an applicant's 
    spouse who has been living separately from that applicant, or spousal 
    income when court proceedings for a divorce or legal separation have 
    been commenced, will not be included in annual income but will be 
    considered in determining repayment ability. Four of these respondents 
    recommended that the term ``living apart'' be removed from this 
    provision, and the other commenters recommended that a minimum 
    separation time be included to provide greater guidance in those cases 
    where applicants and their spouses are apart or that the section be 
    otherwise clarified. RHCDS does not concur with these recommendations. 
    RHCDS must be a prudent lender, but, as a part of its supervisory 
    credit mission and the Department's goal to be customer friendly, the 
    Agency must have the flexibility to accommodate adverse situations that 
    its applicants may face. The Agency believes that these provisions are 
    reasonable and that they will not present an undue burden to loan 
    approval officials who are processing applications.
        Two comments were received regarding the provisions under sections 
    1944.5(e)(6) and 1944.6(d)(1), which deal with the consideration of 
    medical expenses. One of these respondents noted that the language 
    under Sec. 1944.6(d)(1), stating that amounts which are granted 
    specifically for, or in reimbursement of, the cost of medical expenses 
    will not be included in annual income could be construed to include 
    insurance premiums paid by the employer, and recommended clarification 
    of this provision. RHCDS is unable to concur with this recommended 
    revision. While the respondent's observations may have merit, the 
    provision in question was adopted in response to recent revisions to 
    HUD's income guidelines and formulae. The second commenter questioned 
    why the medical expenses deduction is open only to elderly families, 
    expressed concern that this may constitute discrimination, and 
    recommended that the medical expenses deduction be open to all 
    applicants. Again, while the respondent's observations may have merit, 
    RHCDS is unable to make revisions to the provisions governing the 
    definition of an elderly family or the provisions that limit the 
    medical expenses deduction only to elderly families. RHCDS is required 
    to use the income guidelines and formulae established by HUD and the 
    provisions in question were adopted in response to recent revisions to 
    HUD's income guidelines and formulae.
        Four comments were received regarding the various provisions 
    governing the consideration of loan co-signers. Two of these 
    respondents recommended that RHCDS revise Sec. 1944.8(c) so that co-
    signers will be required to meet the same creditworthiness requirements 
    as applicants. The third respondent recommended that an applicant's 
    principal, interest, taxes and insurance (PITI) be used in determining 
    the co-signer's monthly obligations to income (MOTI) ratio. The fourth 
    commenter recommended that entities be allowed to serve as loan co-
    signers as well as individuals. RHCDS has carefully considered all of 
    these suggestions and concurs with the commenters' recommendations. 
    Section 1944.8(c) has 
    
    [[Page 55119]]
    been revised to incorporate these comments.
        Three comments were received regarding differing aspects of the 
    provisions under Sec. 1944.9(f), which deal with the evaluation of 
    applicant credit history, and the respondents generally favored the 
    revisions to this section. However, one comment was received objecting 
    to Sec. 1944.9(f)(4)(ii), which requires RHCDS personnel, in cases 
    where an applicant disputes credit information received from an on-line 
    profile credit report made at the time of application, to determine if 
    the applicant has subsequently provided conclusive proof that the 
    report is in error. The commenter feels that errors could occur in 
    interpreting creditor correspondence or court documents and the like 
    which applicants submit to disprove the on-line report, and that 
    misinterpretations of this type of information could lead to erroneous 
    conclusions on RHCDS' part. The respondent recommends that the 
    applicant be responsible for ensuring the veracity of materials used to 
    invalidate information contained in the on-line report. RHCDS does not 
    concur with this recommendation. The Agency recognizes that the 
    information contained in such profile reports may not be complete or 
    accurate. The use of profile reports is intended as an initial tool to 
    assist applicants, who are in the preliminary stages of the 
    consideration process, in removing any potential problems that could 
    adversely affect them during the later stages of consideration, so that 
    their chances of obtaining RHCDS credit are enhanced. A standard 
    mortgage credit report must be requested at a later stage in the 
    consideration process, and, therefore, we believe that it is 
    appropriate for the loan approval official to use good judgment in 
    reviewing materials submitted by the applicant to dispute erroneous 
    profile report information.
        One comment was received suggesting that RHCDS expand 
    Sec. 1944.9(f)(2)(ii), which outlines the circumstances under which a 
    bankruptcy will not be considered an indication of an unacceptable 
    credit history, to include specific information on the Chapter 7 and 
    Chapter 13 bankruptcy processes. RHCDS concurs with this recommendation 
    and has incorporated the respondent's proposed language in the final 
    rule.
        One comment was received objecting to the provisions contained 
    under Sec. 1944.9(g), which outline the circumstances under which an 
    applicant may be considered for additional credit if the applicant had 
    a previous RHCDS debt which was settled, if the applicant was released 
    from personal liability for the debt, or if the applicant is currently 
    under consideration for debt settlement. The respondent feels that any 
    applicant who is being considered for debt settlement under subpart B 
    of part 1956 or was granted a debt settlement under this subpart should 
    be ineligible for further assistance from RHCDS. RHCDS does not concur 
    with this recommendation. The language under this section both clearly 
    delineates and limits the circumstances under which an applicant who 
    has not been successful with a present or previous RHCDS debt may be 
    considered for additional credit. In such cases, the applicant must 
    clearly demonstrate that the applicant's failure to meet the loan 
    obligation was due to circumstances beyond the applicant's control and 
    that the underlying reasons which created those circumstances will not 
    reoccur. This is consistent with RHCDS' mission of assisting those 
    individuals and families who have been denied economic advancement and 
    who are unable to obtain conventional credit.
        Thirteen comments were received on differing aspects of the 
    provisions governing the processing of applications. One respondent 
    referred to Sec. 1944.27(a)(1) specifically with respect to Form FmHA 
    410-4, ``Application for Rural Housing Assistance (Nonfarm Tract) 
    Uniform Residential Loan Application'' (URLA), and recommended that the 
    URLA be completely revised for a number of reasons. While the 
    commenter's suggestions may have merit, the URLA itself was not a part 
    of the proposed rule and, therefore, it is not under consideration for 
    revision as a part of the final rule process at this time. However, we 
    will keep the respondent's comments on file should the URLA become 
    subject to review in the future.
        Two comments were received recommending that Secs. 1944.27(b)(2) 
    and 1944.27(d)(1) be revised to indicate that a processing priority 
    will be provided to applicants who are leveraging RHCDS funds with 
    other resources and, accordingly, that Sec. 1944.26 be revised to 
    include a set-aside reserve for leveraging purposes. RHCDS concurs with 
    these respondents' recommendations and has adopted them in the final 
    rule.
        One comment was received recommending minor, grammatical 
    improvements to Sec. 1944.27(b)(4) and (b)(5). RHCDS has revised this 
    section for greater clarity.
        Two comments were received recommending that RHCDS conduct an 
    application ``open season,'' whereby public notice would be issued 
    advertising a specific timeframe in which applications would be 
    accepted in RECD field offices for processing within any given fiscal 
    year. These respondents felt that, in light of the reduced allocations 
    for the program, an open season would facilitate application processing 
    and assist in the reduction of application backlogs. RHCDS is unable to 
    concur with this recommendation. A revision to the program of this 
    nature which would permit rejection of applications made outside of 
    specific dates would not be consistent with the mission of giving very 
    low- and low-income applicants an opportunity for home ownership which 
    is not provided through any other means.
        Seven comments were received objecting to the provisions contained 
    under Sec. 1944.27(c)(1)(ii), regarding the requirement that where 
    there are more than 50 unprocessed applications on hand, the RHCDS loan 
    approval official will inform each applicant, at least every 6 months, 
    of the current funding status and provide an estimate of when the loan 
    is to be processed, and these respondents generally felt that this 
    requirement would be unduly burdensome on field office personnel. RHCDS 
    does not concur with the recommendation that this provision be removed. 
    In order to provide the best possible service to RHCDS customers, RHCDS 
    personnel have a responsibility to keep applicants informed of the 
    status of their application and the potential availability of funds. 
    Since the notification process occurs only on a biannual basis, RHCDS 
    does not agree that it would be an undue burden for its field offices 
    to prepare and circulate such routine correspondence with its 
    applicants. One comment was received requesting further clarification 
    of Sec. 1944.27(c)(1)(ii) regarding the number of biannual notices to 
    be provided to applicants, and whether applicants have the right to 
    request an appeal if they should fail to respond to the biannual notice 
    regarding their continued interest in participating in the program. 
    This section clearly states that notification will be provided at least 
    every 6 months to each applicant whose application has not been 
    processed when there are more than 50 unprocessed applications on hand. 
    Thus, as long as the number of unprocessed applications exceeds 50, 
    there would be no limit on the number of biannual notices that could 
    potentially be provided. The failure of an applicant to respond will be 
    considered withdrawal of the application by the applicant.
        One comment was received recommending that RHCDS add language to 
    Sec. 1944.27(c) to require the screening of all applicants for 
    eligibility 
    
    [[Page 55120]]
    under the Guaranteed Rural Housing (GRH) loan program, and that any 
    applicant found eligible under the GRH program would be disqualified 
    for a direct loan with payment assistance. RHCDS does not concur with 
    this recommendation. Under the procedure, assessing an applicant's 
    ability to obtain other credit is required during the applicant 
    interview, which is conducted after all information needed to make a 
    determination of eligibility has been obtained. Therefore, RHCDS does 
    not feel that further additions to Sec. 1944.27(c) are needed at this 
    time.
        One comment was received objecting to the provisions under 
    Sec. 1944.27(e)(1)(v) which require applicants to provide a copy of the 
    divorce decree or other legal document in order for RHCDS to verify the 
    amount of alimony or child support payments, and the respondent noted 
    that this information should not be solicited by RHCDS because this 
    action would constitute discrimination against divorced persons. In 
    order to provide financial assistance only to applicants who need it 
    and in the amounts needed, RHCDS is required under law to verify 
    applicant income, including alimony or child support payments, to 
    determine the applicant's and eligibility for program assistance, and, 
    therefore, requesting a copy of a divorce decree or other legal 
    document is not considered a discriminatory act, provided the request 
    is solely for the purpose of verifying income. Loan approval officials 
    cannot require this information from all applicants who are divorced; 
    it may be required only when it is necessary to verify alimony or child 
    support payments received. Loan approval officials should consider 
    obtaining other means of verification, such as checks, etc., when it is 
    feasible to do so.
        One comment was received recommending that, prior to filing an 
    application, direct loan applicants should be required to take a 
    ``Homebuyers' Education'' course, similar to provisions included under 
    subpart 1980-D as a part of the GRH program. While RHCDS agrees that 
    this type of course is beneficial to potential homeowners, and, in 
    fact, is requiring homebuyers' education in association with the direct 
    loan program as a pilot initiative in a small number of states, we are 
    unable to require such a measure at this time on a nationwide basis due 
    to budgetary constraints. We encourage RHCDS loan approval officials to 
    counsel their applicants on the homebuyers' education programs 
    available to them within their communities.
        One comment was received suggesting that Sec. 1944.27(f)(1) be 
    revised to include partial participation loans when discussing other 
    credit options with applicants during the applicant interview. RHCDS 
    does not concur with this recommendation; however, it is expected that 
    loan approval officials in states with active partial participation 
    loan programs will routinely discuss participation options with 
    applicants.
        Two comments were received regarding Sec. 1944.27(b)(5) regarding 
    the use of an on-line profile credit report as one of the steps to 
    process applications. Both commenters felt that the use of on-line 
    profile credit reports have merit, but that RHCDS loan approval 
    officials should be provided with the latitude to make an eligibility 
    determination on the basis of the information contained in the profile 
    report if it contains adverse information. RHCDS does not concur with 
    this recommendation. The information contained in the profile report 
    may not be complete or accurate and, therefore, it would be 
    inappropriate and premature for the loan approval official to proceed 
    with an eligibility determination on the basis of such a report. The 
    use of profile reports is intended as a tool to assist applicants, who 
    are in the preliminary stages of the consideration process, in removing 
    any potential problems that could adversely affect them during the 
    latter stages of consideration so that their chances of obtaining RHCDS 
    credit are enhanced.
        Seven comments were in favor of the requirement that all applicants 
    will be required to submit a complete, legible copy of their most 
    recently filed Federal income tax return to verify income. Three of 
    these respondents felt that the provision requiring returns to be 
    stored in a secure place separate from the loan docket to prevent any 
    wrongful release of the tax return information is a cumbersome and 
    inconvenient requirement, with one of the commenters who objected to 
    this provision noting that RHCDS' files are already protected under the 
    Privacy Act of 1974 and, thus, are secure and not made available to the 
    public. RHCDS does not concur with the comments that the separate 
    storage of tax return information is unnecessary.
        Two of the respondents requested clarification of this provision, 
    questioning who would be responsible for the separate maintenance of 
    the returns and, further, noting that RHCDS already controls its 
    applicant files and restricts access to those files. In order to assure 
    the confidentiality of this information the Agency has determined that 
    it is necessary for field offices to store tax return information 
    separately in a locked storage facility as a result of Internal Revenue 
    Service procedures governing taxpayer information.
        One respondent recommended that RHCDS revise this provision and 
    include language to require applicants to submit a copy of their most 
    recent W-2 Form in addition to their return. RHCDS does not concur with 
    this recommendation. W-2 Forms do not necessarily contain all 
    information concerning an applicant's income. For example, certain 
    types of business income not derived through the applicant's employer 
    will not be revealed on the W-2 Form. For this reason, RHCDS believes 
    that the applicant's tax returns are a more reliable tool for RHCDS' 
    purposes and that they are a better source of comprehensive income 
    information.
        Another respondent recommended that RHCDS revise Sec. 1944.27(a)(1) 
    to indicate that a completed application will consist of Form FmHA 410-
    4, ``Application for Rural Housing Assistance (Nonfarm Tract) Uniform 
    Residential Loan application'' (hereinafter called URLA) properly 
    filled out, dated, and signed; an RHCDS form for verifying employment 
    signed by the applicant or household member for each employer, all of 
    which are available in any RECD field office; and a complete, legible 
    copy of the applicant's most recently filed income tax return. The 
    commenter suggests that this change would be consistent with the 
    language included under Sec. 1944.27(e) and industry standards. RHCDS 
    does not concur with this suggestion. RHCDS does not believe that an 
    applicant's tax return should be required to constitute a completed 
    application because a tax return is not necessary in order to make a 
    preliminary determination of eligibility for assistance. The tax return 
    is intended to be used during the application processing phase as a 
    means of verifying applicant income.
        Five comments were received on the provisions contained in the 
    proposed rule governing the issuance of a certificate of eligibility to 
    applicants. Two of the respondents were in favor of the certificate, 
    but felt that it should be issued to all eligible applicants and that 
    applicants who submit packaged applications which already contain 
    information necessary to complete a real estate appraisal should not be 
    excluded from receipt of such a certificate. RHCDS does not concur with 
    this recommendation. The certificate of eligibility provides an 
    applicant who has not submitted a contract for a house, information 
    that is necessary to 
    
    [[Page 55121]]
    complete an appraisal and the amount of loan the applicant can afford 
    based on current income and ratios. It is expected that packagers 
    participating in the program who are responsible for assisting 
    applicants in preparing applications in connection with the sale of a 
    specific house will be well familiar with the program and will advise 
    their clients of the eligibility requirements of an RHCDS loan, as well 
    as the maximum loan amount that the applicants will be able to afford. 
    Applicants who submit packaged applications in connection with the 
    information necessary to complete a real estate appraisal will be 
    provided written notice of their eligibility by the loan approval 
    official rather than the certificate of eligibility.
        Two respondents were opposed to the certificate and felt that it 
    would be a cumbersome process that would remove processing flexibility 
    from RHCDS personnel. These commenters recommended that this provision 
    be removed. RHCDS does not concur with this recommendation. RHCDS 
    believes that the certificate of eligibility is a better method of 
    providing applicants with information concerning their loan repayment 
    and affordability limits. The certificate is designed to provide 
    information tailored to each individual applicant.
        One respondent expressed concern over the certificate of 
    eligibility in terms of the provisions that allow a maximum of two 60-
    day extensions to applicants if they are unable to provide the 
    information needed to complete a real estate appraisal within 90 days, 
    but satisfactorily demonstrate to RHCDS that they are actively working 
    on compiling the information requested. The commenter recommended that 
    the provisions authoring extensions be removed. RHCDS does not concur 
    with this request. The Agency's requirements governing the suitability 
    of dwellings to be financed under the program have been substantially 
    revised to provide applicants greater flexibility in locating 
    appropriate housing. Because RHCDS' property requirements are more 
    relaxed under the new guidelines, extensions to prolong the viability 
    of certificates of eligibility should not be necessary on a frequent 
    basis, and we expect that loan approval officials will exercise this 
    authority only under very limited circumstances.
    
    Proposed Rule Published on January 6, 1993
    
        Twelve comments were received from a variety of sources on this 
    proposed rule, including six RHCDS employees. This rule proposed 
    changes to eligibility restrictions, determination of annual income and 
    payment assistance, and loan processing and servicing procedures.
        The following changes were made in the final rule due to the 
    comments received: (1) Earned income tax credits will be excluded in 
    the determination of annual income; (2) income exempted by Federal 
    statutes cannot be used to withhold an applicant's eligibility for 
    assistance; (3) Income exclusion for Nazi victims has been included in 
    this final rule; (4) The requirement that RHCDS post the selected Rural 
    Housing applicants' names has been eliminated; (5) RHCDS's applicants 
    are to submit Federal income tax returns as part of a completed loan 
    application; and (6) revisions to the payment assistance regulation 
    have been made.
        All comments submitted with respect to this proposed rule were 
    given due consideration and are discussed further in the following 
    paragraphs:
        One commenter indicated that the definition of income in 
    Sec. 1944.5(f)(3) needs to be revised in accordance with section 479B 
    of the Higher Education Technical Amendments of 1987, Public Law 100-
    50, Act, as well as the changes required in Section 103 of the Housing 
    and Community Development Act of 1992, Public Law 102-550. RHCDS agrees 
    with this and has adopted the changes as final rule. This policy is 
    consistent with current HUD regulations.
        Regarding Sec. 1944.5(e)(8) on earned income tax credit, section 
    11111(b) of the Omnibus Budget Reconciliation Act of 1990, Public Law 
    101-508, provided that the earned income tax credit may not be treated 
    as income for purposes of title V of the Housing Act of 1949. One 
    comment was received from an RHCDS employee. The employee supported the 
    elimination of Earned Income Tax Credit as income because it caused the 
    field offices to estimate earned income. This section excludes treating 
    any earned income tax credit as income and is being adopted as a final 
    rule.
        Referencing Sec. 1944.5(e)(7) on income exclusion for Nazi victims, 
    Public Law 103-286, August 1, 1994, provided that payments made to 
    individuals because of their status as victims of Nazi persecution must 
    be disregarded in determining eligibility for and the amount of 
    benefits under any federally assisted program which provides benefits 
    or services based, in whole or in part, on need. We are therefore, 
    adopting and including this exclusion in the final rule.
        Of the three comments received regarding removing the posting of 
    selected applicants' names on RECD field office bulletin boards, the 
    majority of commenters supported the provision as proposed. One 
    commenter stated loan officers can simply refer applicants to real 
    estate brokers and contractors when the applicants are informed of 
    their selection for processing. Two commenters supported the proposal, 
    but expressed concern about the unavailability of services. They felt 
    that the instruction should be revised to provide notice to the public 
    that applicants, or their representative, upon request, may obtain a 
    list of such applicants, including date of application and priority 
    listed. Under the Freedom of Information Act (FOIA) as interpreted in 
    United States Department of Justice v. Reporters Committee for Freedom 
    of the Press, 489 U.S. 749 (1989), RHCDS applicants have a right to 
    privacy and publication of names of related RHCDS selected applicants 
    who must have low- or very low- income violates this right.
        The payment assistance regulation under Sec. 1944.34 is being 
    updated and discrepancies with previously published regulations are 
    removed in the final rule. Revisions to the payment assistance 
    regulation are made to: (1) Provide a method for the verification of 
    income from sources other than employment to make verification of 
    miscellaneous income easier for the RHCDS personnel; (2) allow existing 
    borrowers whose incomes have risen above the Department of Housing and 
    Urban Development's yearly published low income levels to continue to 
    receive payment assistance; (3) revise the effective period of the 
    payment assistance agreement in situations where the borrower is 
    unemployed; (4) ensure that the Agency handles a reduction in income 
    consistently between the servicing regulations and the payment 
    assistance regulation; and (5) remove the provision for canceling 
    payment assistance benefits to a family that improved its property 
    beyond what is considered to be modest for the area.
        The following material discusses the amendments to payment 
    assistance by sections:
        Of the three comments received on Sec. 1951.313(f) regarding the 
    cancellation of payment assistance agreements (reasons for 
    cancellation), all commenters requested clarification regarding 
    cancellation of payment assistance agreements when a borrower is living 
    in a nursing home, but the borrower's household goods remain in their 
    dwelling financed by RHCDS. Several commenters pointed out that 
    sometimes a stay in a nursing home or other care facility is temporary. 
    One commenter stated that non-occupancy should be defined. RHCDS has 
    analyzed 
    
    [[Page 55122]]
    all comments received on this proposal and based on that analysis and 
    its own review, we are providing additional guidance as follows: (1) 
    While nursing homes and specialized care facilities are considered full 
    time residences, only indefinite and prolonged stays should be 
    considered as non-occupancy of the dwelling. A short term or 
    specifically limited stay at full-care facilities that does not exceed 
    6 months, such as when an individual is recuperating from a serious 
    accident or illness, should not be grounds for terminating payment 
    assistance. If the stay at a special facility exceeds 6 months, the 
    borrower must supply appropriate medical documentation to support this 
    situation.
        Section 1951.313(f)(1) on indicators of non-occupancy is being 
    amended to state that the primary indicators of non-occupancy are when 
    the borrower and his or her household belongings are absent from the 
    property and the borrower fails to maintain the property or to arrange 
    for its care. Several comments were received on the various indicators 
    of non-occupancy and clarification was requested. In listing various 
    indicators of non-occupancy, it was intended that the loan approval 
    official should consider the circumstances and obtain information, as 
    needed, to determine the appropriate action.
        One comment was received on Sec. 1951.313(f)(3) concerning a 
    borrower who provides fraudulent or materially inaccurate financial 
    information in connection with a payment assistance application/
    renewal. The commenter recommended that this provision be eliminated 
    because it conflicts with existing regulations (7 CFR section 
    1951.608(b)(2) of subpart M of part 1951) and because it grants RHCDS 
    staff too much discretion in determining when information is materially 
    inaccurate or fraudulently provided. RHCDS disagrees and we are not 
    amending this section. The Departmental appeals procedure will provide 
    for a review of the materiality of inaccurate or fraudulently provided 
    information.
    
