Streamlining and Consolidation of the Sections 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs

DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 3560

RIN 0575-AC13

Streamlining and Consolidation of the Sections 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs

AGENCY:

Rural Housing Service, USDA.

ACTION:

Proposed rule.

SUMMARY:

The Rural Housing Service (RHS), formerly Rural Housing and Community Development Service (RHCDS), a successor Agency to the Farmers Home Administration (FmHA), proposes to streamline and reengineer its regulations and to utilize private sector process and techniques in the administration of the origination, management, servicing, and preservation of its Multi-Family Housing (MFH) programs. These programs include the section 515 Rural Rental Housing (RRH) loan program, the section 514/516 Farm Labor Housing loan and grant program, and the section 521 Rental Assistance (RA) program.

This action is to reduce regulations, assure quality housing for residents, improve customer service, and improve the Agency's ability to achieve effectiveness and flexibility in managing the MFH portfolio. This streamlining will result in a reduction to the Code of Federal Regulations (CFR) coverage of the MFH programs by 90 percent. To explain how this was accomplished, the rewrite of the 1930-C regulation is offered as an example. This regulation alone covers 366 pages of CFR. The extensive language currently describes in detail, the form and format for conducting internal MFH supervisory activities by Agency personnel. This regulation has been replaced in the proposed rule with a four-page chapter. This was accomplished by using the authority of the regulation to develop a new handbook, which will provide direction on conducting monitoring actions. The handbook will incorporate many ideas that were obtained from the streamlining process into the streamlining of Agency supervisory efforts and will clarify and standardize the monitoring requirements, thereby reducing burden on borrowers and management agents.

DATES:

Written or e-mail comments on this proposed rule must be received on or before August 1, 2003.

ADDRESSES:

Written comments may be submitted, in duplicate, to the Branch Chief, Regulations and Paperwork Management Branch, Support Services Division, U.S. Department of Agriculture, Stop 0742, 1400 Independence Avenue SW., Washington, DC 20250-0742. Comments may be submitted via the Internet by addressing them to “

comments@rus.usda.gov

” and must contain the word “Streamlining” in the subject. All comments will be available for public inspection at 3rd floor, 300 E Street, SW., Washington, DC 20546 during normal working hours.

FOR FURTHER INFORMATION CONTACT:

Sue Harris-Green, Deputy Director, Multi-Family Housing Direct Loan Division, Rural Housing Service, U.S. Department of Agriculture, Room 1241, South Building, Stop 0781, 1400 Independence Avenue, SW., Washington, DC 20250-0781; Telephone: (202) 720-1660.

SUPPLEMENTARY INFORMATION:

Classification

This proposed rule has been determined to be significant and was reviewed by the Office of Management and Budget (OMB) under Executive Order (E.O.) 12866.

Environmental Impact Statement

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

Regulatory Flexibility Act

The proposed rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has determined and certified by signature on this document that this rule will not have a significant economic impact on a substantial number of small entities since this rulemaking action does not involve a new or expanded program nor does it require any more action on the part of a small business than required of a large entity.

Executive Order 13132, Federalism

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

Civil Justice Reform

This proposed rule has been reviewed under E.O. 12988, Civil Justice Reform. If this proposed rule is adopted: (1) Unless otherwise specifically provided, all state and local laws that are in conflict with this rule will be preempted: (2) no retroactive effect will be given this rule except as specifically prescribed in the rule; and (3) administrative proceedings of the National Appeals Division of the Department of Agriculture (7 CFR part 11) must be exhausted before bringing suit.

Unfunded Mandate Reform Act

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Pub. L. 104-4, establishes requirements for federal agencies to assess the effects of their regulatory actions on state, local, and tribal governments and the private sector. Under section 202 of the UMRA, federal agencies generally must prepare a written statement, including cost-benefit analysis, for proposed and final rules with “federal mandates” that may result in expenditures to state, local, or tribal governments, in the aggregate, or to the private sector, of $100 million or more in any one year. When such statement is needed for a rule, section 205 of the UMRA generally requires a federal Agency to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost effective or least burdensome alternative that achieves the objectives of the rule.

This rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for state, local and tribal governments or the private sector. Therefore, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995, the Agency will seek Office of Management and Budget (OMB) approval of the reporting and recordkeeping requirements contained in this proposed regulation.

Title:

Direct Multi-Family Housing Loans and Grants.

Type of Request:

New Information Collection.

Abstract:

Through public and private partnerships, RHS enables limited profit and nonprofit sponsors to develop rental housing for low-, very low- and moderate-income rural residents across rural America. In addition, loans and grants are made to house farmworkers,

one of the most under-housed segments of our society. The $11.8 million portfolio of 444,000 units and nearly 17,400 projects often provides the only decent, safe, and sanitary affordable rental housing available in rural areas.

The information collected is used by the Agency to manage, plan, evaluate, and account for Government resources. The reports are required to ensure the proper and judicious use of public funds.

Estimate of Burden:

Public reporting burden for this collection of information is estimated to average 0.61 hours per response.

Respondents:

Limited for profit and nonprofit developers, public bodies and rural tenant households.

Estimated Number of Respondents:

500,000.

Estimated Number of Responses per Respondent:

4.3.

Estimated Number of Responses:

2,166,709.

Estimated Total Annual Burden on Respondents:

1,318,434 hours.

Copies of this information collection can be obtained from Tracy Givelekian, Regulations and Paperwork Management Branch, at (202) 692-0039.

Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the Agencies, including whether the information will have practical utility; (b) the accuracy of the Agencies' estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology.

All responses to this notice will be summarized, included in the request for OMB approval, and will become a matter of public record. Comments should be submitted to Tracy Givelekian, Regulations and Paperwork Management Branch, Support Services Division, Rural Housing Service, U.S. Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., Washington, DC 20250-0742. A comment is best assured of having its full effect if it is received within 30 days of publication of this rule.

Programs Affected

The programs affected by this regulation are listed in the Catalog of Federal Domestic Assistance under number 10.405—Farm Labor Housing Loans and Grants; 10.415—Rural Rental Housing Loans; and 10.427—Rural Rental Assistance Payments.

Intergovernmental Consultation

These loans are subject to the provisions of E.O. 12372 which require intergovernmental consultation with state and local officials. RHS conducts intergovernmental consultations for each loan in a manner delineated in RD Instruction 1940-J (available in any RD office and on the Internet at

http://rdinit.usda.gov/regs/).

Background Information

An Overview

Most communities in rural America have a scarcity of decent rental housing affordable to very low-income families. In addition, migrant farm workers and farm laborers, whose incomes are extremely limited, face some of the worst housing conditions in the nation. Despite improvements in housing quality, especially in the number of rural units with complete plumbing facilities, there are about 2.7 million families who live