    Other Affected Regulations
    
        Due to the revisions in the final rule to subpart A of part 1944, 
    conforming changes were necessary to the following regulations as 
    noted.
    
    List of Subjects in 7 CFR Parts 1900, 1910, 1924, 1940, 1944, 1950, 
    1951, 1955, and 1965
    
        Loan programs--Agriculture, Loan programs--Housing and community 
    development, Low and moderate income housing, Rural areas.
        Therefore, chapter XVIII, title 7, Code of Federal Regulations, is 
    amended as follows:
        1. The authority citation for parts 1900, 1950, 1951, 1955, and 
    1965 is revised to read as follows:
    
        Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.
    
    CHAPTER XVIII--[AMENDED]
    
        2. 7 CFR chapter XVIII is amended by removing the words ``interest 
    credit'' and adding in their place, the words ``payment assistance'', 
    in the following places:
        a. Sec. 1950.105(c)
        b. Sec. 1965.26(c)(2) introductory text
        c. Sec. 1965.26(c)(3) (2 times)
    
    
    Sec. 1955.66  [Amended]
    
        3. Section 1955.66(e)(2) is amended by removing the words 
    ``interest credits'' and adding in their place, the words ``payment 
    assistance''.
        4. Section 1900.52(l) is added to read as follows:
    
    
    Sec. 1900.52  Definitions.
    
    * * * * *
        (l) Interest credit. The terms ``interest credit'' and ``interest 
    credit assistance,'' as they relate to Single Family Housing (SFH), are 
    interchangeable with the term ``payment assistance.'' Payment 
    assistance is the generic term for the subsidy provided to eligible SFH 
    borrowers to reduce mortgage payments.
    
    PART 1910--GENERAL
    
        5. The authority citation for part 1910 continues to read as 
    follows:
    
        Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.
    
    Subpart A--Receiving and Processing Applications
    
        6. Section 1910.1(d) is added to read as follows:
    
    
    Sec. 1910.1  General.
    
    * * * * *
        (d) The terms ``interest credit'' and ``interest credit 
    assistance,'' as they relate to Single Family Housing (SFH), are 
    interchangeable with the term ``payment assistance.'' Payment 
    assistance is the generic term for the subsidy provided to eligible SFH 
    borrowers to reduce mortgage payments.
        7. Section 1910.4(a) is revised to read as follows:
    
    
    Sec. 1910.4  Processing applications.
    
    * * * * *
        (a) Completed RH applications. Completed applications are those as 
    described in Sec. 1944.27 (copies available in any RECD office), and 
    all applications for Rural Housing loans will be processed as outlined 
    in that instruction.
    * * * * *
        8. Section 1910.5 is amended in paragraph (c)(6) by revising the 
    reference ``Sec. 1944.4(c)'' to read ``Sec. 1944.9,'' and revising 
    ``FmHA or its successor agency under Public Law 103-354'' to read 
    ``CFSA or RHCDS,'' and by adding paragraph (e) to read as follows:.
    
    
    Sec. 1910.5  Evaluating applications.
    
    * * * * *
        (e) Delinquency on a Federal debt. The Department of Housing and 
    Urban Development Credit Alert Interactive Voice Response System 
    (CAIVRS) will be used to help determine if an applicant is delinquent 
    on any Federal debt.
    
    
    Sec. 1910.6  [Amended]
    
        9. Section 1910.6 is amended in the first sentence of paragraph (g) 
    introductory by revising the words ``Rural Housing'' to read ``RH'' and 
    by revising the reference ``Sec. 1944.26'' to read ``Sec. 1944.27,'' by 
    revising the words ``section 41'' to ``section 44'' in the second 
    sentence of paragraph (g)(1) and by revising the words ``section 41 of 
    Form FmHA'' to read ``section 44 of Form FmHA 1940-1;'' in paragraph 
    (j).
    
    PART 1924--CONSTRUCTION AND REPAIR
    
        10. The authority citation for part 1924 continues to read as 
    follows:
    
        Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.
    
    Subpart A--Planning and Performing Construction and Other 
    Development
    
    
    Sec. 1924.6   [Amended]
    
        11. Section 1924.6(c) introductory text is amended in the first 
    sentence by removing the words ``Exhibit E of.''
    
    
    Sec. 1924.9   [Amended]
    
        12. Section 1924.9(a) is amended in the second sentence by revising 
    the references ``Sec. 1944.17(a)(2)(iv)'' to read 
    ``Sec. 1944.17(a)(2)(iii)'' and ``subpart A of part 2024 of this 
    chapter (available in any FmHA or its successor agency under Public Law 
    103-354 office)'' to read ``FmHA Instruction 2024-A (available in any 
    RECD field office),'' and by revising ``FmHA'' to read ``RHCDS'' in the 
    fourth and sixth (2 places) sentences.
    
    PART 1940--GENERAL
    
        13. The authority citation for part 1940 is revised to read as 
    follows:
    
    
    [[Page 55123]]
    
        Authority: 5 U.S.C. 301; 7 U.S.C. 1989; and 42 U.S.C. 1480.
    
    Subpart I--Truth in Lending--Real Estate Settlement Procedures
    
    
    Sec. 1940.401   [Amended]
    
        14. Section 1940.401(c)(3)(ii) is amended by revising the reference 
    ``Sec. 1951.314'' to ``Sec. 1951.315.''
    
    Subpart S--Accountability Requirements of Persons Paid To Influence 
    the Making of an FmHA Housing Loan and/or Grant
    
        15. Section 1940.903 is amended by removing the definitions of 
    ``FmHA'' and ``FmHA housing loan and/or grant'' by adding new 
    definitions of ``Interest Credit'' and ``RHCDS housing loan and/or 
    grant'' in alphabetical order to read as follows:
    
    
    Sec. 1940.903   Definitions
    
    * * * * *
        Interest credit. The terms ``interest credit'' and ``interest 
    credit assistance,'' as they relate to Single Family Housing (SFH), are 
    interchangeable with the term ``payment assistance.'' Payment 
    assistance is the generic term for the subsidy provided to eligible SFH 
    borrowers to reduce mortgage payments.
    * * * * *
        RHCDS housing loan and/or grant. Any loan: insured; direct or 
    guaranteed, made pursuant to the Housing Act of 1949, as amended. The 
    term includes rental assistance (RA) and interest credits. The term 
    does not include contracts, such as procurement contracts, which are 
    subject to the Federal Acquisition Regulation (FAR).
    * * * * *
    
    PART 1944--HOUSING
    
        16. The authority citation for Part 1944 is revised to read as 
    follows:
    
        Authority: 5 U.S.C. 301, 7 U.S.C. 1989, and 42 U.S.C. 1480.
    
        17. Subpart A of part 1944 is revised to read as follows:
    Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and 
    Authorizations
    Sec.
    1944.1  General.
    1944.2  Definitions.
    1944.3  Loan purposes.
    1944.4  Loan restrictions.
    1944.5  Annual income.
    1944.6  Adjusted annual income.
    1944.7  [Reserved]
    1944.8  Income eligibility requirements.
    1944.9  Other eligibility requirements.
    1944.10  Rural area designation.
    1944.11  Site requirements.
    1944.12  Environmental requirements.
    1944.13  National flood insurance.
    1944.14  [Reserved]
    1944.15  Ownership requirements.
    1944.16  Dwelling requirements.
    1944.17  Maximum loan amounts.
    1944.18  Security requirements.
    1944.19-1944.21  [Reserved]
    1944.22  Refinancing non-RHCDS debts.
    1944.23  [Reserved]
    1944.24  Technical services.
    1944.25  Rates and terms.
    1944.26  Fund allocation.
    1944.27  Application processing.
    1944.28-1944.30  [Reserved]
    1944.31  Loan approval.
    1944.32  [Reserved]
    1944.33  Loan closing.
    1944.34  Payment assistance.
    1944.35  Deferred mortgage payments.
    1944.36  [Reserved]
    1944.37  Subsequent section 502 RH loans.
    1944.38  Mutual Self-Help Housing loans.
    1944.39  RH loans to RHCDS employees and loan closing officials.
    1944.40  [Reserved]
    1944.41  Housing demonstration programs.
    1944.42  Condominium and community land trust requirements.
    1944.43  [Reserved]
    1944.44  Borrower graduation.
    1944.45  Conditional commitments.
    1944.46  Appeals.
    1944.47-1944.48  [Reserved]
    1944.49  Administrative instructions.
    1944.50  OMB control number.
    
    PART 1944--HOUSING
    
    Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and 
    Authorizations
    
    
    Sec. 1944.1   General.
    
        This subpart sets forth the policies and procedures and delegates 
    authority for making section 502 Rural Housing (RH) loans to 
    individuals under section 502 of title V of the Housing Act of 1949, as 
    amended. The objective of section 502 RH loans is to provide eligible 
    persons who will live in rural areas with an opportunity to own 
    adequate but modest, decent, safe, and sanitary dwellings and related 
    facilities. The requirements of subpart E of part 1901 will be applied 
    as appropriate. Loans and services provided under this subpart shall 
    not be denied to any person or applicant based on race, sex, national 
    origin, color, religion, marital status, familial status, age, physical 
    or mental disability (applicant must possess the capacity to enter into 
    a legal contract for services or have a court appointed guardian or 
    conservator empowered to obligate the applicant in real estate 
    matters), receipt of income from public assistance, or because the 
    applicant or borrower has, in good faith, exercised any right under the 
    Consumer Credit Protection Act, 15 U.S.C. Sec. 1601 et seq.
        (a) In compliance with the Fair Housing Act as amended and the 
    Americans with Disabilities Act of 1990, reasonable accommodation must 
    be given to individuals who are developmentally disabled so that they 
    have the opportunity to become successful homeowners. When an applicant 
    or an applicant's representative indicates the existence of a 
    disability during the loan process, e.g., by requesting the Rural 
    Housing and Community Development Service (RHCDS) disability deduction 
    to income due to mental or physical disability or through verification 
    of income from a Federal or state government source because of mental 
    or physical disability, RHCDS must ask the applicant or the applicant's 
    representative what reasonable accommodation should be made in order 
    for the loan to be processed. The reasonable accommodation request must 
    be provided to RHCDS by the applicant or the applicant's 
    representative. Reasonable accommodation can include allowing a court 
    appointed guardian or conservator to execute appropriate loan making 
    and loan closing documents on behalf of the applicant; the court order 
    must show that the guardian or conservator has the power and 
    responsibility to obligate the applicant in real estate matters and a 
    copy of the court order must be made a part of the loan docket.
        (b) Any processing or servicing activity conducted pursuant to this 
    subpart involving authorized assistance to RHCDS employees, members of 
    their families, known close relatives, or business or close personal 
    associates, is subject to the provisions of subpart D of part 1900. 
    Applicants for this assistance are required to identify any known 
    relationship or association with an RHCDS employee.
        (c) RHCDS will collect fees for credit reports, real estate 
    appraisals, and conditional commitment applications when appropriate. 
    RHCDS may use its own employees or other agents or institutions in 
    carrying out its responsibilities under this subpart.
    
    
    Sec. 1944.2  Definitions.
    
        The following definitions apply to this subpart:
        Annual payment borrowers. Borrowers who signed promissory notes 
    providing for annual payments, including borrowers converted to monthly 
    payments through the use of Form FmHA 1951-34, ``Direct Payment Plan 
    Change.''
        Certificate of Eligibility. Certificate issued by RHCDS to 
    applicants who have received a final determination of 
    
    [[Page 55124]]
    eligibility after verification of all income. Applicants can present 
    this to real estate agents, builders, and sellers to indicate their 
    eligibility for an RH loan in the amount set forth on the certificate.
        Conditional commitment. Assurance from RHCDS, in exchange for a 
    specific fee, to an owner, qualified builder, or dealer-contractor that 
    a dwelling offered for sale will be acceptable for purchase by a 
    qualified RH loan applicant under specified limited conditions.
        Cosigner. A party who joins in the execution of a promissory note 
    to compensate for any deficiency in the borrower's repayment ability. 
    The cosigner becomes jointly liable to comply with the terms of the 
    note in the event of the borrower's default, but is not entitled to any 
    interest in the security or borrower rights. If the security is 
    transferred to the cosigner, the cosigner may assume the RHCDS 
    indebtedness on program or nonprogram (NP) terms, as applicable.
        Deficient housing. A dwelling which meets one or more of the 
    following conditions:
        (1) Lacks complete plumbing; i.e. no bathtub or shower, wash basin, 
    flush toilet, or hot running water for the exclusive use of the 
    occupant;
        (2) Lacks adequate heating;
        (3) Is physically deteriorated or structurally unsound; i.e. roof 
    leaks, falling plaster or sheetrock, extensive termite or wood rot 
    damage, dangerous electrical service; or
        (4) Overcrowding situations which will be corrected after loan 
    closing; i.e., more than 2 persons per bedroom.
        Elderly family. An elderly family consists of one of the following:
        (1) A person who is the head, spouse, or sole member of a family 
    and who is 62 years of age or older, or who is disabled, and is the 
    applicant or borrower or the coapplicant or coborrower; or
        (2) Two or more persons who are living together, at least one of 
    whom is age 62 or older, or disabled, and who is the applicant or 
    borrower or coapplicant or coborrower; or
        (3) In the case of a family where the deceased borrower, 
    coborrower, or spouse, was at least 62 years old, or disabled, the 
    surviving household member shall continue to be classified as an 
    ``elderly family'' for the purpose of determining adjusted income even 
    though the surviving members may not meet the definition of elderly 
    family on their own, provided:
        (i) They occupied the dwelling with the deceased family member at 
    the time of the death; and
        (ii) If one of the surviving family members is the spouse of the 
    deceased family member, the surviving family shall be classified as an 
    elderly family only until the remarriage of the surviving spouse; and
        (iii) At the time of the death of the deceased family member, the 
    dwelling was financed under title V of the Housing Act of 1949.
        Equivalent interest rate. The interest rate charged under payment 
    assistance. It is determined by a comparison of the borrower's adjusted 
    annual income to the median income for the area where the security 
    property is located, based on income figures published by the 
    Department of Housing and Urban Development (HUD) as reflected in 
    exhibit C (available in any RECD field office).
        Existing dwelling. A dwelling which is:
        (1) More than 1 year old; or
        (2) Less than 1 year old but the dwelling is covered by an approved 
    10-year warranty plan as described in subpart A of part 1924 and the 
    contractor provides complete plans and specifications, together with a 
    certification that construction was completed in compliance with said 
    plans and specifications, applicable building codes, and thermal 
    performance standards (TPS) for new construction. In addition, the 
    contractor must provide evidence that the contractor meets any 
    licensing requirements in the state and is an approved builder in good 
    standing under the approved 10-year warranty plan.
        Extended family. A family unit comprised of adult relatives who 
    live together with the other members of the household, for reasons of 
    physical dependency, economics, or social custom, who, under other 
    circumstances, could maintain separate households. An example would be 
    parents living with their adult children.
        Farm. Includes the total acreage of one or more tracts of land 
    which:
        (1) Is owned by the applicant;
        (2) Is operated as a single unit;
        (3) Is in agricultural production; and
        (4) Annually will produce agricultural commodities for sale and 
    home use with a gross annual value equivalent to $400 in 1944.
        Floor. A minimum percentage of adjusted family income which the 
    borrower must pay for principal, interest, taxes and insurance.
        Full-time student. A person who is carrying a subject load that is 
    considered full-time for day students (excluding correspondence 
    courses) under the standards and practices of the educational 
    institution attended. An educational institution includes a vocational 
    school with a diploma or certificate program, as well as an institution 
    offering a college degree.
        Homeowners association. An association of individual unit owners 
    that is responsible for the common property and improvements for the 
    benefit of all the individual owners, and enforcement of the 
    organization's rules and regulations.
        Household or family. The applicant, coapplicant, and all other 
    persons who will make the applicant's dwelling their primary residence 
    for all or part of the next 12 months (excluding foster children placed 
    in the home and live-in aides). Children who are members of the family, 
    but have been removed and placed in foster care, will be counted as 
    residents of the household. Children who are subject to a joint custody 
    agreement and live in the unit at least 50 percent of the time are 
    considered to be household members.
        HUD. The Department of Housing and Urban Development.
        Income. Income limits, the definitions of which are included below 
    in order from the lowest to the highest are contained in exhibit C 
    (available in any RECD office).
        (1) Very low-income. An adjusted annual income that does not exceed 
    the very low-income limit according to size of household as established 
    by HUD for the county or MSA where the property is or will be located.
        (2) Low-income. An adjusted annual income greater than the very 
    low-income limit but that does not exceed the low income limit 
    according to size of household as established by HUD for the county or 
    MSA where the property is or will be located.
        (3) Moderate-income. An adjusted annual income greater than the 
    low-income limit but that does not exceed the maximum limit for 
    moderate-income households.
        (4) Above moderate-income. An adjusted annual income that exceeds 
    the maximum limit for moderate-income households.
        Insurance. The insurance required by RHCDS as a condition of loan 
    approval, including homeowners insurance, fire and extended coverage 
    insurance including flood insurance, when applicable.
        Insured warranty. Plan which offers new homeowners varying degrees 
    of protection against builder default or major structural defects in 
    their home.
        Live-in aides. Persons living in the household for the sole purpose 
    of providing essential care and well being for an elderly, or household 
    member 
    
    [[Page 55125]]
    who is disabled. Live-in aides cannot be related to a household member 
    and would not be living in the unit except to provide essential 
    supportive services.
        Market value. For the purposes of this instruction, market value is 
    defined as the appraised value of the property as improved.
        Median income. An adjusted median annual income for the size of 
    household as established by HUD for the county or MSA where the 
    property is or will be located.
        Metropolitan Statistical Area (MSA). MSAs are defined according to 
    a set of detailed standards prepared by the Federal Committee on MSAs. 
    An area qualifies as an MSA if it contains a city of at least 50,000 
    population or an urbanized area of at least 50,000 with a total 
    metropolitan population of at least 100,000. MSAs are defined in terms 
    of entire counties, except in the six New England States where they are 
    defined in terms of cities and towns. An MSA may also include 
    additional counties having strong economic and social ties to the 
    central county. The term Standard Metropolitan Statistical Area (SMSA) 
    was in use prior to the June 30, 1983, effective date of the MSA 
    terminology.
        Minor. For the purposes of determining adjusted annual income, this 
    definition is restricted to persons under 18 years of age. Neither the 
    head of household nor spouse may be counted as a minor. Foster children 
    are not counted as minors for determining annual or adjusted annual 
    income.
        Monthly payment borrowers. Borrowers who signed promissory notes 
    providing for payment of monthly installments.
        MSA. Metropolitan Statistical Area.
        Net family assets. Include:
        (1) The value of equity in real property (other than the dwelling 
    or site); cash on hand; savings; checking accounts; demand deposits; 
    and the market value of stocks, bonds, and other forms of capital 
    investments, including voluntary retirement plans that are accessible 
    to the applicant such as individual retirement accounts (IRAs), 401(k) 
    plans, and Keogh accounts, as well as amounts that can be withdrawn 
    from other retirement and pension funds without retiring or terminating 
    employment, but exclude:
        (i) Interests in American Indian trust land,
        (ii) Cash on hand which will be used to reduce the amount of the 
    loan,
        (iii) The value of necessary items of personal property such as 
    furniture and automobile,
        (iv) The assets that are a part of the business, trade, or farming 
    operation in the case of any member of the household who is actively 
    engaged in such operation, and
        (v) The value of a trust fund that has been established where the 
    trust is not revocable by, or under the control of, any member of the 
    household, so long as the fund continues to be held in trust.
        (2) The value of any business or household assets disposed of by a 
    member of the household for less than fair market value (including 
    disposition in trust, but not in a foreclosure or bankruptcy sale) 
    during the 2 years preceding the date of application, in excess of the 
    consideration received therefore. In the case of a disposition as part 
    of a separation or divorce settlement, the disposition shall not be 
    considered to be for less than fair market value if the household 
    member receives important consideration not measurable in dollar terms.
        Nonfarm tract. A parcel of land that is not a farm and is located 
    in a rural area, or a building site that is part of a farm, and which 
    secures an RH loan in accordance with Sec. 1944.18(b)(10).
        Payment assistance. The generic term for the subsidy provided to 
    eligible borrowers to reduce mortgage payments. This term is used 
    interchangeably with the terms ``interest credit,'' ``interest credit 
    assistance,'' and ``payment assistance in the form of interest 
    credit.''
        Participation loan. A loan that is made by another lender in 
    conjunction and simultaneously with a loan made under this part.
        Person with a disability. A person who is unable to engage in any 
    substantially gainful activity by reason of any medically determinable 
    physical or mental impairment expected to result in death or which: is 
    expected to be of long or indefinite duration; substantially impede his 
    or her ability to live independently; and is of such a nature that the 
    person's ability to live independently could be improved by more 
    suitable housing conditions. In the case of an individual who has 
    attained the age of 55 and is blind, disability is defined as inability 
    by reason of such blindness to engage in any substantially gainful 
    activity requiring skills or abilities comparable to those of any 
    gainful activity in which the individual has previously engaged with 
    some regularity over a substantial period of time. Receipt of veteran's 
    benefits for disability, whether service-oriented or otherwise, does 
    not automatically establish disability. A person with a disability also 
    includes a person with a developmental disability. A developmental 
    disability means a severe, chronic disability of a person which:
        (1) Is attributable to a mental or physical impairment or 
    combination of mental and physical impairments;
        (2) Is manifested before the person attains age 22;
        (3) Is likely to continue indefinitely;
        (4) Results in substantial functional limitations in three or more 
    of the following areas of major life activity:
        (i) Self-care,
        (ii) Receptive and expressive language,
        (iii) Learning,
        (iv) Mobility,
        (v) Self-direction,
        (vi) Capacity for independent living, or
        (vii) Economic self-sufficiency; and
        (5) Reflects the person's need for a combination and sequence of 
    special care, treatment, or other services which are of lifelong or 
    extended duration, and are individually planned and coordinated.
        Place. An area containing a concentration of inhabitants within a 
    determinable unincorporated area.
        Real estate taxes. The amount of real taxes and the annual portion 
    of assessments estimated to be due and payable on the dwelling and the 
    dwelling site, reduced by the amount of any tax exemption available to 
    the borrower, regardless of whether such an exemption is actually 
    claimed. Tax exemptions may include such things as homestead 
    exemptions, special exemptions for low-income families, senior 
    citizens, veterans, and others.
        Rehabilitation. Major repairs and improvements to existing 
    dwellings such as the installation or completion of bathroom 
    facilities, installation of major items of equipment, additions, or 
    structural changes.
        RHCDS. Rural Housing and Community Development Service.
        Senior citizen. Is a person who is 62 years of age or older.
        Town. Is a municipality similar to a city but does not include a 
    New England-type town which resembles a township or county in most 
    states.
        Urban area. Either a town, village, city, place, or any associated 
    combination thereof which, with the immediately adjacent densely 
    settled areas, has a population in excess of the limits prescribed in 
    Sec. 1944.10(a)(2) (i) and (ii).
    
    
    Sec. 1944.3  Loan purposes.
    
        (a) A loan may be made to an eligible applicant for the following 
    purposes:
        (1) To buy, build, rehabilitate, improve, or relocate a dwelling 
    and provide related facilities for use by the applicant as a permanent 
    residence;
        (2) To buy, build, rehabilitate, improve, or relocate a dwelling, 
    and 
    
    [[Page 55126]]
    provide related facilities for a farm owner to provide housing to be 
    occupied by the farm manager, tenants, sharecroppers, or farm laborers; 
    and
        (3) To refinance secured debts or unsecured debts as provided in 
    Sec. 1944.22, except the Agency will not refinance debts for 
    manufactured homes;
        (b) A loan made under paragraph (a) (1) or (2) of this section may 
    be used to:
        (1) Purchase, in fee title, a minimum adequate site, as outlined in 
    Sec. 1944.11 on which the improvements are or will be located, if the 
    applicant does not own an adequate site;
        (2) Pay reasonable acquisition costs for a leasehold interest in a 
    minimum adequate site at the time of making the initial RH loan;
        (3) Provide an adequate and safe water supply or an adequate 
    wastewater disposal facility;
        (4) Provide site preparation, including grading, foundation 
    plantings, seeding or sodding of lawns, trees, walks, yard fences, and 
    driveways to building sites;
        (5) Purchase and install essential equipment in the dwelling 
    including items such as a range, refrigerator, clothes washer or 
    clothes dryer, if these items are normally sold with dwellings in the 
    area, and if purchase of these items is not the primary purpose of the 
    loan;
        (6) Provide special design features or equipment when necessary 
    because of physical disability of the applicant or of a member of the 
    household;
        (7) Purchase and install approved energy saving measures and 
    approved furnaces and space heaters which use a type of fuel that is 
    commonly used, and is economical and dependably available;
        (8) Provide storm cellars and similar protective structures;
        (9) Pay incidental expenses such as legal fees, costs of title 
    clearance, and loan closing services; appraisal, surveying, 
    environmental, and tax monitoring; personal liability insurance fees 
    for self-help housing applicants; and incidental expenses authorized in 
    exhibit G (available in any RECD field office);
        (10) Pay lender charges and fees in connection with participation 
    loans, (except as provided in Sec. 1944.4), provided they are the same 
    as those charged other applicants for similar types of transactions;
        (11) Pay reasonable connection fees for utilities such as water, 
    sewer, electricity, and gas, which are required to be paid by the 
    applicant and which cannot be paid from other funds;
        (12) Pay the applicant's share of Social Security taxes and similar 
    taxes for labor hired by the applicant in connection with making the 
    planned improvements;
        (13) Pay real estate taxes which are due and payable on the 
    building and site owned by the applicant at the time of closing an 
    initial loan, if this amount is not a part of the loan;
        (14) Establish escrow accounts for the payment of real estate taxes 
    and property insurance premiums in those states where the use of escrow 
    accounts is authorized by the National office;
        (15) Provide living area for all members of the applicant's 
    household, including ``extended family;''
        (16) Finance the purchase of single family housing units located in 
    a condominium development, community land trust, or planned unit 
    development with a homeowners association. If professional management 
    is employed (prior National office approval is required);
        (17) Pay fees for the development and packaging of loan 
    applications and related actions to public and private nonprofit 
    organizations which are tax exempt under the Internal Revenue Code of 
    1986 (except when restricted under Sec. 1944.4) when:
        (i) The loan has been packaged in accordance with exhibit A 
    (available in any RECD field office) and the limitations of 
    Sec. 1944.17; and
        (ii) The charges are reasonable considering:
        (A) The amount and purpose of the assistance;
        (B) The repayment ability of the recipient; and
        (C) The cost of similar services in the same or a similar rural 
    area.
        (iii) The State Director may issue a State Supplement outlining 
    what is considered a reasonable amount for the jurisdiction. In no case 
    may the amount exceed that found in exhibit B of subpart B of part 1944 
    (available in any RECD office).
    
    
    Sec. 1944.4  Loan restrictions.
    
        Loan funds may not be used to:
        (a) Make a new loan to pay off existing RHCDS debts in lieu of a 
    transfer with assumption.
        (b) Refinance:
        (1) RHCDS debts, except as authorized under Sec. 1951.316.
        (2) Debts on a manufactured home.
        (c) Purchase or improve income-producing land, or buildings to be 
    used principally for income-producing purposes, or buildings not 
    essential for RH purposes, or buy or build buildings which are either 
    largely, or in part, specifically designed to accommodate a business or 
    income-producing enterprise. (Home based operations such as child care, 
    home/beauty product sales, the production of crafts, etc., that do not 
    require specifically designed features to accommodate the enterprise, 
    are not restricted under this subpart; however, housing related 
    expenses such as mortgage interest, real estate taxes, and insurance, 
    which may be claimed as business expense deductions for income tax 
    purposes, will not be allowed when determining annual income for RHCDS 
    assistance.)
        (d) Pay fees, charges, or commissions, such as finders' fees, fees 
    for packaging the application (except as provided in Sec. 1944.3), or 
    placement fees for the referral of a prospective applicant to RHCDS.
        (e) Pay packaging fees (as provided under Sec. 1944.3) for the 
    purchase of an RHCDS inventory property or where the packager is 
    receiving a grant under subpart B of part 1944.
        (f) Improve the entry of a homestead entryman or desert entryman 
    prior to receipt of patent.
        (g) Finance manufactured homes which are not constructed and 
    installed in accordance with exhibit F of this subpart and exhibit J of 
    subpart A of part 1924. (Both exhibits are available in any RECD field 
    office.)
    
    
    Sec. 1944.5  Annual income.
    
        Annual income determinations will be thoroughly documented in the 
    case file. Historical data based on the past 12 months or last fiscal 
    year may be used if a determination of expected income cannot logically 
    be made. Annual income will be calculated as follows:
        (a) Current verified income, either part-time or full-time, 
    received by the applicant and all adult members of the household 
    including the spouse is derived by multiplying:
        (1) An hourly wage by 2080 hours (for part-time employment use 
    anticipated annual hours); or
        (2) A weekly wage by 52 weeks; or
        (3) A biweekly wage by 26 weeks; or
        (4) A monthly wage by 12 months or a bimonthly wage by 24 pay 
    periods.
        (b) If the spouse or any other adult member of the household is not 
    presently employed but there is a recent history of such employment, 
    that person's income will be projected unless the applicant or the 
    person involved signs a statement that the person is not presently 
    employed and does not intend to resume employment in the foreseeable 
    future, or, if payment assistance is involved, during the term of the 
    payment assistance agreement.
        (c) Income from such sources as seasonal work of less than 12 
    months duration, commissions, overtime, bonuses, and unemployment 
    compensation will be computed as the 
    
    [[Page 55127]]
    estimated annual amount of such income for the ensuing 12 months. 
    Temporary income such as unemployment benefits, worker's compensation, 
    etc., will be projected over 12 months when computing payment 
    assistance on an annual basis. Historical data based on the past 12 
    months may be used if a determination of expected income cannot 
    logically be made.
        (d) The following are included in annual income:
        (1) The gross amount, before any payroll deductions, of wages and 
    salaries, overtime pay, commissions, fees, tips, bonuses, and other 
    compensations for personal services of all adult members of the 
    household. If a cost of living allowance or a proposed increase in 
    income has been estimated to take place on or before loan approval, 
    loan closing, or the effective date of the payment assistance 
    agreement, it will be included as income.
        (2) The net income from the operation of a farm, business, or 
    profession. The following provisions apply:
        (i) Expenditures for business or farm expansion, capital 
    improvements, or payments of principal on capital indebtedness shall 
    not be used as deductions in determining income. A deduction is allowed 
    in the manner prescribed by Internal Revenue Service (IRS) regulations 
    only for interest paid in amortizing capital indebtedness.
        (ii) Farm and nonfarm business losses are considered ``0'' in 
    determining annual income.
        (iii) A deduction, based on straight line depreciation, is allowed 
    in the manner prescribed by IRS regulations for the exhaustion, wear 
    and tear, and obsolescence of depreciable property used in the 
    operation of a trade, farm, or business by a member of the household. 
    The deduction must be based on an itemized schedule showing the amount 
    of straight line depreciation.
        (iv) Any withdrawal of cash or assets from the operation of a farm, 
    business, or profession will be included in income, except to the 
    extent the withdrawal is reimbursement of cash or assets invested in 
    the operation by a member of the household.
        (v) A deduction is allowed for verified business expenses, such as 
    lodging, meals, and fuel, for business trips made by salaried 
    employees, such as long-distance truck drivers, who must meet these 
    expenses without reimbursement.
        (vi) Housing related expenses for the property being financed such 
    as mortgage interest, real estate taxes, and insurance, which may be 
    claimed as business expense deductions for income tax purposes, will 
    not be deducted from annual income.
        (3) Interest, dividends, and other net income of any kind from real 
    or personal property, including:
        (i) The share received by adult members of the household from 
    income distributed from a trust fund.
        (ii) Any withdrawal of cash or assets from an investment except to 
    the extent the withdrawal is reimbursement of cash or assets invested 
    by a member of the household.
        (iii) Where the household has net family assets, as defined in 
    Sec. 1944.2, in excess of $5,000, the greater of the actual income 
    derived from all net family assets or a percentage of the value of such 
    assets based on the current passbook savings rate, as determined by 
    RHCDS.
        (4) The full amount of periodic payments received from Social 
    Security (including Social Security received by adults on behalf of 
    minors or by minors intended for their own support), annuities, 
    insurance policies, retirement funds, pensions, disability or death 
    benefits, and other similar types of periodic receipts. Amounts 
    received from the United States Government which are attributable to 
    underpayment of benefits for one or more prior months shall be excluded 
    in the calculation of annual income as provided in 42 U.S.C. 1382b.
        (5) Payments in lieu of earnings, such as unemployment and 
    disability compensation, worker's compensation, and severance pay.
        (6) Public assistance except as indicated in exhibit H (available 
    in any RECD field office).
        (7) Periodic allowances, such as:
        (i) Alimony and child support awarded in a divorce decree or 
    separation agreement, unless the applicant certifies the payments are 
    not received, and the applicant provides documentation to RHCDS that a 
    reasonable effort has been made to collect the payments through the 
    official entity responsible for enforcing such payments; or
        (ii) Recurring monetary gifts or contributions from someone who is 
    not a member of the household.
        (8) All regular pay, special pay (except for persons exposed to 
    hostile fire), and allowances of a member of the armed forces who is 
    the applicant or spouse, whether or not that family member lives in the 
    home.
        (e) The following are not included in annual income but may be 
    considered in determining repayment ability:
        (1) Payments received for the care of foster children or foster 
    adults (usually individuals with disabilities, unrelated to the 
    applicant, who are unable to live alone);
        (2) The income of an applicant's spouse, when the spouse has been 
    living apart from the applicant for less than 3 months (for reasons 
    other than military or work assignment), but not if court proceedings 
    for divorce or legal separation have commenced;
        (3) Temporary, nonrecurring, or sporadic income (including gifts);
        (4) Lump-sum additions to family assets such as inheritances, 
    capital gains, insurance payments included under health, accident, 
    hazard, or worker's compensation policies, and settlements for personal 
    or property losses (except as provided in paragraph (d)(5) of this 
    section);
        (5) Amounts which are granted specifically for, or in reimbursement 
    of, the cost of medical expenses;
        (6) Earnings in excess of $480 for each full-time student 18 years 
    old or older (excluding the head of household and spouse);
        (7) Reparation payments paid by a foreign government arising out of 
    the Holocaust. If an applicant for an RHCDS loan was deemed ineligible 
    because the applicant's income exceeded the low income (moderate income 
    for guaranteed loans) because of the applicant's Nazi persecution 
    benefits, the RHCDS approval official should notify the applicant to 
    reapply for a loan;
        (8) Any earned income tax credit;
        (9) Adoption assistance payments in excess of $480 per adopted 
    child;
        (10) Deferred periodic payments of supplemental security income and 
    Social Security benefits that are received in a lump sum;
        (11) Amounts received by the family in the form of refunds or 
    rebates under state or local law for property taxes paid on the 
    dwelling unit;
        (12) Amounts paid by a State agency to a family with a 
    developmentally disabled family member living at home to offset the 
    cost of services and equipment needed to keep the developmentally 
    disabled family member at home; and
        (13) Any other revenue which a Federal statute exempts shall not be 
    considered income or used as a basis for determining eligibility for an 
    RHCDS loan, payment assistance, or denying or reducing Federal 
    financial assistance or benefits to which the recipient would otherwise 
    be entitled. Additional financial assistance which is considered exempt 
    income under Federal statutes. (See exhibit H available in any RECD 
    field office).
        (f) The following will not be counted when calculating annual 
    income and 
    
    [[Page 55128]]
    will not be considered in determination of repayment ability:
        (1) Income of live-in aides as described in 1944.2.
        (2) Income from employment of minors (including foster children) 
    under 18 years of age. The applicant, coapplicant, or spouse may never 
    be considered minors.
        (3) The full amount of student financial assistance paid directly 
    to the student or to the educational institution.
    
    
    Sec. 1944.6  Adjusted annual income.
    
        Adjusted annual income is annual income as determined in 
    Sec. 1944.5 less the following:
        (a) A deduction of $480 for each member of the family residing in 
    the household, as defined by Sec. 1944.2, other than the applicant, 
    coapplicant, or spouse who is:
        (1) Under 18 years of age; or
        (2) Eighteen years of age or older and is disabled; or
        (3) A full-time student, aged 18 or older.
        (b) A deduction of $400 for any elderly family.
        (c) A deduction for the care of minors 12 years of age or under, to 
    the extent necessary to enable a member of the applicant's family to be 
    gainfully employed or to further the applicant's education. The 
    deduction will be based only on moneys reasonably anticipated to be 
    paid for care services and, if caused by employment, must not exceed 
    the amount of income received from such employment. Payments for these 
    services may not be made to persons whom the applicant is entitled to 
    claim as dependents for income tax purposes.
        (d) A deduction of the amount by which the aggregate of the 
    following expenses of the household exceeds 3 percent of gross annual 
    income:
        (1) Medical expenses for any elderly family. This includes medical 
    expenses, for any household member, the applicant anticipates incurring 
    over the ensuing 12 months which are not covered by insurance. Examples 
    of medical expenses are dental expenses, prescription medicines, 
    medical insurance premiums, eyeglasses, hearing aids and batteries, the 
    cost of home nursing care, the costs of transportation to and from 
    medical treatment, monthly payments on accumulated major medical bills, 
    and cost of full-time nursing or institutional care which cannot be 
    provided in the home for a member of the household; and
        (2) Reasonable attendant care and auxiliary apparatus expenses for 
    each member of any household who is disabled to the extent necessary to 
    enable any member of such household (including such member who is 
    disabled) to be employed.
    
    
    Sec. 1944.7  [Reserved]
    
    
    Sec. 1944.8  Income eligibility requirements.
    
        (a) Repayment ability. An applicant is eligible for a section 502 
    RH loan only if the following requirements are met:
        (1) Income limit. The adjusted annual income as defined in 
    Sec. 1944.6 at the time of loan approval does not exceed the applicable 
    income limit. (See exhibit C available in any RECD field office).
        (2) Adequate and dependable income. The applicant (and coapplicant 
    if applicable) has adequate and dependably available income. The 
    determination of income dependability will include consideration of the 
    applicant's past history of annual income and the history of the 
    typical annual income of others in the area with similar types of 
    employment. Such income must be sufficient to meet the income ratios 
    described in Sec. 1944.8(a)(3), as modified by Sec. Sec. 1944.34 and 
    1944.35.
        (3) Determining repayment ability. In considering whether the 
    applicant has adequate repayment ability, RHCDS must calculate the 
    principal, interest, taxes, and insurance (PITI) and total debt (TD) 
    ratios. If a participation loan is involved, the PITI will also include 
    the principal and interest payments on the participation loan. The PITI 
    ratio is calculated by dividing the monthly PITI for the proposed loan 
    (less any payment assistance for which the applicant may qualify) by 
    the gross monthly family income. The TD ratio is calculated by dividing 
    the applicant's monthly obligations by total gross monthly family 
    income.
        (i) Total monthly debt consists of the PITI for the proposed loan 
    (less any payment assistance for which the applicant may qualify), 
    homeowner and other assessments, and long term obligations. Long term 
    obligations include those obligations such as alimony, child support, 
    child care, and other obligations with a remaining repayment period of 
    more than 6 months, other shorter term obligations that are considered 
    to have a significant impact on repayment ability, plus 5 percent of 
    the current balance on all revolving credit cards.
        (ii) Income, for the purpose of determining these ratios, includes 
    the total gross monthly income of the applicant, coapplicant, and any 
    other member of the household who will be a party to the note, 
    including any income that may be excepted under Sec. 1944.5.
        (iii) The very low-income applicant is considered to have repayment 
    ability when the proposed PITI and TD ratios are less than or equal to 
    a PITI ratio of 29 percent and a TD ratio of 38 percent; however, the 
    low-income applicant is considered to have repayment ability when the 
    proposed PITI and TD ratios are less than or equal to a PITI ratio of 
    33 percent and a TD ratio of 38 percent as defined in 
    Sec. 1944.8(a)(3). Very low-income applicants whose PITI ratio exceeds 
    the authorized ratio shall be considered for deferred mortgage 
    assistance as provided in Sec. 1944.35.
        (iv) When the ratios do not support repayment of the proposed loan, 
    at the applicant's request, RHCDS may make an exception to the above 
    income ratio calculations under the following circumstances or 
    compensating factors:
        (A) When the applicant presents documented evidence of having met 
    housing related costs in the past 6 months that are equal to or greater 
    than the projected housing costs after approval of the proposed loan. 
    These housing costs must have been maintained when the applicant's 
    household income was equal to or less than the current annual income, 
    and the applicant's household debt load was equal to or greater than 
    the current debt load. Projected housing costs will include the RHCDS 
    monthly payment after application of any payment assistance for which 
    the applicant may qualify, projected real estate taxes and assessments, 
    premiums for required property and flood insurance, estimated utility 
    and maintenance costs, and any other costs expected to be incurred with 
    home ownership.
        (B) If the applicant's TD ratio and/or PITI ratio exceed the 
    maximum authorized ratio, the State Director may allow a higher ratio 
    based on compensating factors. Acceptable compensating factors include, 
    but are not limited to, the applicant has recently entered a 
    profession, in which the applicant has adequate schooling, that would 
    historically lead to significant pay increases, the applicant has 
    accumulated savings which, when added to the applicant's housing 
    expense shows a capacity to make payments on the proposed loan, and the 
    availability of overtime income to increase the applicant's income. A 
    low TD ratio, by itself, does not compensate for a high PITI ratio.
        (b) Additional coapplicant. Applicants applying who do not meet the 
    requirements of paragraph (a)(2) of this section will be considered 
    ineligible unless other adults in the household have adequate income 
    and wish to join in the application as a coapplicant. The 
    
    [[Page 55129]]
    combined incomes and obligations shall then be considered in 
    determining repayment ability.
        (c) Cosigner. RHCDS will also consider the use of a cosigner when 
    the applicant applying for assistance does not meet the requirements of 
    paragraph (a)(2) of this section. Cosigners must have adequate and 
    dependably available income sufficient to repay the applicant's monthly 
    installment with applicable payment assistance. Cosigners are subject 
    to the same determination of repayment ability outlined in paragraph 
    (a)(3) of this section as the applicant, with the amount of the 
    applicant's monthly installment with applicable payment assistance 
    considered as part of the cosigner's PITI ratio.
        The cosigner may be an individual or an entity but may not be a 
    member of the applicant's household.
    
    
    Sec. 1944.9  Other eligibility requirements.
    
        In addition to the income eligibility requirements of Sec. 1944.8, 
    the applicant must:
        (a) Qualify as one of the following:
        (1) A person who does not own a dwelling, (except for refinancing 
    purposes), or owns a dwelling which is not structurally sound, 
    functionally adequate, or large enough to accommodate the needs of the 
    applicant, or,
        (2) A farmowner without decent, safe, and sanitary housing for the 
    farmowner's own use or for the use of farm tenants, sharecroppers, farm 
    laborers, or farm manager.
        (b) Be without sufficient resources to provide the necessary 
    housing or related facilities, and be unable to secure the necessary 
    credit from other sources upon terms and conditions which the applicant 
    could reasonably be expected to fulfill.
        (1) If the applicant has only an undivided interest in the land to 
    be improved, those co-owners whose execution of the mortgage is 
    required under Sec. 1944.18(b)(8) must also be unable to provide the 
    improvement with their own resources or obtain the necessary credit 
    elsewhere, either individually or jointly with the applicant.
        (2) Applicants are expected to reduce the need for loan funds by 
    utilizing available nonessential assets and/or cash on hand; however, 
    IRAs, Simplified Employee Pensions (SEPs), 401(k) plans, and similar 
    personal retirement accounts do not have to be liquidated when 
    considering other resources. Reasonable reserves may be retained for 
    unforeseen events.
        (3) RHCDS will provide information on area lenders participating in 
    the section 502 guaranteed RH loan program and section 502 
    participation RH loan program to all applicants who are required to 
    seek other credit.
        (c) Be a natural person (individual) who resides as a citizen in 
    any of the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin 
    Islands, Guam, American Samoa, the Commonwealth of the Northern 
    Marianas, the Federated States of Micronesia, the Republic of Palau, or 
    the Republic of the Marshall Islands, or a noncitizen who resides in 
    one of the foregoing areas after being legally admitted in one of the 
    alien entry categories set forth in section 214 of the Housing and 
    Community Development Act of 1980, 42 U.S.C. 1436a. An applicant who is 
    not a United States citizen is required to submit evidence that the 
    applicant has been lawfully admitted to the country as a resident in 
    one of the categories specified in the preceding sentence. Verification 
    is only required when the applicant is not a U.S. citizen.
        (d) Possess legal capacity to incur the loan obligation (or have a 
    court appointed guardian or conservator who is empowered to obligate 
    the applicant in real estate matters), and have reached the legal age 
    of majority in the State, or have had the disability of minority 
    removed.
        (e) Have the potential ability to personally occupy the home on a 
    permanent basis. Due to the probability of transfer, or moving after 
    graduation, military personnel on active duty and full-time students 
    will not be granted loans unless:
        (1) The applicant, if military personnel, will be discharged at an 
    early date (usually within 1 year). The family must continue to occupy 
    the home in case the borrower is transferred to another duty station 
    before discharge;
        (2) The applicant intends to make the home a permanent residence 
    and there are reasonable prospects that employment will be available in 
    the area after graduation; and
        (3) An adult member of the household will be available to make 
    inspections as the home is being constructed and to sign checks for 
    work performed.
        (f) Have a credit history which indicates a reasonable ability and 
    willingness to meet obligations as they become due.
        (1) Any or all of the following are indicators of an unacceptable 
    credit history unless RHCDS determines that the cause was beyond the 
    applicant's control (except for Federal judgments described in 
    paragraph (f)(1)(i) of this section), and satisfies the criteria in 
    paragraph (f)(3) of this section:
        (i) An outstanding judgment obtained by the United States in a 
    Federal Court (other than the United States Tax Court), which has been 
    recorded, shall cause the applicant to be ineligible for any loan or 
    grant until the judgment is paid in full or otherwise satisfied. RHCDS 
    loan or grant funds may not be used to satisfy the judgment. The 
    Administrator may waive the rejection of an application based on 
    verification of an outstanding Federal judgment upon specific 
    determination that it is in the best interest of the Government to do 
    so. Verification of delinquent Federal debt and processing of 
    applications with such debt must comply with Sec. 1944.27(b)(4).
        (ii) Incidents of more than two debt payments being more than 30 
    days late if the incidents have occurred within the last 12 months. 
    This includes more than two late payments on a single account. 
    Instances of more than two late payments may be waived in the event 
    that the RHCDS loan will result in a significant reduction in shelter 
    costs, which will contribute to improved debt payment ability.
        (iii) Loss of security due to a foreclosure if the foreclosure has 
    been completed within the last 36 months.
        (iv) An outstanding IRS tax lien.
        (v) Other outstanding tax liens with no satisfactory arrangements 
    for payments.
        (vi) A court-created or affirmed obligation (judgment), caused by 
    non-payment, that is currently outstanding or has been outstanding 
    within the last 12 months, not including hospital or State motor 
    vehicle liens described under Sec. 1944.17.
        (vii) Two or more rent payments paid 30 days or more past due, that 
    have occurred within the last 2 years. Notwithstanding the previous 
    sentence, if there have been no other credit problems in the 
    applicant's last 2 years general credit history, only the past rental 
    year will be considered. Instances of more than two late payments may 
    be waived in the event that the RHCDS loan will result in a significant 
    reduction in shelter costs, which will contribute to improved debt 
    payment capability.
        (viii) Collection accounts outstanding with no satisfactory, 
    reasonable arrangements for repayment, or collection accounts which 
    have been outstanding within the last 12 months which were paid in full 
    within 6 months of an eligibility determination for RHCDS assistance, 
    where there is no record of regular payments being 
    
    [[Page 55130]]
    maintained on the account prior to receipt of the final payment.
        (ix) Non-Agency debts written off within the last 36 months.
        (x) Agency debts (including debts to predecessors of the Agency) 
    which were debt settled pursuant to subpart B of part 1956, or by 
    release from personal liability under subpart A of part 1955 or subpart 
    C of part 1965, or debt settlement is being considered except where the 
    conditions of paragraph (g) of this section can be met.
        (2) The following will not indicate an unacceptable credit history:
        (i) ``No history'' of credit transactions by the applicant.
        (ii) A bankruptcy in which the debts were discharged (Chapter 7) 
    more than 36 months prior to the date of the application or where an 
    applicant successfully completed a bankruptcy debt restructuring plan 
    or Chapter 13 plan, and has demonstrated a willingness to meet 
    obligations when due for the past 12 months prior to the date of 
    application.
        (iii) A judgment satisfied more than 12 months before the date of 
    application, or foreclosure with no monetary loss which was completed 
    more than 12 months before the date of application.
        (3) When an applicant has an unacceptable credit history, an 
    exception may be considered by the loan approval official (except for 
    Federal judgments described in paragraph (f)(1)(i) of this section) 
    when the applicant provides documentation that:
        (i) The circumstances were of a temporary nature, were beyond the 
    applicant's control, and have been removed. Examples: loss of job; 
    delay or reduction in benefits, or other loss of income; increased 
    expenses due to illness, death, etc.
        (ii) The adverse action or delinquency was the result of a refusal 
    to make full payment because of defective goods or services or as a 
    result of some other justifiable dispute relating to the goods or 
    services purchased or contracted for.
        (4) Applicants will be advised of adverse credit which is 
    discovered as a result of an on-line profile credit report at the time 
    of application and will be provided the telephone number and address of 
    the credit repository so that the applicant may contact the repository 
    directly to correct the negative or incorrect information or discuss 
    the circumstances of the credit problem with the RHCDS staff. 
    Applicants will not be rejected on the basis of information contained 
    in an on-line credit report; however, once a full written credit report 
    is received by RHCDS, it will be the responsibility of the applicant to 
    work directly with the credit repository to correct any erroneous 
    credit bureau records. The credit history cannot be determined 
    satisfactory until:
        (i) The credit repository issues a corrected report, showing that 
    the error has been removed, or
        (ii) The credit repository has not issued a corrected report within 
    30 days of the applicant's submission of disputed credit information 
    but the applicant submits conclusive proof, acceptable to RHCDS, that 
    the report is in error, such as creditor correspondence, court 
    documents, etc.
        (g) Meet the following conditions if the applicant had any previous 
    RHCDS debt settled pursuant to subpart B of part 1956, or by release 
    from personal liability under subpart A of part 1955 or subpart C of 
    part 1965, or debt settlement is being considered:
        (1) RHCDS must determine that failure to pay the debt was the 
    result of circumstances beyond the applicant's control, or the 
    conditions which necessitated the debt settlement or release, other 
    than weather hazards, disasters, or price fluctuations, have been or 
    will be removed by making the loan, and
        (2) Before causing the applicant to incur any expense in connection 
    with the loan, with the exception of the cost of a credit report, RHCDS 
    must determine the applicant's eligibility and notify the applicant of 
    same.
        (h) Have the ability to carry out the required obligations of the 
    loan. If the applicant has demonstrated inability to do so by recent 
    failure to maintain a former residence in a habitable and responsible 
    manner, or by unauthorized conversion or alteration of the structure, 
    or by creating a public nuisance in or around a former residence, RHCDS 
    must determine that the reasons contributing to such inability have 
    been removed and are not likely to recur.
        (i) Provide accurate and truthful application and financial 
    information to RHCDS at the time of application. Applicants who have 
    failed to fully disclose financial and application information will be 
    denied program assistance.
    
    
    Sec. 1944.10  Rural area designation.
    
        (a) For the purposes of this subpart, a rural area is:
        (1) Open country which is not part of or associated with an urban 
    area.
        (2) Any town, village, city, or place, including the immediately 
    adjacent densely settled area, which is not part of or associated with 
    an urban area and which:
        (i) Has a population not in excess of 10,000 if it is rural in 
    character, or
        (ii) Has a population in excess of 10,000 but not in excess of 
    20,000, and
        (A) Is not contained within an MSA, and
        (B) Has a serious lack of mortgage credit for low- and moderate-
    income households as determined by the Secretary of Agriculture and the 
    Secretary of HUD.
        (3) An area classified as a rural area prior to October 1, 1990, 
    (even if within an MSA), with a population exceeding 10,000, but not in 
    excess of 25,000, which is rural in character, and has a serious lack 
    of mortgage credit for low- and moderate-income families. This is 
    effective through receipt of census data for the year 2000.
        (b) A determination that open country, or any town, village, city, 
    or place is not part of or associated with an urban area must include a 
    finding that any densely populated section of the area in question is 
    separated from the densely populated section of any adjacent urban area 
    by open spaces. Open spaces include undeveloped, agricultural, or 
    sparsely settled areas. Other spaces such as physical barriers (e.g., 
    rivers, canals), public parks, commercial and industrial developments, 
    small areas reserved for recreational purposes, recognized open spaces 
    for which development is planned, and similar nonresidential areas, are 
    not considered open spaces for the purpose of this program. RHCDS files 
    must contain documentation that local planning boards, where available, 
    were contacted at the time of each review to verify that areas 
    considered as open spaces are not scheduled for development in the next 
    5 years.
        (c) Two or more towns, villages, cities, and places may have 
    contiguous boundaries, and each be considered separately if they are 
    not otherwise associated with each other, and their densely populated 
    areas are not contiguous, as determined after consideration of 
    paragraphs (a) and (b) of this section.
        (d) Population count in any area will be taken from the decennial 
    U.S. Census of Population, national population updates published by the 
    Bureau of the Census, any special population census conducted by the 
    Bureau of the Census, and the following:
        (1) Significant new development on the periphery of ineligible 
    areas which requires a change in boundaries.
        (2) Redesignation of corporate limits by local authorities which 
    affects the eligibility status of an area.
        (e) In determining population count for area eligibility, 
    consideration must 
    
    [[Page 55131]]
    be given to developed areas in counties or states which are contiguous 
    to, and, therefore, a part of developed areas in other counties or 
    states. This determination must be made in agreement between the State 
    Directors concerned.
        (f) In order to ensure that the RH program is limited to eligible 
    areas, RHCDS will periodically review areas under their jurisdiction. 
    If the review shows that an area is not rural, RHCDS will limit the RH 
    program in that area after the date of the decision, to the loan 
    purposes prescribed in paragraph (i) of this section.
        (g) [Reserved]
        (h) [Reserved]
        (i) If an area designation is changed from rural to nonrural, loans 
    may be made only in the following instances:
        (1) Applications received by RHCDS prior to the change of 
    designation may be processed.
        (2) New conditional commitments may be issued and existing 
    conditional commitments will be honored only in conjunction with the 
    approval of RH loan applications which were received prior to the date 
    the area was designated nonrural.
        (3) Inventory property sales and transfers by assumption may be 
    processed in such areas as authorized by Sec. 1955.103 or 
    Sec. 1965.126, respectively.
        (4) Subsequent loans may be made on property in an area where the 
    designation was changed from rural to nonrural after the initial loan 
    was made:
        (i) To make necessary repairs.
        (ii) To pay equity in connection with an assumption and transfer of 
    an RH loan.
    
    
    Sec. 1944.11  Site requirements.
    
        (a) Location. The property on which the loan is made must be 
    located in a designated rural area as defined in Sec. 1944.10, or in an 
    area where the designation has been changed as provided in 
    Sec. 1944.10(i) and must also meet the requirements of Secs. 1944.12 
    and 1944.13. A nonfarm tract to be purchased or improved with loan 
    funds must not include farm service buildings; however, a small 
    outbuilding such as a storage shed may be included.
        (b) Access. The property must be contiguous to and have direct 
    access from a street, road, or driveway that meets the applicable 
    requirements of Sec. 1924.115(b).
        (c) Minimum adequate site. The site must be of a size that it 
    cannot be subdivided into two or more adequate sites under existing 
    zoning ordinance requirements for the area. A site on which a loan is 
    to be made must have an adequate water and/or wastewater disposal 
    system, other related facilities, and a yard, or those items must be 
    provided with loan funds.
        (1) The water and/or wastewater disposal system whether individual, 
    central or privately owned and operated must meet the applicable water 
    and wastewater disposal system requirements of subpart C of part 1924 
    as well as the design requirements of the state Department of Health or 
    comparable reviewing and regulatory agency.
        (2) Written verification must be obtained from the regulatory 
    agency that the wastewater disposal systems comply with the Safe Water 
    Drinking Act and the Clean Water Act, respectively. There must be 
    assurance of continuous service at reasonable rates for central water 
    and wastewater disposal systems. A system owned or operated by a 
    private party must have a legally irrevocable agreement which allows 
    interested third parties to enforce the obligation of the operator to 
    provide satisfactory service at reasonable rates.
    
    
    Sec. 1944.12  Environmental requirements.
    
        All applications shall receive the appropriate level of 
    environmental review in accordance with subpart G of part 1940.
    
    
    Sec. 1944.13  National flood insurance.
    
        Flood insurance in accordance with 7 CFR part 1806, subpart B must 
    be obtained and maintained for the life of the loan for all property 
    located in a special flood hazard area as determined by the Federal 
    Emergency Management Agency (FEMA). If flood insurance is not available 
    in a special flood hazard area, the property is not eligible for 
    federal financial assistance.
    
    
    Sec. 1944.14  [Reserved]
    
    
    Sec. 1944.15  Ownership requirements.
    
        (a) After the loan is closed, the borrower must have an interest in 
    the property to be purchased, improved, or refinanced, which qualifies 
    as one of the following:
        (1) Full marketable title with a deed vesting a fee interest in the 
    property to the borrower. (The buyer and the seller will convert the 
    purchaser's interest under a recorded land purchase contract to a deed/
    mortgage situation with full marketable title prior to loan closing.)
        (2) An undivided interest if the co-owners meet the security 
    requirements imposed by Sec. 1944.18(b)(8).
        (3) A life estate interest with rights of present possession, 
    control, and beneficial use of the property if the remaindermen meet 
    the security requirements imposed by Sec. 1944.18(b)(9).
        (4) Leasehold interest, including loans made for the purchase of a 
    dwelling located on land owned by a community land trust as described 
    in Sec. 1944.42, if all of the following conditions are met:
        (i) The applicant is unable to obtain fee title to the property and 
    the rent charged for the lease does not exceed the rate being paid for 
    similar leases.
        (ii) The lessor owns the fee simple title. This provision does not 
    apply to American Indians with leasehold interests on tribal allotted 
    or trust land.
        (iii) Neither the leasehold nor the fee simple title is subject to 
    a prior lien unless RHCDS authorizes acceptance of the prior lien prior 
    to approval of the loan. The amount of the RH loan plus any prior liens 
    shall not exceed the market value of the leasehold.
        (iv) The lease is in writing and contains the following provisions:
        (A) The lessor's consent to the RH mortgage.
        (B) Reasonable security of tenure. The borrower's interest must not 
    be subject to summary forfeiture or cancellation.
        (C) The right of RHCDS to foreclose the RH mortgage and sell 
    without restrictions that would adversely affect the market value of 
    the security.
        (D) The right of RHCDS to bid at foreclosure sale or to accept 
    voluntary conveyance of the security in lieu of foreclosure.
        (E) The right of RHCDS, after acquiring the leasehold through 
    foreclosure or voluntary conveyance in lieu of foreclosure, or in event 
    of abandonment by the borrower, to occupy the property or sublet it, 
    and to sell for cash or credit. In case of an inventory property sale 
    of the leasehold, the right of RHCDS to take a mortgage with rights 
    similar to those under the original RH mortgage.
        (F) The right of the borrower, in the event of default or inability 
    to continue with the lease and the RH loan, to transfer the leasehold, 
    subject to the RH mortgage, to an eligible transferee with assumption 
    of the RH debt.
        (G) Advance written notice of at least 90 days to RHCDS of the 
    lessor's intention to cancel or terminate the lease.
        (H) Negotiated provisions as to the liability of RHCDS for unpaid 
    rentals or other charges accrued at the time RHCDS acquires possession 
    of the property or title to the leasehold, and those which become due 
    during RHCDS's possession or ownership, pending further servicing or 
    liquidation.
        (v) An unexpired term which is at least 150 percent of the term of 
    the RHCDS loan, unless the RHCDS loan is guaranteed by a public 
    authority, Indian tribe, or Indian Housing Authority, in 
    
    [[Page 55132]]
    which case the unexpired term of the lease must be at least 2 years 
    longer than the repayment period of the loan; Provided that: in no 
    event may the unexpired term of the lease be less than 15 years.
        (5) Possessory rights on an American Indian reservation or State-
    owned land if the security requirements imposed by Sec. 1944.18 are 
    met.
        (6) The interest of an American Indian in land held in severalty 
    under trust patents or deeds containing restrictions against alienation 
    if the security requirements imposed by Sec. 1944.18(b)(3) are met.
        (b) If an applicant's title to any part of the property does not 
    qualify as an ownership interest under paragraph (a) of this section, 
    an RH loan may nevertheless be made, if:
        (1) The defect cannot be cured at a reasonable cost, and
        (2) No improvements to be constructed or repaired with loan funds 
    will be located on the parcel to which title is defective, and
        (3) No security value will be accorded to the parcel to which title 
    is defective.
    
    
    Sec. 1944.16  Dwelling requirements.
    
        Dwellings financed must provide modest, decent, safe, and sanitary 
    housing. Costs of dwellings financed cannot exceed the maximum dollar 
    limitation established under section 203(b) of the National Housing Act 
    (12 U.S.C. 1709) (available from any HUD office) for the area in which 
    the property is located unless authorized by RHCDS under 
    Sec. 1944.17(g). Loans shall not be approved for dwellings containing 
    in-ground swimming pools or structures designed for income-producing 
    facilities or purposes.
        (a) New dwellings. Construction must meet the requirements 
    contained in subpart A of part 1924 including the thermal performance 
    standards for new construction outlined in exhibit D of subpart A of 
    part 1924.
        (b) Existing dwellings. Consideration should be given to financing 
    existing dwellings in areas with a good supply of competitively priced, 
    suitable housing. Homes financed should be affordable to the applicant, 
    including operating and maintenance costs.
        (1) Loans will not be made on an existing manufactured home unless 
    it is already financed by RHCDS or is being sold from RHCDS inventory.
        (2) Existing homes, including those already financed with an 
    existing section 502 direct loan, must be inspected by RHCDS or by a 
    disinterested third party inspector satisfactory to RHCDS who will 
    determine and certify to RHCDS and the applicant that the dwelling 
    meets the criteria outlined in paragraphs (b)(2)(i), (ii), and (iii) of 
    this section. The sales agreement must identify the party (i.e., 
    purchaser or seller) who has accepted responsibility for obtaining and 
    paying for these inspections and certifications. Inspections are not 
    required on public water and wastewater disposal systems. RHCDS 
    inventory property will be inspected and repaired in accordance with 
    subpart B of part 1955. The inspector will:
        (i) Determine and certify to RHCDS and the applicant that the 
    dwelling is structurally sound, functionally adequate, in good repair, 
    or will be placed in good repair with loan funds, and meets the 
    ``General'' requirements in Guide 2 of subpart A of part 1924 
    (available in any RECD field office).
        (ii) Certify to RHCDS and the applicant that the dwelling meets 
    thermal performance standards for existing dwellings required in 
    exhibit D of subpart A of part 1924.
        (iii) Certify to RHCDS and the applicant that the dwelling has 
    adequate electrical, heating, plumbing, water, and wastewater disposal 
    systems, and is free of termites and other wood damaging pests and 
    organisms.
        (c) Repairs. Any dwelling repaired with RH funds must be 
    structurally sound, functionally adequate, and be placed in good repair 
    with loan funds. If the loan is not more than $7,500 and is scheduled 
    for repayment in not more than 15 years from the date of the note, the 
    dwelling, after repair, may lack some equipment or features such as a 
    complete bath, kitchen cabinets, closets, or completed finished 
    interior in some rooms. Such dwellings must meet the housing needs of 
    the applicant and provide decent, safe, and sanitary living conditions 
    when the improvements financed with the loan are completed. Repairs 
    required as a condition of loan approval will be performed in 
    accordance with subpart A of part 1924. The applicant in cooperation 
    with the seller will establish and provide documentation regarding who 
    is responsible for the required repairs and when the repairs will be 
    completed for RHCDS inspection. Repairs on manufactured homes are 
    limited to those financed by a subsequent loan for existing homes 
    currently financed with a section 502 RH loan, inventory property 
    sales, and transfers.
        (d) Improvements. Improvements financed with loan funds must be on 
    land which, after loan closing, is part of a tract owned by the 
    borrower in accordance with Sec. 1944.15(a), or on an easement 
    appurtenant to such a tract.
        (e) Manufactured homes. Exhibit F (available in any RECD field 
    office) contains supplemental information concerning construction 
    requirements for manufactured homes.
    
    
    Sec. 1944.17  Maximum loan amounts.
    
        The amount of the loan may not exceed the maximum dollar limitation 
    of section 203(b) of the National Housing Act (12 U.S.C. 1709) 
    (available from any HUD office) unless authorized by RHCDS as an 
    exception. Applicants are expected to reduce the need for loan funds by 
    using available non-essential assets including cash on hand as outlined 
    under Sec. 1944.9.
        (a) The amount will be the lesser of the cost of:
        (1) The acquisition and any necessary development or
        (2) The market value of the security, less the unpaid principal 
    balance and past-due interest of any other liens against the security 
    property, plus an appraisal fee, for the following types of dwellings:
        (i) An existing dwelling, as described in Sec. 1944.2, including 
    one being financed by transfer or inventory property sale, except as 
    provided in exhibit F (available in any RECD field office).
        (ii) A new dwelling when any one of the following conditions exist:
        (A) A conditional commitment was issued in accordance with 
    Sec. 1944.45.
        (B) The RH loan will be closed prior to the start of construction, 
    and construction conforms to the requirements contained in subpart A of 
    part 1924.
        (C) The required construction inspections were made by the Federal 
    Housing Administration (FHA) or Veterans Administration (VA). If 
    qualified under this paragraph, a complete set of plans and 
    specifications must be submitted together with copies of construction 
    phase inspection reports or certification by FHA or VA indicating the 
    dwelling was built in accordance with approved plans and 
    specifications. The builder will also furnish a certification of 
    compliance with RHCDS thermal standards for new construction. (See 
    exhibit D of subpart A of part 1924 available in any RECD office.)
        (D) The manufactured home and site meet the requirements. (See 
    exhibits F and J of subpart A of part 1924 available in any RECD 
    office.)
        (b) A loan will be limited to 90 percent of the market value of the 
    security, plus an appraisal fee, for any dwelling that does not meet 
    the requirements of paragraph (a) of this section, with the exception 
    of manufactured housing units. 
    
    [[Page 55133]]
    
        (c) Notwithstanding the provisions of paragraph (a) of this 
    section, a loan on a dwelling which causes the total secured 
    indebtedness to exceed the requirements of paragraph (a) of this 
    section, may be made when the excess indebtedness is all or part of a 
    lien held by a public body (except for a lien arising out of a judgment 
    against the applicant in favor of the United States in a Federal Court 
    other than the United States Tax Court), hospital, or welfare 
    institution for advances made for medical bills, welfare payments, or 
    provided:
        (1) The applicant is unable to settle or compromise such lien 
    sufficiently to avoid exceeding the market value;
        (2) The lien securing the excess amount will at all times be 
    inferior to the RHCDS mortgage securing the initial loan and any 
    subsequent loan or advances determined by the RHCDS to be reasonably 
    necessary to carry out the purpose of the initial loan or to protect 
    the Government's financial interest;
        (3) The existence of the excess lien will not jeopardize the 
    security or servicing so as to preclude the making of a sound RH loan;
        (4) The applicant has the ability to meet any payments on the 
    excess debt as they become due or are likely to become due.
        (d) Notwithstanding the provisions of paragraph (a) of this 
    section, when a subsequent loan for closing costs only is made 
    simultaneously with an inventory property sale (as provided in 
    Sec. 1955.117(f)) or a transfer, the total indebtedness may exceed the 
    sale price or market value of the security property, whichever is less, 
    by no more than 1 percent.
        (e) Notwithstanding the provisions of paragraph (a) of this 
    section, when RHCDS is refinancing the loan of an existing RHCDS 
    borrower in accordance with Sec. 1951.316, the debt may exceed the 
    market value of the security property to the extent necessary to 
    refinance the borrower's outstanding indebtedness plus closing costs 
    required in connection with the refinancing.
        (f) Notwithstanding the provisions of paragraph (a) of this 
    section, when a subsequent loan is needed for repairs essential to 
    protect the Government's security interest, the total RHCDS 
    indebtedness may exceed the market value of the security by no more 
    than the amount of the subsequent loan consisting of the cost of 
    essential repairs and reasonable closing costs.
        (g) RHCDS may grant exceptions to allow the amount of the loan to 
    exceed the maximum dollar limitation of section 203(b) of the National 
    Housing Act (12 U.S.C. 1709) under the following conditions:
        (1) RHCDS may increase the loan amount in selected areas when the 
    existing mortgage limit is insufficient to provide adequate housing for 
    applicants and modest housing costs in the area exceed maximum loan 
    limits or where different maximum loan limits exist in adjacent areas 
    of the same community, for example: One limit on one side of the street 
    compared to a higher limit on the other side.
        (2) RHCDS may increase the loan amount where necessary to 
    accommodate the specific needs of the family such as a larger home to 
    correct overcrowding situations for exceptionally large households and 
    reasonable accommodation for a household member who is disabled. When 
    the request is to allow reasonable accommodation for a household member 
    who is disabled, the additional loan amount will not exceed the cost of 
    the special features provided and the amount of the appraisal fee.
    
    
    Sec. 1944.18  Security requirements.
    
        (a) Adequate security. Except as provided below, to protect the 
    interests of RHCDS, all loans must be adequately secured. Except as 
    provided in Sec. 1944.17(c) and paragraph (b) of this section, a loan 
    is adequately secured only when all of the following requirements are 
    met:
        (1) RHCDS obtains at closing a mortgage on all ownership interests 
    in the entire tract.
        (2) No liens prior to the RHCDS mortgage exist at the time of 
    closing, and no junior liens are likely to be taken immediately 
    subsequent to or at the time of closing.
        (3) The provisions of subpart B of part 1927 regarding title 
    clearance and the use of legal services are complied with.
        (4) The property improvements and proposed improvements are totally 
    on the site and do not encroach on adjoining property. RHCDS may 
    require a survey, at the buyer's or seller's expense.
        (b) Exceptions. Exceptions to the usual security requirements will 
    be made only as follows:
        (1) Note only. A loan of $2,500 or less, scheduled for repayment in 
    not more than 10 years from the date of the note, that is not subject 
    to recapture of subsidy in accordance with subpart I of part 1951, may 
    be secured by the borrower's promissory note alone when RHCDS 
    determines that:
        (i) The applicant has a credit history which indicates an ability 
    and willingness to pay debts when they are due;
        (ii) The applicant will have sufficient income to readily meet all 
    obligations; and
        (iii) The applicant's equity in the real estate as improved, 
    equals, or exceeds the amount of the proposed loan.
        (2) Mortgage insurance. When the applicant is the holder of 
    possessory rights on an American Indian reservation or State-owned 
    land, adequate security is required. This may include mortgage 
    insurance guaranteeing payment from a State agency or American Indian 
    tribe. States will issue a State Supplement covering special security 
    and title clearance requirements needed for loans of this type.
        (3) American Indian land. American Indian land in trust or 
    restricted status acquired with an RH loan will remain in trust or 
    restricted status. These mortgages must be approved by the Secretary of 
    the Interior. A State Supplement will be issued to prescribe the 
    actions to be taken by RHCDS personnel to implement the making of loans 
    under such conditions.
        (4) Best mortgage obtainable. Loans of $7,500 or less scheduled for 
    repayment in not more than 15 years from the date of the note and 
    subsequent loans made for minimal essential repairs necessary to 
    preserve the Government's security must be secured by a mortgage, 
    except as provided in paragraph (b)(1) of this section, but title 
    clearance and the use of legal services in accordance with subpart B of 
    part 1927 are not required unless the loan approval official determines 
    that the procedures in subpart B of part 1927 are necessary to assure 
    repayment or accomplish the objective of the loan. Evidence of 
    ownership must be in accordance with Sec. 1944.24(d)(2).
        (5) Leasehold. When the applicant owns only a leasehold interest 
    will treat the lessee's interest like any other type of ownership 
    interest in determining whether a mortgage on the leasehold is 
    required. The lease must meet the requirements of 
    Sec. 1944.15(a)(5)(iv) and (v). In any state in which applicants are 
    likely to own a leasehold interest, the State Director will issue a 
    state supplement outlining the technical requirements for making such 
    loans.
        (6) Security by junior lien. RHCDS may take a junior mortgage as 
    security for an RH loan if the tract, which will secure the RHCDS 
    mortgage, provides adequate security for the entire prior lien debt and 
    the RH loan, and
        (i) The prior mortgage does not contain provisions that may 
    jeopardize the RHCDS security position or the applicant's ability to 
    repay the loan, such as provisions for future advances, 
    
    [[Page 55134]]
    forfeiture, cancellation, foreclosure without adequate notice to junior 
    lienholders, attorney's fees exceeding those customary for the area in 
    cases of foreclosure; or
        (ii) Such provisions are satisfactorily limited, modified, or 
    waived; and
        (iii) The conditions set forth in subpart B of part 1927 are met.
        (7) Liens junior to RHCDS lien. Liens junior to the RHCDS lien will 
    be allowed at closing or immediately subsequent to closing only when:
        (i) The junior lien will not interfere with the purpose or 
    repayment of the RH loan, and
        (ii) The total amount of the RH loan, the junior lien, and any 
    prior liens will not exceed the market value of the security except as 
    provided in Sec. 1944.17(c), and
        (iii) The conditions set forth in subpart B of part 1927 are met.
        (8) Undivided interest. When the applicant owns an undivided 
    interest in the property, the co-owners' interests need not be included 
    in the mortgage in the following instances:
        (i) When one or more of the co-owners are not legally competent 
    (and there is no representative who can legally consent to the 
    mortgage) or cannot be located, or the ownership rights are divided 
    among such a large number of co-owners that it is not practical for all 
    their interests to be mortgaged, the mortgaging of interests not 
    exceeding 50 percent may be excluded from the security requirements 
    upon prior approval by RHCDS. All legally competent co-owners using or 
    occupying the property will be required to sign the mortgage. Co-owners 
    will be required to sign the note when necessary for a sound loan or to 
    obtain the required security. The loan may not exceed the value of the 
    percentage of the market value of the property represented by the 
    interests of the owners who sign the mortgage. In determining such 
    value, consideration will be given to any adverse effect which might 
    result from sale of the mortgaged interests separately from the 
    nonmortgaged interests.
        (ii) When the applicant owns only an undivided interest in a 
    building site which will be a part of the farm, the interest of the 
    applicant's co-owners may be excluded from the security requirements 
    upon approval by RHCDS if:
        (A) The market value of the jointly owned tract is at least equal 
    to the debts against it (including the RHCDS loan), and
        (B) The applicant's participation in the joint ownership of part of 
    the farm and its operations has been and is likely to continue to be 
    successful.
        (9) Life estate. When the applicant owns a life estate interest in 
    the property, the remainder interests need not be included in the 
    mortgage if one or more of the persons holding remainder interests are 
    not legally competent (and there is no representative who can legally 
    consent to the mortgage) or cannot be located, or if the remainder 
    rights are divided among such a large number of people that it is not 
    practicable to obtain the signatures of all the remainder interests. In 
    the instance of numerous heirs, the mortgaging of remainder interests, 
    not exceeding 50 percent of the total remainder interest may be 
    excluded from the security requirements upon prior approval by RHCDS. 
    In such cases, the loan may not exceed the value of the property 
    interests owned by the persons executing the mortgage.
        (10) Farm dwelling. When the applicant is the owner of a farm, a 
    mortgage may be taken only on the dwelling and dwelling site provided 
    the following conditions can be met:
        (i) The tract to be mortgaged must not include farm service 
    buildings, must be in a good residential location, be otherwise 
    suitable as a residential type of nonfarm tract, provide adequate 
    security for the loan, be contiguous to and have direct access to a 
    public road, or
        (ii) The tract to be mortgaged must contain at least enough land to 
    clearly provide adequate security for the loan and to make the tract 
    readily saleable in the area.
        (11) Land purchase contract. When the ownership interest is by 
    virtue of a land purchase contract (as described in Sec. 1927.52), the 
    ownership interest must be converted to a deed/mortgage interest prior 
    to loan closing and meet the conditions of Sec. 1944.22(b)(6) prior to 
    loan closing.
        (c) Additional security. When necessary to supplement the 
    applicant's equity in the farm or nonfarm tract on which the dwelling 
    is located, or to facilitate servicing of the loan, RHCDS may also 
    require a mortgage on other real estate owned by the applicant.
        (d) Assignment of income from real estate to be mortgaged. Income 
    to be received by the applicant from royalties, leases, or other 
    existing agreements under which the value of the real estate security 
    will be depreciated will be assigned and disposed of in accordance with 
    applicable portions of subpart C of part 1965, and the provisions for 
    written consent of any prior lienholder. In small nonfarm tract cases, 
    RHCDS may authorize withholding transmittal of assignments to lessees 
    for execution until production begins.
    
    
    Secs. 1944.19-1944.21  [Reserved]
    
    
    Sec. 1944.22  Refinancing non-RHCDS debts.
    
        (a) Loan funds may be used for refinancing non-RHCDS debts on a 
    dwelling (except for manufactured homes) if the debt was incurred by 
    the applicant prior to the date the application was filed and the 
    following conditions can be met:
        (1) The debt was incurred for purposes for which a section 502 RH 
    loan could be made or is a protective advance by the mortgagee for 
    items covered by the mortgage to be refinanced, including accrued 
    interest, insurance premiums, real estate tax advances, or preliminary 
    foreclosure costs.
        (2) The debt must be a lien against the property which will be 
    security for the RH loan. The promissory note and security instrument 
    for the debt to be refinanced must represent rates and terms that were 
    typical and customary for long-term residential financing in the area 
    at the time the debt was incurred.
        (3) A loan to refinance a qualified secured debt may also include 
    short-term or unsecured debts, if necessary to establish a sound 
    repayment ability, if such short-term or unsecured debts were incurred 
    for authorized section 502 RH loan purposes and are not a significant 
    portion of the loan.
        (4) Payments on the debt are so seriously delinquent or, if not 
    delinquent, it must be evident that the applicant will be unable to 
    continue to maintain payments, for reasons beyond the control of the 
    applicant, and the applicant is likely to lose the dwelling at an early 
    date if the debt is not refinanced. Such delinquency must be due to 
    loss of employment or household income, illness, other similar events, 
    or unforeseen circumstances.
        (5) A statement must be obtained from the creditor for each debt to 
    be refinanced showing the purpose for which the debt was incurred, the 
    date on which it was incurred, the final due date, interest rate, 
    amount and frequency of installments, unpaid principal and accrued 
    interest, and amount of delinquency, if any.
        (6) Refinancing such debts will not jeopardize the required 
    priority of the RHCDS security instrument.
        (b) Loan funds may be used for refinancing non-RHCDS debts on a 
    building site without a dwelling when the applicant is unable to pay 
    the debt from personal resources and failure to authorize the use of RH 
    funds to pay 
    
    [[Page 55135]]
    such costs would prevent the applicant from acquiring decent, safe, and 
    sanitary housing and the following conditions can be met:
        (1) The site meets the conditions prescribed in Sec. 1944.11(c).
        (2) The debt was incurred prior to the date of application for the 
    sole purpose of purchasing the site.
        (3) The debt is a lien against the property which will be used as 
    security for the RH loan. The promissory note and security instrument 
    for the debt represent rates and terms that were typical and customary 
    for short-term residential financing in the area at the time the debt 
    was incurred.
        (4) The refinancing loan will include adequate funds for 
    constructing a modest dwelling on the site for the use of the 
    applicant, which conforms with the requirements of Sec. 1944.16(a).
        (5) A statement must be obtained from the creditor for each debt to 
    be refinanced showing the purpose for which the debt was incurred, the 
    date on which it was incurred, the final date due, interest rate, 
    amount and frequency of installments, unpaid principal and accrued 
    interest, and amount of delinquency, if any.
        (6) Refinancing such debts will not jeopardize the required 
    priority of the RHCDS security instrument.
        (c) If a loan of $5,000 or more is necessary for repairs to correct 
    major deficiencies and make the dwelling decent, safe, and sanitary, an 
    existing lien which meets the requirements of paragraphs (a)(l), (2), 
    (3), and (5) of this section may be refinanced regardless of 
    delinquency, if necessary for the applicant to have repayment ability 
    for the existing loan and the requested loan for repairs.
        (d) Debts or costs incurred after the date of application may be 
    refinanced if the costs were incurred for:
        (1) Fees for legal, and other technical services, or
        (2) Materials, construction, or site acquisition.
        (e) RHCDS may authorize the use of RH funds to pay costs provided 
    for in paragraphs (d) (1) and (2) of this section only when RHCDS 
    retains the same lien priority as the debt to be refinanced and all of 
    the following conditions exist:
        (1) The costs were incurred after the applicant filed a written 
    application for a loan but before the loan was closed. In the event of 
    a subsequent loan to complete improvements previously planned, the 
    costs must have been incurred after the initial loan was closed.
        (2) The applicant is unable to pay such costs from personal 
    resources or to obtain credit from other sources, and failure to 
    authorize the use of RH funds to pay such costs would jeopardize the 
    applicant's capability of repaying the loan.
        (3) The construction or repair work conforms to that shown on the 
    building plans and specifications or the RHCDS Development Plan, when 
    applicable, and the costs were incurred for authorized section 502 RH 
    loan purposes.
    
    
    Sec. 1944.23  [Reserved]
    
    
    Sec. 1944.24  Technical services.
    
        (a) Planning and performing construction work. Any construction 
    work will be planned and completed in accordance with subpart A of part 
    1924 or a lesser standard as may be prescribed by RHCDS for 
    demonstration type loans.
        (b) Planning and performing site development work. Any site 
    development will be planned and completed in accordance with subpart C 
    of part 1924, except as provided for manufactured homes in exhibit J of 
    subpart A of part 1924.
        (c) Appraisals. Appraisals will be required as follows:
        (1) When a mortgage will be taken to secure a total indebtedness of 
    more than $15,000, an appraisal of the security property will be made 
    to ensure that the security requirements of the Agency are satisfied. 
    The loan can exceed the market value of the security by the amount of 
    an appraisal fee. A fee will be charged for each application for a 
    section 502 RH loan when an appraisal is needed for initial and 
    subsequent loans and assumptions. Fees will be waived for appraisals 
    done for subsequent loans to existing borrowers for minimal essential 
    repairs that are necessary to protect the Government's security 
    property. The fee will be collected at loan closing by the closing 
    agent.
        (2) When the total indebtedness will be $15,000 or less, an 
    appraisal of the real estate or leasehold interest is not required 
    unless RHCDS is uncertain as to the adequacy of the security.
        (3) Real estate mortgaged as additional security will be appraised 
    when it represents a substantial portion of the security for the loan 
    or when requested by the loan approving official.
        (d) Title clearance and legal services.
        (1) When real estate will be taken as security (including a 
    mortgage on a leasehold), except on a best mortgage obtainable basis, 
    title clearance and legal services for making and closing the loan will 
    be provided in accordance with subpart B of part 1927. Title clearance 
    and legal services will not be requested until the loan is approved.
        (2) When real estate will not be mortgaged or when the best real 
    estate mortgage obtainable is taken as security without title clearance 
    or use of legal services, the applicant will be required to submit 
    evidence of ownership of the farm or nonfarm tract. When RHCDS is 
    uncertain as to whether or not the applicant is a qualified owner, such 
    action will be taken as RHCDS considers necessary, such as requiring 
    the applicant to furnish additional information. No loan will be made 
    if RHCDS has actual knowledge that the applicant does not have valid 
    title to the property.
    
    
    Sec. 1944.25  Rates and terms.
    
        (a) Interest rate. The interest rate charged by RHCDS will be the 
    lower of the rates in effect at the time of loan approval or loan 
    closing. Interest rates are specified in exhibit B of FmHA Instruction 
    440.1 (available in any RECD field office).
        (b) Amortization. Loans will be scheduled for repayment over a 
    period that will not exceed the expected useful life of the property as 
    a dwelling. Only one of the amortization periods listed in this 
    paragraph may be used for a borrower. Each loan will be scheduled for 
    repayment from the date of the promissory note, for a period not to 
    exceed one of the following as applicable:
        (1) Thirty-three years for initial and subsequent loans.
        (2) Thirty-eight years for initial loans (subsequent loans may be 
    made for a period not to exceed the remaining years of the initial 
    loan) when the following conditions are met:
        (i) Adjusted annual income does not exceed 60 percent of the median 
    income for the area as reflected in exhibit C, (available in any RECD 
    field office), and
        (ii) The longer term is necessary to show repayment ability, with 
    or without mortgage payment deferral.
        (3) Thirty years for manufactured homes.
        (4) Ten years for loans not exceeding $2,500 which are not secured 
    by a real estate mortgage.
        (c) Payment assistance. Applicants may be eligible for a non-cash 
    credit which may reduce the applicant's scheduled payment to a level 
    equivalent to amortizing the loan to as low as 1 percent. The policies 
    for granting and servicing payment assistance are set forth in 
    Sec. 1944.34 and subpart G of part 1951, respectively.
    
    
    Sec. 1944.26  Fund allocation.
    
        State Directors will maintain an adequate reserve to fund hardship 
    applications, servicing type loans, the 
    
    [[Page 55136]]
    State's portion of funds for Mutual Self-Help Housing loans and the 
    RHCDS portion of participation loans. Reserve funds will be used for:
        (a) Hardship applications.
        (1) Hardship as determined by the State Director on a case-by-case 
    basis, including applications from persons living in deficient housing 
    as defined in Sec. 1944.2, for more than 6 months.
        (2) Refinancing non-RHCDS debts in accordance with Sec. 1944.22(a) 
    and RHCDS debts in accordance with Sec. 1951.316.
        (b) Servicing type loans.
        (1) Financing for the purchase of Government-owned inventory 
    properties;
        (2) Subsequent loans for essential improvements or repairs;
        (3) Subsequent loans in connection with inventory property sales or 
    transfers with assumption of the RHCDS indebtedness.
        (c) Mutual Self-Help Housing loans. Homes must be located in an 
    RHCDS approved self-help project.
        (d) Participation loans. Loans made by RHCDS in conjunction with 
    another lender for the purchase of a dwelling.
    
    
    Sec. 1944.27  Application processing.
    
        (a) Accepting applications. RHCDS will accept completed 
    applications in accordance with subpart A of part 1910.
        (1) Complete applications. A completed application will consist of 
    Form FmHA 410-4, ``Application for Rural Housing Assistance (Nonfarm 
    Tract) Uniform Residential Loan Application,'' (URLA) and an RHCDS form 
    for verifying employment, for each employer, all of which are available 
    in any RECD field office.
        (2) Incomplete applications. If the application is not dated and 
    signed or sections are not properly completed, it may be returned for 
    completion.
        (3) Packaged applications. Builders, brokers, contractors, the 
    applicant, and others, including not-for-profit organizations, may 
    package loan applications in accordance with exhibit A (available in 
    any RECD field office). Builders and sellers holding conditional 
    commitments may also assist applicants in applying for an RH loan.
        (b) Processing steps.
        (1) [Reserved]
        (2) Complete applications will be processed in the order received, 
    in accordance with subpart A of part 1910 and subpart E of part 1901, 
    except that preference will be given to applications for Mutual Self-
    Help Housing loans, loan servicing purposes, purchase of an inventory 
    property, assumption of an existing RHCDS loan, and to applicants who 
    qualify as a hardship, as outlined in Sec. 1944.26. Veterans 
    preference, as outlined in subpart A of part 1910, will apply.
        (3) [Reserved]
        (4) If HUD's Credit Alert Interactive Voice Response System 
    (CAIVRS) identifies a delinquent Federal debt, RHCDS will immediately 
    suspend processing of the application and the applicant will be 
    notified in writing of the suspension and will be asked to contact the 
    appropriate Federal agency, at the telephone number provided by CAIVRS, 
    to resolve the delinquency. When the applicant provides RHCDS with 
    official documentation that the delinquency has been paid in full or 
    otherwise resolved, processing of the application will be continued. 
    After 30 days from the suspension notification, if CAIVRS indicates the 
    existence of an unsatisfied judgment in the favor of the United States, 
    or if the applicant remains delinquent on a Federal debt and is unable 
    to resolve the delinquency, the applicant will be rejected. The RHCDS 
    Administrator may grant an exception to this requirement if it is in 
    the best interest of the Government to do so.
        (5) If an on-line profile credit report, where available, reveals 
    adverse credit information, the applicant will be given the opportunity 
    to correct the adverse information. Applications will not be rejected 
    or withdrawal encouraged based on information provided in the on-line 
    credit report. This service is provided for the sole purpose of 
    providing assistance to the applicant by identifying any credit 
    problems at the beginning of the loan process and to clarify the 
    difference between eligibility for program assistance and loan 
    approval.
        (c) Determination of eligibility and notification to applicant. 
    Eligibility determination will be made regardless of ranking or funding 
    levels. If an applicant is determined ineligible because the 
    applicant's income is too high, RHCDS may advise the applicant that 
    applicant may qualify for the purchase of a Government inventory 
    property or the assumption of an existing RHCDS borrower's loan on NP 
    terms and may be counseled regarding the RH guaranteed loan program. If 
    an applicant is given an adverse decision, the applicant will be given 
    appeal rights to the Departmental National Appeals Division under Pub. 
    L. 103-354.
        (1) Delayed processing. When available loan funds are not adequate 
    to complete the processing of all applications as they are received, or 
    a large backlog of applications exists which prohibits immediate 
    processing of the application, a preliminary determination of 
    eligibility may be made based on the information provided by the 
    applicant.
        (i) If available funds are not adequate, applicants who appear 
    eligible at the time of application will be advised in writing within 
    30 days of filing of the application of their preliminary eligibility 
    determination and the estimated waiting period. They should be further 
    advised that a final determination of eligibility will be made when 
    loan funds are available for the processing of their application.
        (ii) Where there are more than 50 unprocessed applications on hand, 
    RHCDS will inform each applicant, at least every 6 months, of the 
    current funding status and provide an estimate of when the loan is 
    anticipated to be processed. At that time, the applicant should be 
    advised to contact RHCDS if they are still interested in funding, and 
    that the application will be withdrawn in 30 days if there is no 
    response.
        (2) Immediate processing. Where there is no backlog, available loan 
    funds are adequate, and the application can be processed in a timely 
    manner, RHCDS shall make a preliminary determination of eligibility 
    based on information submitted by the applicant and will request 
    additional information as necessary to make a final determination of 
    eligibility.
        (i) On-line profile credit reports may be used to allow a means for 
    the loan approval official to determine if there is adverse credit 
    information on the applicant's record prior to payment of the credit 
    report fee.
        (ii) The age of the applicant will not be considered except as 
    provided in Sec. 1944.9.
        (iii) Repayment ability will be evaluated in accordance with 
    Sec. 1944.8.
        (iv) RHCDS will apply the objective standards of credit evaluation, 
    outlined in Sec. 1944.9, for each applicant. All applications will be 
    considered under the same standards.
        (v) [Reserved]
        (d) Selection for processing.
        (1) Completed applications for a reserve funding category, as set 
    out in Sec. 1944.26, as well as applications for the assumption of an 
    existing RHCDS loan, will be processed upon receipt.
        (2) All other completed applications will be selected for 
    processing in the order received, as funding becomes available. 
    Selected applicants have 30 days to provide information required under 
    paragraph (e) of this section (including any fees for credit reports) 
    for a final determination of eligibility. Selected applicants who do 
    not respond to this 30-day notice will be withdrawn. Applications 
    selected will be funded in 
    
    [[Page 55137]]
    the order that information is received, until all available loan funds 
    are exhausted. Selected applicants who respond affirmatively to the 
    first notice, but who are not funded within the quarter will be held 
    over and counted as a selected applicant for the next quarterly 
    allotment and will be so notified in writing. If all requested 
    information is not received within 45 days after the second written 
    selection notification, the application will be withdrawn.
        (e) Verification of information.
        (1) Income verification. All applicants will be required to submit 
    a complete, legible copy of their most recently filed Federal income 
    tax return (showing the applicant's signature) unless exempted from 
    filing a return. In cases where a tax preparer has provided the 
    applicant with copies of the return which was filed, one of the copies 
    with the original signature of the tax preparer should be submitted. In 
    Puerto Rico, applicants must submit a signed photocopy of the most 
    recently filed State income tax returns. Applicants who do not have 
    photocopies of their filed Federal returns should contact their 
    Regional Internal Revenue Service. In addition to copies of tax 
    returns, other income verification may be required.
        (i) Applicants will complete such forms as required by RHCDS. A 
    form will be used to verify employment income of each applicant except 
    for self-employment.
        (ii) RHCDS may confirm reported wages and earnings, including 
    ``non-taxable income'' with the Department of Labor or similar agency 
    where this information is available.
        (iii) Applicants deriving their income from a farming or business 
    enterprise, must provide current documentation of income and expenses. 
    This information must not be older than the previous fiscal year.
        (iv) Applicants must provide a copy of the most recent award or 
    benefit letter prepared and signed by the authorizing agency to verify 
    Social Security, pension, and disability income. In addition, the Cost-
    of-Living (COLA) in Social Security Benefits and Supplemental Security 
    Income Payments Notice, Social Security Benefit Statement, Forms SSA-
    1099 and SSA-1042, or Notice of Change in Benefits may be required for 
    documentation of Social Security and Supplemental Security Income.
        (v) The applicant must provide a copy of the divorce decree or 
    other legal document indicating the amount of the payments to verify 
    alimony and child support payments. When the applicant states that less 
    than the amount awarded is received, RHCDS may request documentation 
    from the official entity through which payments are received, or other 
    third parties capable of providing the verification when payment is not 
    made through an official entity, indicating the dates and amounts of 
    payments made to the applicant during the previous 12 months.
        (vi) Income information that cannot be obtained by use of forms 
    provided by RHCDS will be obtained in writing from knowledgeable third 
    parties to the extent possible. When it is not feasible to verify 
    income through third parties, RHCDS may accept an affidavit from the 
    applicant; in the case of child support or alimony, the affidavit must 
    state the effort made to collect the amount awarded, and the amounts 
    and dates of payments received during the previous 12 months.
        (2) Verification of alien status. Aliens are required to present 
    documentation of their status. Exhibit B (available in any RECD field 
    office) outlines the acceptable forms of documentation.
        (3) Verification of disability. Form FmHA 1944-4, ``Certification 
    of Disability or Handicap,'' is used to verify disability in cases 
    where State Review Boards or Social Security records are not available. 
    When Form FmHA 1944-4 contains information which could affect the 
    applicant's eligibility, the applicant may be required to furnish a 
    physician's written opinion regarding the applicant's capacity to incur 
    the loan obligation.
        (f) Applicant interview. After verification of all information 
    necessary for making a final determination of eligibility but prior to 
    issuance of the Certificate of Eligibility, RHCDS will conduct a 
    personal interview with the applicant. The applicant may be accompanied 
    by an advisor but the applicant or court appointed guardian or 
    conservator must be personally responsive to all questions or issues 
    during the interview. During the interview, RHCDS and the applicant 
    will:
        (1) Verify information concerning persons who will occupy the 
    dwelling and on whose income eligibility for the loan and payment 
    assistance is based. Applicants who may be able to obtain other credit 
    will be told they are expected to apply for same from a lender making 
    loans for similar purposes. If requested, the applicant will have the 
    lender indicate the amount, interest rate, and terms of housing credit 
    the lender would be willing to extend to the applicant.
        (2) Reach an understanding that failure of the applicants to fully 
    disclose financial and application information or material 
    falsification or concealment of such information will result in a 
    denial of assistance and possible penalties.
        (g) Issuance of ``Certificate of Eligibility.'' Once all 
    information has been verified and eligibility has been determined, a 
    ``Certificate of Eligibility'' will be issued to all applicants 
    selected for further processing. The certificate will be valid for a 
    period not to exceed 90 days. The certificate will not be issued to 
    applicants who have submitted packaged applications that already 
    contain information necessary to complete a real estate appraisal.
        (1) Appraisals. After the Certificate of Eligibility is issued the 
    applicant has 90 days to provide information needed to complete the 
    real estate appraisal on the property to be financed.
        (i) Information requested will include a copy of the option or 
    sales agreement; a legal description of the property; a direction map; 
    certified building plans and specifications or repair estimates as 
    appropriate; copies of existing surveys, title information, and tax 
    bills; and other information deemed necessary by the appraiser.
        (ii) The applicant must advise RHCDS if they wish to have the cost 
    of the real estate appraisal included in the loan funds.
        (iii) Appraisals will generally be completed within 30 days of the 
    date information requested is received.
        (2) Environmental review. The Agency must complete the 
    environmental review process pursuant to subpart G of part 1940 prior 
    to loan approval or obligation, whichever occurs first.
        (3) Extensions or withdrawals. At the end of 90 days, if the 
    applicant has not submitted the information requested, the application 
    will be deemed withdrawn unless an extension is approved based on 
    evidence that the applicant is actively working on supplying the 
    necessary information. A maximum of two 60-day extensions can be 
    approved.
        (h) Appeals. If the decision on the applicant's request for 
    assistance is unfavorable, the applicant will be notified of the 
    appropriate appeal rights under Pub. L. 103-354 to the National Appeals 
    Division. The applicant will be notified that a new application may be 
    filed when curative action is taken to remove the reasons for 
    rejection.
        (i) Accountability. Applicants should be made aware of the 
    accountability requirements of persons paid to influence the making of 
    an RHCDS housing loan or grant as set out in subpart S of part 1940.
    
    [[Page 55138]]
    
    
    
    Secs. 1944.28-1944.30  [Reserved]
    
    
    Sec. 1944.31  Loan approval.
    
        (a) RHCDS employees are authorized to approve or disapprove loans, 
    as delegated, in accordance with subpart A of part 1901.
        (b) All loan approvals are subject to the availability of funds.
        (c) [Reserved]
        (d) [Reserved]
        (e) If title evidence is required in accordance with subpart B of 
    part 1927 or in accordance with any special requirements for the loan 
    but is not included in the docket, the loan may be approved subject to 
    the applicant furnishing the required title evidence. When the 
    applicant furnishes required title evidence, RHCDS will proceed with 
    processing the loan. In those cases in which the title evidence does 
    not comply with the conditions specified, the docket will be 
    reconsidered by the approval official.
    
    
    Sec. 1944.32  [Reserved]
    
    
    Sec. 1944.33  Loan closing.
    
        (a) Reverification of income. If a loan made on program terms will 
    be closed or the payment assistance agreement will be executed more 
    than 90 days after the date of the last verification of employment, or 
    if there is evidence to indicate the applicant's financial status has 
    changed significantly, the applicant's income will be reverified in 
    accordance with Sec. 1944.27 and the amount of payment assistance will 
    be determined on the basis of the applicant's new income, based on the 
    schedules contained at Sec. 1944.34(c). If the adjusted income is such 
    that the applicant is no longer eligible for payment assistance, the 
    loan may be closed if there is documented evidence to clearly indicate 
    other credit is not available and the applicant has adequate repayment 
    ability based on the revised income for the proposed loan. Payment 
    assistance may be granted if the applicant's income was at or below the 
    low-income level at the time of loan approval but payment assistance 
    will not be granted if the adjusted income exceeds the moderate-income 
    limit set forth in exhibit C (available in any RECD field office).
        (b) Promissory note. An RHCDS approved ``Promissory Note'' will be 
    prepared and signed in accordance with subpart B of part 1927. Payments 
    of principal and interest will be deferred during the period the 
    dwelling is not suitable for occupancy as a residence because of 
    construction or repairs. If the loan is closed before any funds are 
    advanced by RHCDS or loan funds are distributed by multiple advance, 
    accrued interest is added to principal and repaid in regular amortized 
    installments (payment alternative I) after the deferment period. The 
    monthly payment provision will be used for all applicants except those 
    who are existing RHCDS borrowers with previous loans which were made on 
    an annual payment basis. If the annual payment provision is used and 
    installments are not to be deferred, the amount of the first 
    installment will be determined by RHCDS after considering the immediate 
    debt paying ability of the applicant. The amount of the first 
    installment may not be less than an amount equal to interest on the 
    loan from the date of loan closing to the next January 1.
        (c) Real estate mortgage. An RHCDS approved real estate mortgage 
    form will be used for loans to be secured by a real estate mortgage.
        (d) Collection of the first installment. If the annual payment 
    provision of the note is used and payments are not to be deferred, the 
    first installment of a loan closed during December will be paid at the 
    time of loan closing.
        (e) Homeowners or fire and extended coverage insurance. Buildings 
    on the property taken as security for the loan will be insured in 
    accordance with subparts A and B of part 1806. The policy and a paid 
    receipt for 1 full year's premium must be presented by the applicant at 
    loan closing.
        (i) Effective date of loan closing. A loan secured by a real estate 
    mortgage is closed when the mortgage is filed for record and the 
    expected lien is obtained. In other cases, a loan is closed when the 
    applicant executes the note and any other required instruments.
    
    
    Sec. 1944.34  Payment assistance.
    
        (a) General. It is the policy of RHCDS to grant payment assistance 
    on loans to qualified applicants to assist them in obtaining and 
    retaining decent, safe, and sanitary dwellings and related facilities. 
    This section pertains to the granting of payment assistance connected 
    with loan making activities. All other provisions dealing with payment 
    assistance are contained in subparts G and I of part 1951.
        (b) Approval authority. Officials who are authorized to approve 
    section 502 RH loans are also authorized to approve payment assistance.
        (c) Amount of payment assistance. Payment assistance granted will 
    be the difference between the installment due on the promissory note 
    and the amount the greater of the payment amortized at the equivalent 
    interest rate related to the applicant's income or the payment 
    calculated based on the floor related to the applicant's income.
        (1) The floor is a minimum percentage of adjusted family income 
    which the borrower must pay for PITI as follows:
        (i) Very low-income borrowers will pay a minimum of 22 percent;
        (ii) Low-income borrowers with adjusted family income below 65 
    percent of median income will pay a minimum of 24 percent;
        (iii) Low-income borrowers with incomes between 65 percent to 80 
    percent of median will pay a minimum of 26 percent.
        (2) The equivalent interest rate is determined by a comparison of 
    the borrower's adjusted annual income as determined in Sec. 1944.6 to 
    the median income for the area where the security property is located, 
    based on income figures published by HUD as reflected in exhibit C 
    (available in any RECD field office). The following chart is to be used 
    for determining the equivalent interest rate paid by the applicant when 
    eligible for payment assistance, for loan making and loan servicing for 
    loans closed after the effective date of this subpart. In determining 
    percentages, rounding should not be used.
    
                               Percentage of Median Income and Equivalent Rate of Interest                          
    ----------------------------------------------------------------------------------------------------------------
                                        When the applicant's adjusted income is:                                    
    -----------------------------------------------------------------------------------------------------------------
                                                                                        Then the equivalent rate of 
             Equal to or more than                        But less than                        interest is**        
    ----------------------------------------------------------------------------------------------------------------
    00 percent -..........................  50.01 percent of median income..........  1 percent.                    
    50.01 percent.........................  55 percent of median income.............  2 percent.                    
    55 percent............................  60 percent of median income.............  3 percent.                    
    60 percent............................  65 percent of median income.............  4 percent.                    
    65 percent............................  70 percent of median income.............  5 percent.                    
    
    [[Page 55139]]
                                                                                                                    
    70 percent............................  75 percent of median income.............  6 percent.                    
    75 percent............................  80.01 percent of median income..........  6.5 percent.                  
    80.01 percent.........................  90 percent of median income.............  7.5 percent.                  
    90 percent............................  100 percent of median income............  8.5 percent.                  
    100 percent...........................  110 percent of median income............  9 percent.                    
    110 percent...........................  Or more than median income..............  9.5 percent.                  
    ----------------------------------------------------------------------------------------------------------------
    **Or note rate, whichever is less; in no case will the effective interest rate be less than 1 percent except as 
      provided in Sec. 1944.35.                                                                                     
    
    
        (3) Payments for existing borrowers receiving subsequent loans 
    approved after the effective date of this publication or whose loans 
    are being reamortized with a change in the term will be determined 
    under payment assistance.
        (4) Present RHCDS borrowers who are currently receiving payment 
    assistance as of the effective date of this subpart, will continue to 
    be reviewed under the system in effect prior to the effective date of 
    this issuance. Any other exception to the use of these interest rates 
    or minimum percentages of adjusted family income will be made by the 
    RHCDS Administrator under paragraph (h) of this section. Median income 
    is that reflected in exhibit C (available in any RECD field office).
        (d) Recapture. Borrowers must agree to provisions for recapture of 
    any payment assistance the borrower may receive during the life of the 
    loan. See subpart I of part 1951.
        (e) Eligibility. To be eligible for payment assistance, an 
    applicant must qualify for a section 502 RH loan, must personally 
    occupy the dwelling, and must meet the following additional 
    requirements:
        (1) Initial loans including inventory property sales. Payment 
    assistance may be granted at loan closing if:
        (i) The applicant's adjusted annual income, at the time of loan 
    approval, did not exceed the applicable low-income limit contained in 
    exhibit C (available in any RECD field office).
        (ii) The term of the loan will not be less than 25 years.
        (2) Subsequent loans. Payment assistance may be granted on 
    subsequent loans which meet the terms of paragraph (e)(1) of this 
    section. If payment assistance is presently being granted on the 
    initial loan and the applicant's adjusted income does not exceed the 
    moderate-income limit, it may also be granted on a subsequent loan, 
    providing the term of the subsequent loan is 25 years or more.
        (3) Assumptions. Payment assistance may be granted to an applicant 
    assuming an RH loan on new rates and terms, provided the assuming 
    parties qualify according to paragraph (e)(1) of this section. Payment 
    assistance may only be granted on ``same term'' assumptions if the 
    original loan was approved on or after August 1, 1968.
        (f) Processing payment assistance. The adjusted payment for which 
    an applicant qualifies after application of payment assistance will be 
    stated in the most current payment assistance agreement. Payment 
    assistance agreements will be for a 12-month period, with the following 
    exceptions:
        (1) Self-employed applicants. For a self-employed applicant, the 
    initial payment assistance agreement will run from the effective date 
    to 3 months after the end of the applicant's business fiscal year, but 
    not more than a 12-month period. This will allow subsequent agreements 
    to coincide with the applicant's business fiscal year with a 3-month 
    over-lap to provide sufficient time for the applicant to supply 
    verification of the previous year's income.
        (2) Unemployed applicants. For an applicant receiving unemployment 
    benefits, the agreement will be effective for the period during which 
    the applicant will receive unemployment benefits, or, if the period is 
    unknown, no longer than 6 months. The expiration date of the agreement 
    will be established by RHCDS.
        (3) Annual payment applicants. For an applicant currently paying an 
    annual installment, who receives a subsequent loan, the initial payment 
    assistance agreement including the subsequent loan will be in effect 
    until the next January 1.
        (g) Applicant notice of right to appeal. All applicants who request 
    and are denied payment assistance may appeal in accordance with Pub. L. 
    103-354 to the National Appeals Division, USDA.
        (h) Exceptions. RHCDS may make exceptions to proposed transactions 
    in which the conditions prescribed in the foregoing paragraphs of this 
    section cannot be met. This paragraph is primarily intended to be used 
    for those cases in which the granting of payment assistance is 
    necessary for the applicant to retain or obtain a dwelling for the 
    applicant's own use, and there are no other means to do so. RHCDS may 
    authorize a further reduction of the equivalent rate of interest in 
    high cost areas as determined by HUD when there is evidence to indicate 
    that there is no adequate, lower-cost housing available to the 
    applicant which would reduce the applicant's need for additional 
    subsidy; the housing to be financed is comparable in cost to housing 
    financed for very low-income applicants in the area; and the applicant 
    will be unable to acquire adequate housing unless additional subsidy is 
    authorized. This exception is limited to an additional one percentage 
    point reduction in the equivalent rate of interest but in no event may 
    the equivalent rate of interest be less than 1 percent except as 
    authorized in Sec. 1944.35. A high cost area is an area which has been 
    designated as high cost by HUD under the maximum dollar limitation of 
    section 203(b) of the National Housing Act (12 U.S.C. 1709) (available 
    from any HUD office).
    
    
    Sec. 1944.35  Deferred mortgage payments.
    
        (a) General. It is the policy of RHCDS to defer up to 25 percent of 
    the installment amount at the 1 percent equivalent interest rate to 
    qualified RHCDS applicants, to assist them in obtaining decent, safe, 
    and sanitary dwellings and related facilities. Only principal and 
    interest can be deferred.
        (b) Approval authority. Officials authorized to approve section 502 
    RH loans are also authorized to approve the deferral.
        (c) Eligibility. In order to qualify for deferred mortgage payments 
    under this section, the following conditions must exist: 
    
    [[Page 55140]]
    
        (1) The applicant's adjusted family income, at the time of initial 
    loan approval, must not exceed the applicable very low-income limits in 
    exhibit C (available in any RECD field office);
        (2) The term of the loan is 38 years, or 30 years for manufactured 
    housing units;
        (3) The applicant qualifies for the maximum payment assistance 
    (equivalent to an interest rate of no more than 1 percent) allowable 
    under Sec. 1944.34;
        (4) The applicant's PITI, calculated at 1 percent equivalent 
    interest rate for 38 years, exceeds 29 percent of the adjusted annual 
    income; and
        (5) The initial deferral assistance under this section is granted 
    in connection with the initial loan closing; or deferral assistance is 
    being renewed, without interruption, during the 15-year period from the 
    effective date of the initial agreement.
        (d) Amount and terms of deferral.
        (1) The deferral amount is determined as follows:
        (i) The applicant will be at the maximum payment assistance 
    allowable under Sec. 1944.34.
        (ii) RHCDS will calculate the applicant's PITI based on the 
    equivalent 1 percent interest rate for 38 years (30 years for 
    manufactured housing units), and the annual real estate taxes and 
    insurance due for the current year (or escrow amounts for real estate 
    taxes and insurance premiums due during the current year, where 
    applicable).
        (A) If the amount of real estate taxes due for the initial 
    agreement is less than a typical year's taxes (such as in new 
    construction), then ``eligibility'' for deferral assistance will be 
    determined based on the amount of taxes due in a typical year but the 
    ``amount'' of deferral for which the applicant qualifies will always be 
    based upon actual taxes due for the current year. This may result in 
    the applicant being eligible for assistance but not having anything 
    deferred during the first year. Although there may not be any portion 
    of the payment deferred in the first year, the 15-year period for 
    assistance will still be calculated from the date of loan closing.
        (B) For renewals of deferral assistance, only the regularly 
    scheduled PITI due for the current year calculated at 1 percent 
    equivalent interest rate for 38 years, will be considered when 
    calculating the deferral amount. Protective advances, additional 
    payment agreements, and other payment agreements will not be considered 
    in this calculation.
        (iii) If the reduced PITI calculated at 1 percent for 38 years (30 
    years for manufactured housing units) still exceeds 29 percent of gross 
    annual income, the deferred mortgage payment will be 75 percent of the 
    monthly installment amount at the 1 percent equivalent interest rate 
    amortized over 38 years.
        (2) Deferred mortgage payments will be effective for a 12-month 
    period. The effective date will coincide with the anniversary date of 
    the payment assistance agreement. Deferred mortgage assistance may be 
    continued, without interruption, for up to 15 years after the date of 
    loan closing. A borrower who no longer qualifies for deferred mortgage 
    assistance because of an increase in income, will not receive deferred 
    mortgage assistance again, even if income decreases at a later date.
        (e) Review process. The borrower's income, taxes, and insurance 
    will be reviewed annually to determine eligibility for continued 
    deferred mortgage assistance and payment assistance. The review for 
    both types of assistance shall be performed simultaneously. It is not 
    the responsibility of RHCDS to monitor changes in the borrower's 
    income. If a borrower whose payments are being deferred experiences a 
    change in income that qualifies under subpart G of part 1951 for a 
    change in payment assistance, the borrower should request a review for 
    deferred mortgage payment assistance. Adjustments to deferred mortgage 
    assistance and payment assistance will be effective as of the date of 
    income change.
        (1) Annual review. The annual review will be scheduled to take 
    place during the payment assistance review period as defined in subpart 
    G of part 1951 (available in any RECD field office).
        (2) Responsibilities of the applicant. Before a deferral will be 
    approved, the applicant must:
        (i) Provide RHCDS with income verification, as described in 
    Sec. 1944.27;
        (ii) Provide RHCDS with information needed to complete the deferral 
    section of the Payment Assistance/Deferred Mortgage Assistance 
    Agreement;
        (iii) Review and sign the appropriate RHCDS forms and documents, 
    and
        (iv) Participate in an interview to review the deferral 
    information.
        (f) Cancellation of deferral. Deferral under this section may be 
    canceled for any of the conditions for which payment assistance may be 
    canceled in Sec. 1951.313. Once a borrower goes off deferred mortgage 
    payments, the borrower is not eligible to receive this assistance 
    again. Deferred payments may only be continued for up to 15 years after 
    the effective date of the loan closing.
        (g) Recapture. The amount deferred is subject to repayment and 
    recapture in accordance with subpart I of part 1951.
        (h) Appeal/review rights. Because the deferred mortgage regulations 
    are based on the objective application of formulas, deferred mortgage 
    payment calculations are not appealable; however, a review may be 
    requested in accordance with subpart B of part 1900. Applicants who 
    request and are denied deferred mortgage payments, or whose deferral 
    amount has been reduced, canceled, or not renewed based on contested 
    income calculations, may appeal that decision in accordance with Pub. 
    L. 103-354 to the National Appeals Division, U.S.D.A.
    
    
    Sec. 1944.36  [Reserved]
    
    
    Sec. 1944.37  Subsequent section 502 RH loans.
    
        Subsequent section 502 RH loans may be made to existing borrowers 
    for the same purposes and under the same conditions and limitations as 
    an initial loan, except as provided in this section. A new credit 
    report is required for all applicants for subsequent loans in 
    accordance with Sec. 1944.27.
        (a) The subsequent loan will be processed in the same manner as an 
    initial loan, except that a new appraisal report will be required in 
    accordance with Sec. 1944.24 only when real estate will be taken as 
    security and at least one of the following conditions exists:
        (1) The property was not appraised in connection with the initial 
    loan;
        (2) The latest appraisal report of the real estate is over 2 years 
    old;
        (3) The physical characteristics of the property have changed 
    significantly;
        (4) RHCDS is uncertain of the adequacy of the security; or
        (5) The subsequent loan is in connection with a transfer of an 
    existing loan subject to subsidy recapture in accordance with subpart I 
    of part 1951.
        (b) A subsequent RH loan may be made on a note-only basis, provided 
    the amount of the subsequent loan plus the unpaid principal balance of 
    any prior note-only RH loans do not exceed $2,500. Applicants for such 
    loans must meet the requirements of Sec. 1944.18.
        (c) [Reserved]
        (d) The subsequent loan will bear interest at a rate determined in 
    accordance with exhibit B of FmHA Instruction 440.1 (available in any 
    RECD field office).
        (e) A subsequent loan may be made to permit the remaining borrower, 
    if eligible, to purchase the equity of a departing coborrower.
        (f) When an area designation has been changed from rural to 
    nonrural, 
    
    [[Page 55141]]
    subsequent RH loans may be made only in accordance with the provisions 
    of Sec. 1944.10.
        (g) The loan approval official may authorize reamortization of a 
    prior RH loan at the time a subsequent loan is made in those cases in 
    which it is determined that the borrower cannot reasonably be expected 
    to meet installments due unless the account is reamortized. If the 
    account is reamortized, the reamortization must be in accordance with 
    subpart G of part 1951.
        (h) Title clearance and appraisal fees for subsequent loans to 
    existing RHCDS borrowers for minimal essential repairs to protect the 
    Government's security will be handled in accordance with Secs. 1944.18 
    and 1944.24.
    
    
    Sec. 1944.38  Mutual Self-Help Housing loans.
    
        Applicants may build their homes by participating in a Mutual Self-
    Help Housing project sponsored by an RHCDS self help housing grantee. 
    See subpart I of part 1944 for the requirements for an organization to 
    become a self-help housing grantee.
    
    
    Sec. 1944.39  RH loans to RHCDS employees and loan closing officials.
    
        RHCDS employees, and loan closing agents, or members of their 
    families may obtain a section 502 RH loan subject to the provisions of 
    this subpart:
        (a) Written evidence indicating the applicant's inability to obtain 
    the needed credit elsewhere will be included in the application.
        (b) Applications will be processed and loans will be serviced 
    according to subpart D of part 1900.
        (c) Loans, inventory property sales, or assumption agreements will 
    not be approved under this authority for any of the following purposes:
        (1) Buying RHCDS inventory property;
        (2) Buying RHCDS security property from a borrower; or
        (3) Buying RHCDS security property at foreclosure sale.
    
    
    Sec. 1944.40  [Reserved]
    
    
    Sec. 1944.41  Housing demonstration programs.
    
        RHCDS may authorize limited demonstration programs that may not be 
    consistent with some of the provisions of this chapter. Those 
    demonstration programs will be clearly identified as such.
    
    
    Sec. 1944.42  Condominium and community land trust requirements.
    
        (a) Condominiums. A loan may be made on an existing condominium 
    unit when the project has been approved or accepted by Housing and 
    Urban Development (HUD), Federal National Mortgage Association (Fannie 
    Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) provided 
    the applicant and loan meet all other requirements in accordance with 
    this subpart. Official documentation from the approving agency must be 
    submitted with the sales contract. The condominium documents must 
    ensure the following:
        (1) The condominium project has been created and exists in full 
    compliance with the requirements of the condominium enabling statute 
    and all other applicable laws of the jurisdiction where the condominium 
    project is located.
        (2) Any right of first refusal in the condominium documents will 
    not impair the rights of Rural Housing and Community Development 
    Service (RHCDS) to:
        (i) foreclose or take title to a condominium unit pursuant to the 
    remedies in the mortgage;
        (ii) accept a deed or assignment in lieu of foreclosure in the 
    event of default by a mortgagor; and
        (iii) sell or lease a unit acquired by RHCDS.
        (3) If RHCDS obtains title to a condominium unit pursuant to the 
    remedies in its mortgage or through foreclosure, RHCDS will not be 
    liable for more than 3 months of the unit's unpaid regularly budgeted 
    dues or charges accrued before acquisition of the title to the unit by 
    RHCDS. The homeowners association's lien priority may not include costs 
    of collecting unpaid dues.
        (4) In case of condemnation or substantial loss to the units or 
    common elements of the condominium project, unless at least two-thirds 
    of the first mortgagees or unit owners of the individual condominium 
    units have given their consent, the homeowners association may not:
        (i) By act or omission seek to abandon or terminate the condominium 
    project;
        (ii) Change the pro rata interest or obligations of any condominium 
    unit in order to levy assessments or charges, allocate distribution of 
    hazard insurance proceeds or condemnation awards, or determine the pro 
    rata share of ownership of each condominium unit in the common 
    elements;
        (iii) Partition or subdivide any condominium unit;
        (iv) Seek to abandon, partition, subdivide, encumber, sell, or 
    transfer the common elements by act or omission; (the granting of 
    easements for public utilities or other public purposes consistent with 
    the intended use of the common elements by the condominium project is 
    not a transfer within the meaning of this clause); or
        (v) Use hazard insurance proceeds for losses to any condominium 
    property (whether units or common elements) for other than the repair, 
    replacement, or reconstruction of the condominium property.
        (5) The project, including all common elements and amenities, is 
    complete. All amenities are covered by the mortgage at least to the 
    same extent as the common elements.
        (6) All taxes, assessments, and charges that may become liens prior 
    to the first mortgage under local law relate only to the individual 
    condominium units and not to the condominium project as a whole.
        (7) No provision of the condominium documents gives a condominium 
    unit owner or any other party priority over any rights of RHCDS as 
    first or second mortgagee of the condominium unit pursuant to its 
    mortgage in the case of a payment to the unit owner of insurance 
    proceeds or condemnation awards for losses to or taking of condominium 
    units or common elements.
        (8) If the condominium project is on a leasehold the underlying 
    lease provides adequate security of tenure.
        (9) At least 70 percent of the units have been sold. Multiple 
    purchases of condominium units by one owner are counted as one sale 
    when determining if the sales requirement has been met.
        (10) No more than 15 percent of the unit owners are more than 1 
    month delinquent in payment of homeowners association's dues or 
    assessments at the time of delivery of the mortgage to RHCDS.
        (b) Community land trusts. Loans may be made to finance the 
    purchase of a dwelling located on land owned by a community land trust, 
    provided the applicant and the loan meet all other requirements in 
    accordance with this subpart.
        (1) Community land trust is defined as a community housing 
    development organization which is a private nonprofit organization, 
    including State or locally chartered nonprofit organization. In 
    addition to the statutory requirements the ownership requirements must 
    be consistent with the leasehold provisions in Sec. 1944.15(a)(5) of 
    this subpart. The leasehold must be appraised in accordance with 
    subpart C of part 1922 (available in any RECD office).
        (2) The ownership requirements must be consistent with the 
    leasehold provisions in Sec. 1944.15(a)(5). The leasehold must be 
    appraised in 
    
    [[Page 55142]]
    accordance with subpart C of part 1922 (available in any RECD field 
    office).
        (i) The rights are held only by a governmental body or eligible 
    nonprofit organization and exercised by them or someone they have 
    identified as an eligible purchaser;
        (ii) Any right is exercised within 45 days after the holder of 
    these rights may exercise them (for example, the rights are often 
    triggered by a notice of sale from the borrower); and
        (iii) Any option price allows the borrower to recover the 
    borrower's investment plus a reasonable share of appreciation. The 
    national office may approve option rights to be held and exercised by 
    another person or entity on a case-by-case basis.
        (3) All restrictions relating to community land trusts that are 
    allowed by RHCDS must automatically and permanently terminate upon 
    foreclosure and deed-in-lieu of foreclosure. The relevant legal 
    documents must have language that accomplishes this result. Merely 
    subordinating the restrictions to the mortgage is not sufficient. The 
    restrictions cannot come back in force upon subsequent resale by RHCDS.
    
    
    Sec. 1944.43  [Reserved]
    
    
    Sec. 1944.44  Borrower graduation.
    
        Borrowers will be asked to refinance RH loans when the Agency 
    determines that credit likely will be available at rates and terms 
    prevailing in the area and on terms which the borrower can reasonably 
    be expected to meet. Borrowers will be required to apply for a 
    refinancing loan from one or more locally active lenders when asked 
    and, if approved by a lender, accept such credit to pay the RHCDS loan 
    in full.
    
    
    Sec. 1944.45  Conditional commitments.
    
        (a) General. A conditional commitment is assurance from RHCDS to a 
    qualified builder, dealer-contractor, or seller that a dwelling to be 
    offered for sale will be acceptable for purchase by qualified RH loan 
    applicants if accepted by RHCDS and/or built or rehabilitated in 
    accordance with RHCDS approved plans, specifications, and regulations, 
    and priced at not more than a specified amount. The conditional 
    commitment does not reserve funds nor does it assure that an eligible 
    loan applicant will be available to buy the dwelling. The conditional 
    commitment is not effective if the area does not remain rural.
        (b) Eligibility. To be eligible for conditional commitments, the 
    builder, dealer-contractor, or seller must:
        (1) Be the owner as defined in Sec. 1944.15, prior to the beginning 
    of any planned construction, of the site on which the dwelling is 
    located or to be built, except as set out in subpart G of part 1822 
    (FmHA Instruction 444.8).
        (2) Have the experience and ability to complete any proposed work 
    in a competent and professional manner.
        (3) Be financially responsible and have the ability to finance or 
    obtain financing for any proposed construction or rehabilitation.
        (4) Comply with the requirements of subpart E of part 1901 and all 
    applicable laws, regulations, and Executive Orders relating to equal 
    opportunity.
        (5) Plan to build or rehabilitate dwellings which will qualify for 
    purchase by RH applicants and which will be in compliance with all 
    applicable laws, ordinances, and codes.
        (6) Have the legal capacity to enter into the required agreements 
    and the actual capacity to carry them out.
        (c) Limitations. 
        (1) Conditional commitments will be issued only in cases where the 
    commitment applicant's selling price does not exceed the commitment 
    price, which will never be more than the lower of the appraised value 
    or the maximum loan amount as contained in Sec. 1944.17.
        (2) Conditional commitments will be issued by RHCDS for new homes 
    to be constructed, new manufactured homes, or existing homes (other 
    than manufactured).
        (3) Conditional commitments for new or substantially rehabilitated 
    dwellings will not be issued after construction has started.
        (4) The total number of conditional commitments issued in any 
    locality will not exceed the number of homes for which there is an 
    immediate and ready market in that locality. In addition, the total 
    number of conditional commitments outstanding in the area served by an 
    RECD field office will not exceed the number on which the approval 
    official can reasonably expect to be able to approve RH loans within 3 
    months after the houses covered by the commitments are completed, 
    considering the availability of loan funds, and the number of 
    applications in any RECD field office.
        (5) The period of the conditional commitment will be for 12 months 
    from the date of issuance. The commitment may be extended for an 
    additional 6 months because of unexpected delays in construction caused 
    by such factors as bad weather, materials shortages, or marketing 
    difficulties.
        (6) When five or more conditional commitments have been issued to 
    one recipient during a 12-month period, an affirmative marketing plan 
    will be required in accordance with Sec. 1901.203(c).
        (d) Conditional commitments where the dwelling is presold to a 
    specific applicant. In cases where the dwelling is presold and is to be 
    constructed for sale only to a specific applicant and the information 
    on the house and the loan applicant is submitted at the same time, all 
    of the following conditions must be met:
        (1) The conditional commitment will not be approved until the RH 
    loan has been approved;
        (2) Construction will not begin until loan funds are obligated for 
    the RH loan. RHCDS may make an exception to this requirement when it 
    appears likely that funding will be forthcoming and it is necessary to 
    begin construction because of weather conditions or similar 
    circumstances provided the commencement of construction prior to 
    closing the RH loan will not jeopardize RHCDS's lien priority.
        (i) The sales agreement must indicate that the loan has been 
    approved but not funded and must provide that if the loan is not closed 
    within 90 days of the date of approval, the contractor may, in writing, 
    terminate the sales agreement and sell the home to another party. If 
    the sales agreement is terminated, the conditional commitment will be 
    honored for another eligible RHCDS loan applicant for the remaining 
    period of the commitment, providing the contractor has met all other 
    requirements of this subpart.
        (ii) If the sales agreement is terminated, a Certificate of 
    Eligibility will be issued to the loan applicant in accordance with 
    Sec. 1944.27.
        (3) The RH loan will be closed only after the dwelling is 
    constructed or the required rehabilitation completed and final 
    inspection has been made.
        (e) Fees. Each commitment applicant will pay a fee for each 
    conditional commitment at the time an application is submitted. Fees 
    are established in exhibit G (available in any RECD field office). 
    Conditional commitment contractors will be reimbursed at the time the 
    section 502 RH loan is closed for an amount equal to the fee the 
    section 502 RH applicant is charged for the real estate appraisal.
        (f) Processing applications.
        (1) Application submission. Applications for conditional 
    commitments will be submitted on a form provided by the Agency. 
    Attachments, as required by the form, will be included for each 
    individual dwelling for which a conditional commitment is requested.
        (2) [Reserved] 
    
    [[Page 55143]]
    
        (3) Evaluation of applications. The commitment applicant must meet 
    the requirements of paragraphs (b) and (c) of this section, and the 
    dwelling and site must meet the requirements of this subpart and 
    subpart A of part 1924 and comply with all local codes and ordinances. 
    The property must meet the requirements of subpart C of part 1924 and 
    subpart G of part 1940. If the commitment applicant, dwelling, and site 
    qualify, an appraisal will be obtained in accordance with subpart C of 
    part 1922.
        (4) Failure of applicant or dwelling to qualify. If the application 
    is denied for failure to meet the requirements of paragraph (b)(2) or 
    (3) of this section, the applicant may appeal in accordance with Pub. 
    L. 103-354 to the National Appeals Division, U.S.D.A.
        (i) The application fee will be refunded if for any reason 
    preliminary inspection of the property or investigation of the 
    commitment applicant indicates that a conditional commitment will not 
    be issued.
        (ii) Application fees will not be refunded for any property on 
    which the required appraisal has been made.
        (5) Conditional commitment price. The commitment price may not 
    exceed the loan approval authority for section 502 RH loans. See 
    subpart A of part 1901.
        (g) Inspections. Failure to correct any deficiencies or to complete 
    the work in accordance with plans and specifications approved by RHCDS 
    will be a basis for canceling the conditional commitment. The applicant 
    must allow RHCDS access for the purpose of inspection. See subpart A of 
    part 1924.
        (h) Changes in plans, specifications, or commitment price. RHCDS 
    may approve changes in plans and specifications that are consistent 
    with the applicable development standard and exhibit D of subpart A of 
    part 1924. If the changes are requested after an option has been 
    executed by an RH applicant, the change will be approved only if the 
    applicant and the commitment holder agree to the request in writing. If 
    a change will reduce or increase the appraised value of the property, 
    RHCDS will revise the commitment price and inform the commitment 
    holder. Also, in cases when the holder of a commitment reports to RHCDS 
    that costs associated with the construction or repair of a dwelling 
    have increased, RHCDS may increase the commitment price provided the 
    property has not been optioned by an RH applicant, and RHCDS determines 
    that the increase is clearly justified, the circumstances causing the 
    price increase were beyond the commitment holder's control, and the 
    value of the property is adequate to permit the increased commitment 
    price and the price does not exceed the maximum cost established 
    pursuant to Sec. 1944.16. A revised appraisal report will be prepared.
        (i) Cancellation of outstanding conditional commitments.
        (1) Conditional commitments may be canceled when construction of 
    the dwelling is not begun within 60 days after the commitment is 
    issued.
        (2) Conditional commitments will be canceled when construction is 
    not in accordance with all RHCDS requirements, approved plans, 
    specifications, or the applicable development standards, and the 
    builder does not make corrections necessary for compliance.
        (j) [Reserved]
        (k) Builder's warranty. The builder or seller, as appropriate, will 
    execute an RHCDS approved ``Builder's Warranty,'' or provide a 10-year 
    insured warranty when construction is completed or the loan to buy the 
    dwelling is closed.
    
    
    Sec. 1944.46  Appeals.
    
        Any applicant who requests and is denied assistance or who has a 
    right denied, reduced, or canceled may appeal the action in accordance 
    with Pub. L. 103-354 to the National Appeals Division, U.S.D.A.
    
    
    Secs. 1944.47-1944.48  [Reserved]
    
    
    Sec. 1944.49  Administrative instructions.
    
        Detailed administrative instructions for administering this subpart 
    are available in any RECD field office.
    
    
    Sec. 1944.50  OMB control number.
    
        The reporting and recordkeeping requirements contained in this 
    regulation have been approved by the Office of Management and Budget 
    (OMB) and have been assigned OMB control number 0575-0059. Public 
    reporting burden for this collection of information is estimated to 
    vary from 5 minutes to 1.5 hours per response, with an average of .41 
    hours per response, including time for reviewing instructions, 
    searching existing data sources, gathering and maintaining the data 
    needed, and completing and reviewing the collection of information. 
    Send comments regarding this burden estimate or any other aspect of 
    this collection of information, including suggestions for reducing this 
    burden to the Department of Agriculture, Clearance Officer, OIRM, Ag 
    Box 7630, Washington, D.C. 20250; and to the Office of Management and 
    Budget, Paperwork Reduction Project (OMB #0575-0059), Washington, D.C. 
    20503.
    
    Subpart J--Section 504 Rural Housing Loans and Grants
    
    
    Sec. 1944.452  [Amended]
    
        18. Section 1944.452 is amended by removing the word ``handicap'' 
    and adding the words ``physical or mental disability'' in their place 
    and by revising ``FmHA'' to read ``RHCDS''.
        19. Section 1944.453(d) is added to read as follows:
    
    
    Sec. 1944.453  Definitions.
    
    * * * * *
        (d) Owner-occupant. Adults living in the household who have 
    ownership rights in the property at the time a loan or grant is closed.
        20. Section 1944.456 is amended by removing ``County Supervisor'' 
    and replacing it with ``loan approval official'' in paragraphs (a)(1) 
    and (2); by inserting ``, environmental, tax monitoring,'' after the 
    word ``architectural'' in paragraph (i); by removing the wording 
    ``handicapped or disabled persons'' and inserting ``persons who are 
    developmentally disabled'' in paragraph (l); by inserting ``, not to 
    exceed $300,'' after the word ``fees'' in paragraph (m) introductory 
    text; by removing existing paragraph (m)(2); and by redesignating 
    paragraph (m)(3) as paragraph (m)(2); and by adding a new paragraph 
    (m)(3) to read as follows:
    
    
    Sec. 1944.456  Loan and grant purposes.
    
    * * * * *
        (m) *  *  *
        (3) The package is acceptable and the request is funded.
        21. Section 1944.457 is amended by revising the heading; by 
    inserting the word ``loan'' after the word ``Maximum'' in paragraph 
    (a)(1); by removing the word ``individual'' in paragraphs (a) (1) and 
    (2) and inserting the words ``owner-occupant;'' by revising ``$15,000'' 
    to read ``$20,000'' at the end of paragraph (a)(1); by revising 
    ``$5,000'' to read ``$7,500'' at the end of paragraph (a)(2); and by 
    revising paragraph (a)(4) to read as follows:
    
    
    Sec. 1944.457  Loan and grant restrictions and record keeping.
    
    * * * * *
        (a) *  *  *
        (4) Document the amount of grant provided each grantee on a list of 
    section 504 recipients and retain it in the office operational file. 
    The list will contain the names of all owner-occupants at the time of 
    the grant closing. The list must include the following information 
    recorded at the time a section 504 grant is made:
        (i) Grantee's names, address, and case number; 
    
    [[Page 55144]]
    
        (ii) Amount of the grant; and
        (iii) Date grant was closed.
    * * * * *
        22. Section 1944.458 is amended by revising ``District Director'' 
    to read ``next level approval official'' in paragraph (d)(3), and 
    paragraphs (d) (1) and (2) are revised to read as follows:
    
    
    Sec. 1944.458  Eligibility requirements.
    
    * * * * *
        (d) *  *  *
        (1) Evaluation of personal resources will exclude the dwelling and 
    a minimum adequate site, personal automobile, household goods, and 
    liquid assets up to $7,500. Liquid assets are cash or other assets that 
    can be converted to cash in 90 days or less. Real estate acreage larger 
    than a minimum adequate site will not be excluded from the evaluation.
        (2) In cases where the family is experiencing unusually high 
    medical expenses, the next level approval official may waive requiring 
    the use of liquid assets down to $7,500.
    * * * * *
        23. Section 1944.461 is amended by revising the term ``County 
    Supervisor'' to read ``loan approval official'' in paragraphs 
    (a)(1)(iii)(A) and (d)(2), by revising the term ``County Supervisors'' 
    to read ``loan approval officials'' in the introductory text of 
    paragraph (a), by removing the words ``loan plus any outstanding'' and 
    inserting in their place ``and existing section 504'' in paragraph 
    (b)(1), by removing the word ``remaindermen's'' before the word 
    ``interests'' and inserting the word ``remainder'' in its place in 
    paragraph (b)(3) introductory text, and by revising paragraphs (b)(3), 
    (i), (iii), and (iv) to read as follows:
    
    
    Sec. 1944.461  Security and other requirements.
    
    * * * * *
        (b) *  *  *
        (3) *  *  *
        (i) One or more of the holders of remainder interests is not 
    legally competent (and there is no guardian or conservator who can 
    consent to the mortgage), cannot be located, or the remainder rights 
    are divided among such a large number of people that it is not 
    practical to obtain the signatures of all the remainder interests;
    * * * * *
        (iii) All legally competent persons (or the guardian or conservator 
    for any person who is not legally competent) holding remainder 
    interests who are using or occupying the dwelling sign the mortgage; 
    and,
        (iv) The loan does not exceed the market value of the portion of 
    the property represented by the remainder interests of the persons 
    signing the mortgage.
    * * * * *
        24. Section 1944.463 is amended by inserting the words ``or other 
    construction development'' after the words ``safety hazards'' and by 
    revising ``FmHA'' to read ``RHCDS'' in the first sentence of paragraph 
    (a) introductory text; by inserting the words ``security is taken and 
    the total section 504 indebtedness will be'' after the word ``when,'' 
    by removing ``(including land sale contracts) is'' and by revising 
    ``$7,500'' to read ``$15,000'' in the first sentence of paragraph (d) 
    introductory text; by removing the words ``Total FmHA indebtedness'' 
    from the first sentence of paragraphs (e)(1) and (e)(2) and inserting 
    the words ``section 504 assistance'' in their place; by revising the 
    term ``County Supervisor'' to read ``loan approval official'' in the 
    second sentence of paragraph (e)(1); and by revising paragraph (d)(1) 
    to read as follows:
    
    
    Sec. 1944.463  Technical services.
    
    * * * * *
        (d) * * *
        (1) On a nonfarm tract or small farm, or on a leasehold interest in 
    a nonfarm tract or small farm, an estimate of value (limited vs. 
    complete appraisal) will be done in accordance with subpart C of part 
    1922, based on the direct sales comparison approach only, utilizing the 
    most recent comparable sales data available. The Uniform Residential 
    Appraisal Report (URAR) will be used for this purpose. These appraisals 
    will be done by RHCDS employees having a good understanding of 
    appraisal concepts and adequate appraisal training. A small farm, for 
    the purpose of this subpart, is a farm as defined in Sec. 1944.2 which 
    has value primarily as a residence rather than for the production of 
    agricultural commodities, and repayment of the RH loan is not dependent 
    on farm income.
    * * * * *
        25. Section 1944.467 is amended by removing paragraph (d); by 
    removing and reserving paragraph (c) by redesignating paragraphs (e), 
    (f), (g) and (h) as paragraphs (d), (e), (f) and (g) respectively; by 
    revising the term ``County Supervisor'' to read ``loan approval 
    official'' in paragraph (a)(1) and newly redesignated paragraph (e); 
    and by revising the introductory text of paragraph (a), and paragraph 
    (a)(3) to read as follows:
    
    
    Sec. 1944.467  Processing applications.
    
        (a) Application. Application for Section 504 assistance will be 
    made on a form provided by the Agency. The application will be 
    processed in accordance with Sec. 1944.27 using applicable forms from 
    exhibit E, available in any RECD field office.
    * * * * *
        (3) Actions taken under this subpart are subject to the 
    environmental requirements of subpart G of part 1940.
    * * * * *
    
    
    Sec. 1944.468  [Amended]
    
        26. Section 1944.468 is amended by removing the words ``must not be 
    over 90 days old.'' at the end of paragraph (b) and inserting the words 
    ``are as prescribed in subpart A of this part.''
    
    
    Sec. 1944.469  [Amended]
    
        27. Section 1944.469 is amended by revising the term ``County 
    Supervisor'' to read ``loan approval official'' in the introductory 
    paragraph; by removing and reserving paragraphs (b) and (c) and by 
    adding the words ``or Deed of Trust'' to the name of Form FmHA 1927-1 
    after the word ``Mortgage'' in paragraph (d).
        28. Section 1944.472 is amended by adding new language at the end 
    of the paragraph to read as follows:
    
    
    Sec. 1944.472  Subsequent Section 504 loans and/or grants.
    
        * * * If the area designation has changed from rural to nonrural, 
    subsequent loans and grants will be made only for essential repairs.
        29. Section 1944.500 is revised to read as follows:
    
    
    Sec. 1944.500  OMB control number.
    
        The reporting requirements contained in this regulation have been 
    approved by the Office of Management and Budget (OMB) and have been 
    assigned OMB control number 0575-0062. Public reporting burden for this 
    collection of information is estimated to average 5 minutes per 
    response, including time for reviewing instructions, searching existing 
    data sources, gathering and maintaining the data needed, and completing 
    and reviewing the collection of information. Send comments regarding 
    this burden estimate or any other aspect of this collection of 
    information, including suggestions for reducing this burden to the 
    Department of Agriculture, Clearance Officer, OIRM, Ag Box 7630, 
    Washington, D.C. 20250; and to the Office of Management and Budget, 
    Paperwork Reduction Project (OMB #0575-0062), Washington, D.C. 20503.
    
    [[Page 55145]]
    
    
    PART 1951--GENERAL
    
    Subpart D--Final Payment on Loans
    
    
    Sec. 1951.155  [Amended]
    
        30. Section 1951.155(c) introductory text is amended to remove 
    ``FmHA'' and replace it with ``RHCDS, RBCDS, RUS, and/or CFSA'' in the 
    next to the last sentence of the paragraph.
    
    Subpart G--Borrower Supervision, Servicing, and Collection of 
    Single Family Housing Loan Accounts
    
    
    Sec. 1951.301  [Amended]
    
        31. Section 1951.301 is amended by revising ``Farmers Home 
    Administration or its successor agency under Public Law 203-354'' to 
    read ``Rural Housing and Community Development Service (RHCDS) or its 
    successor agency,'' by revising ``FmHA or its successor agency under 
    Public Law 103-354'' to read ``RHCDS,'' and replacing the word 
    ``handicap'' with ``disability''.
        32. Section 1951.304(d) is added to read as follows:
    
    
    Sec. 1951.304  Definitions.
    
    * * * * *
        (d) Interest credit. The terms ``interest credit'' and ``interest 
    credit assistance,'' as they relate to Single Family Housing (SFH), are 
    interchangeable with the term ``payment assistance.'' Payment 
    assistance is the generic term for the subsidy provided to eligible SFH 
    borrowers to reduce mortgage payments.''
    
    
    Sec. 1951.312  [Amended]
    
        33. Section 1951.312, in paragraph (b), the heading is revised to 
    read ``Payment Assistance'' and the words ``and Sec. 1951.313 of this 
    subpart'' are added at the end of the paragraph.
    
    
    Secs. 1951.313-1951.319  [Amended]
    
        34. Sections 1951.313 through 1951.319 are redesignated as 
    Secs. 1951.314 through 1951.320, and a new Sec. 1951.313 is added to 
    read as follows:
    
    
    Sec. 1951.313  Payment assistance.
    
        (a) General. The correction, renewal, and cancellation of payment 
    assistance agreements and payment assistance granted as a servicing 
    action on existing loans is handled under this section. Payment 
    assistance granted under this section will be approved and computed in 
    accordance with subpart A of part 1944 of this chapter. Recapture of 
    payment assistance will be calculated and repaid in accordance with 
    subpart I of this part.
        (b) [Reserved]
        (c) Existing loans. Payment assistance may be granted at any time 
    after loan closing if the following conditions are met.
        (1) The loan was approved on or after August 1, 1968.
        (2) The borrower personally occupies the dwelling unless determined 
    uninhabitable by RHCDS or is temporarily not occupied for reasons such 
    as seasonal or migratory employment, military call-up, or 
    hospitalization.
        (3) The borrower's adjusted annual income does not exceed the 
    moderate-income limit contained in exhibit C of subpart A of 
    Instruction 1944 (available in any RECD field office).
        (i) If there is not a reasonable expectation that current income 
    will continue for 12 months, income will be projected for the period 
    expected rather than for 12 months. For example, if a borrower is 
    receiving unemployment benefits, the payment assistance agreement will 
    be effective for the period of the benefits. At the end of the benefit 
    period or earlier if circumstances change, the borrower's situation 
    will be reviewed and appropriate action taken based on current 
    circumstances.
        (ii) [Reserved]
        (iii) If one coborrower has left the dwelling due to domestic 
    discord, payment assistance may be based on the remaining borrower's 
    income if the following conditions are met:
        (A) The remaining coborrower is occupying the dwelling, owns a 
    legal interest in the property, is liable for the debt, and agrees to 
    notify RHCDS if the other coborrower returns.
        (B) Legal papers have been filed to commence divorce or legal 
    separation, a restraining order has been obtained, or one coborrower 
    has not been living in the dwelling for at least 3 months.
        (iv) Payment assistance will not be granted if separation is due to 
    work assignment or military orders.
        (4) The term of the loan at closing was at least 25 years. If an 
    account has been reamortized and the term of the loan was at least 25 
    years initially, payment assistance may be granted even though the term 
    of the reamortized loan is less than 25 years. If the term of the loan 
    was less than 25 years prior to reamortization, the reamortized term 
    must be at least 25 years.
        (5) The amount of payment assistance granted will be based upon the 
    borrower's adjusted family income compared to median income for the 
    area where the property is located as determined by Sec. 1944.34(c).
        (6) Payment assistance may be granted retroactively for up to 6 
    months if the conditions described in paragraphs (c)(1) through (c)(5) 
    of this section existed at the time.
        (d) Correction. A corrected payment assistance agreement will be 
    prepared under the following circumstances.
        (1) Change in income. RHCDS is not responsible for monitoring 
    changes in a borrower's income. If RHCDS becomes aware of income 
    changes outside of the renewal period that will change the amount of 
    authorized payment assistance as defined in Sec. 1944.34(c), a new 12-
    month agreement will be prepared effective the due date following the 
    date RHCDS became aware of the change.
        (2) Insufficient payment assistance. If a borrower received less 
    payment assistance than the borrower was eligible to receive, a 
    corrected agreement will be prepared. The effective date of the 
    corrected agreement will be the same date as the agreement being 
    replaced.
        (3) Unauthorized assistance. If a borrower received unauthorized 
    payment assistance, the account will be serviced in accordance with 
    Subpart M of this part. This includes situations where the borrower did 
    not advise RHCDS of income increases as required on the Payment 
    Assistance/Deferral/Repayment form.
        (e) Renewal. 
        (1) Contractors. State Directors are authorized to enter into 
    contracts for the processing of payment assistance renewals. Renewal 
    contracts will cover all required actions except approval or 
    cancellation of payment assistance.
        (2) Annual renewal period. Monthly, the Finance Office will provide 
    each County Office or contractor a list of borrowers whose payment 
    assistance agreements expire in approximately 120 days.
        (i) Borrower Interview. The borrower must be available for an 
    interview during each renewal period.
        (ii) Determination of eligibility. Adjusted annual income will be 
    determined and documented in the file. All borrowers will be required 
    to submit a copy of their most recent Federal income tax return. In 
    addition, income for wage earning borrowers will be verified by use of 
    an RHCDS form (available in any RECD field office), and wage matching, 
    if available. Borrowers receiving social security or retirement 
    benefits must provide copies of their most recent benefit/award 
    letters. Payment assistance will not be renewed if the borrower's 
    adjusted family income exceeds the moderate-income limit, (available in 
    any RECD field office) or if the borrower does not occupy the dwelling. 
    
    
    [[Page 55146]]
    
        (iii) Renewals not completed prior to expiration of existing 
    agreement. If not due to RHCDS error, the effective date of the renewal 
    will be the next due date after the date of approval. If due to RHCDS 
    error, the effective date will be the expiration date of the previous 
    agreement.
        (3) Termination of foreclosure action. If a payment assistance 
    agreement expired after a problem case report recommending foreclosure 
    was submitted and the foreclosure action was terminated prior to sale 
    or payment in full, payment assistance will be renewed effective as of 
    the expiration date of the previous agreement if RHCDS is to continue 
    with the loan.
        (f) Cancellation. Payment assistance will be canceled when any of 
    the following conditions occur:
        (1) The borrower has never occupied the dwelling and RHCDS will not 
    continue with the loan. Cancellation will be effective as of the date 
    of loan closing or amortization effective date, whichever is 
    applicable.
        (2) The borrower ceases to occupy the dwelling. Cancellation will 
    be effective the payment due date following the date of non-occupancy 
    if known; otherwise, the payment due date following the date RHCDS 
    became aware of non-occupancy.
        (3) The borrower has received improper payment assistance as 
    determined in accordance with subpart M of this part and a corrected 
    agreement will not be submitted. Cancellation will be effective the 
    payment due date following the date RHCDS became aware of the 
    situation.
        (4) The borrower is no longer eligible for payment assistance due 
    to an increase in income. Cancellation will be effective the payment 
    due date following the date RHCDS became aware of the increase.
        (5) The borrower sells the property or title to the security 
    property is otherwise transferred. Cancellation will be effective the 
    payment due date subsequent to the date title transferred. When 
    security property is acquired by RHCDS, cancellation will be effective 
    the payment due date prior to the date of acquisition.
        (g) [Reserved]
        (h) Notice of right for review or appeal. All borrowers who request 
    and are denied payment assistance or whose payment assistance is 
    reduced, canceled, or not renewed may appeal or request a review in 
    accordance with Pub. L. 103-354 to the National Appeals Division, 
    U.S.D.A.
        (i) [Reserved]
        (j) Hardship waiver. The approval official may submit to the 
    District Director any situation in which the borrower cannot meet the 
    conditions of paragraphs (c) and (e) of this section and it is 
    determined that without payment assistance the borrower would 
    experience extreme hardship or lose the property through foreclosure. A 
    waiver may be granted if the above can be determined and the borrower 
    has no other means of retaining the dwelling.
    
    
    Sec. 1951.314  [Amended]
    
        35. Section 1951.314 is amended by revising the reference 
    ``Sec. 1944.5(d)(11)'' to lead ``Sec. 1944.5(e)(2)'' in paragraph (e).
    
    
    Sec. 1951.330  [Amended]
    
        36. Section 1951.330(b)(4) is amended by revising the reference 
    ``Sec. 1944.34'' to read ``Sec. 1951.313(d)(1)'' and by removing ``FmHA 
    or its successor agency under Public Law 103-35'' and replace it with 
    ``RHCDS.''
        37. Section 1951.330(c) is amended by revising the reference 
    ``Secs. 1951.313 and 1951.314'' to read ``Secs. 1951.314 and 
    1951.315''.
    
    Subpart I--Recapture of Section 502 Rural Housing Subsidy
    
        38. Section 1951.401 is revised to read as follows:
    
    
    Sec. 1951.401  Purpose.
    
        This subpart outlines the policies and procedures for the recapture 
    of interest credits or Homeownership Assistance Program (HOAP) subsidy 
    granted on initial and subsequent section 502 Rural Housing (RH) loans, 
    transfers, and credit sales approved on or after October 1, 1979. The 
    terms ``interest credit'' and ``interest credit assistance,'' as they 
    relate to Single Family Housing (SFH), are interchangeable with the 
    term ``payment assistance.'' Payment assistance is the generic term for 
    the subsidy provided to eligible SFH borrowers to reduce mortgage 
    payments.
    
    Subpart J--Management and Collection of Nonprogram (NP) Loans
    
        39. Section 1951.457(b) is revised as follows:
    
    
    Sec. 1951.457  Payments.
    
    * * * * *
        (b) Payments not received when due. NP borrowers are expected to 
    make scheduled payments when due. The Agency personnel are not required 
    to provide program supervision, servicing, management or credit 
    counseling in accordance the agency servicing instructions if payments 
    are not received when due. To ensure consistency, a series of contacts 
    will be made when servicing delinquent accounts. All actions taken, 
    agreements reached and recommendations made in the servicing of the 
    borrower's account are to be documented. When appropriate, the Agency 
    may work out a reasonable agreement with an NP borrower to cure a 
    delinquency; however, such an agreement will not usually exceed 1 year. 
    Failure to make payments as agreed will result in actions determined by 
    the agency to best protect the Government's interest. Collection of a 
    delinquency from an Internal Revenue Service (IRS) offset will be used 
    to the extent permitted by law.
    
    Subpart M--Servicing Cases Where Unauthorized Loan or Other 
    Financial Assistance Was Received--Single Family Housing
    
        40. Section 1951.602 is amended by redesignating paragraphs (g), 
    (h), and (i) as paragraphs (h), (i), and (j), respectively; and adding 
    a new paragraph (g) to read as follows:
    
    
    Sec. 1951.602  Definitions.
    
    * * * * *
        (g) Interest credit. The terms ``interest credit'' and ``interest 
    credit assistance,'' as they relate to SFH, are interchangeable with 
    the term ``payment assistance.'' Payment assistance is the generic term 
    for the subsidy provided to eligible SFH borrowers to reduce mortgage 
    payments.''
    * * * * *
    
    
    Sec. 1951.604  [Amended]
    
        41. Section 1951.604(a)(1)(iv)(E) is amended by revising 
    ``Sec. 1944.2(h)'' to read ``Sec. 1944.2.''
        42. Section 1951.608 is amended by revising the last sentence of 
    paragraph (a)(3)(ii) to read as follows:
    
    
    Sec. 1951.608  Decision on servicing actions.
    
        (a) * * *
        (3) * * *
        (ii) * * * A form provided by the Agency must be submitted 
    simultaneously with the lump sum payment to cancel payment assistance 
    or adjust the amount of payment assistance for each period of time 
    unauthorized payment assistance was granted.
    * * * * *
    
    PART 1955--PROPERTY MANAGEMENT
    
    Subpart A--Liquidation of Loans Secured by Real Estate and 
    Acquisition of Real and Chattel Property
    
        43. Section 1955.3 is amended by adding the definition of 
    ``Interest credit'' to read as follows: 
    
    [[Page 55147]]
    
    
    
    Sec. 1955.3  Definition.
    
    * * * * *
        Interest credit. The terms ``interest credit'' and ``interest 
    credit assistance,'' as they relate to Single Family Housing (SFH) 
    loans, are interchangeable with the term ``payment assistance.'' 
    Payment assistance is the generic term for the subsidy provided to 
    eligible SFH borrowers to reduce mortgage payments.
    * * * * *
    
    
    Sec. 1955.15  [Amended]
    
        44. Section 1955.15(d)(2)(iv) is amended in the next to last 
    sentence by revising the reference ``Sec. 1951.314'' to read 
    ``Sec. 1951.315.''
    
    Subpart B--Management of Property
    
    
    Sec. 1955.63  [Amended]
    
        45. In Sec. 1955.63, paragraph (c) introductory text is amended by 
    removing the words ``except the requirements relating to size and/or 
    design features will not be considered'', and by revising the phrase 
    ``the Agency'' to read ``RHCDS''. Paragraph (c)(1) is amended by 
    removing the words ``in size, design and/or cost.''
    
    PART 1965--REAL PROPERTY
    
    Subpart A--Servicing of Real Estate Security For Farmer Program 
    Loans and Certain Note-Only Cases
    
    
    Sec. 1965.26  [Amended]
    
        46. Section 1965.26(c)(2)(iv)(C) is amended by revising the 
    reference to paragraph ``(c)(iv)(A)'' in the first sentence to read 
    ``(c)(2)(iv)(A)'' and to replace ``FmHA or its successor agency under 
    Public Law 103-354'' with ``RHCDS'' each time it appears.
        47. Section 1965.26(c)(3) is amended by revising the reference to 
    ``Sec. 1951.314'' to read ``Sec. 1951.315'' in the last sentence of the 
    paragraph.
    
    Subpart C--Security Servicing for Single Family Rural Housing Loans
    
        48. Section 1965.101 is revised to read as follows:
    
    
    Sec. 1965.101  Purpose.
    
        This subpart prescribes policies and procedures for servicing 
    actions related to real estate which secures section 502 and section 
    504 Rural Housing (RH) loans on nonfarm tracts or on farms when the 
    borrower is indebted to Rural Housing and Community Development Service 
    (RHCDS) for the RH loan only herein referred to as Single Family 
    Housing (SFH) loans. Security servicing for RH loans when the borrower 
    is also indebted for Farmer Program loans is under subpart A of part 
    1965 of this chapter. Security servicing for nonprogram (NP) loans on a 
    single family residence will be according to subpart J of part 1951 of 
    this chapter. The terms ``interest credit'' and interest credit 
    assistance,'' as they relate to SFH in this subpart, are 
    interchangeable with the term ``payment assistance.'' Payment 
    assistance is the generic term for the subsidy provided to eligible SFH 
    borrowers to reduce mortgage payments.
    
    
    Sec. 1965.126  [Amended]
    
        49. Section 1965.126 is amended as follows:
        a. In paragraph (b)(3) by removing the phrase ``FmHA or its 
    successor agency under Public Law 103-354'' each time it appears and 
    inserting the term ``RHCDS'' in its place and by removing the words 
    ``serve as a minimum adequate site for another dwelling.'' and 
    inserting the words ``be subdivided and sold.'' in their place at the 
    end of the first sentence.
        b. In paragraph (b)(4)(i) by removing the term ``FmHA'' in the 
    first sentence and inserting the term ``RHCDS'' and by removing the 
    second, third, and fourth sentences and the word ``however;'' and the 
    comma preceding it in the last sentence.
        c. In paragraph (b)(4)(ii)(A) by removing the word ``clearly,'' and 
    by removing the words ``size, design, and/or cost.'' and inserting in 
    their place the word ``value.''
        d. In paragraph (b)(8) by removing the phrase ``FmHA or its 
    successor agency under Public Law 103-354'' each time it appears and 
    replacing it with the term ``RHCDS'' and by adding the words ``except 
    as provided in Sec. 1944.17 of subpart A of part 1944 of this 
    chapter,'' following the words ``being assumed'' in the first sentence.
    
        Dated: October 13, 1995.
    Jill Long Thompson,
    Under Secretary for Rural Economic and Community Development.
        Dated: October 13, 1995.
    Dallas Smith,
    Deputy Under Secretary for Farm and Foreign Agriculture Services.
    [FR Doc. 95-26553 Filed 10-26-95; 8:45 am]
    BILLING CODE 3410-07-U
    
    

Document Information

Effective Date:
10/27/1995
Published:
10/27/1995
Department:
Farm Service Agency
Entry Type:
Rule
Action:
Final rule.
Document Number:
95-26553
Dates:
October 27, 1995.
Pages:
55112-55147 (36 pages)
PDF File:
95-26553.pdf
CFR: (142)
7 CFR 1709)
7 CFR 1944.15(a)(4)
7 CFR 1944.10(a)(2)
7 CFR 1944.8(a)(3)
7 CFR 1944.15(a)(5)(iv)
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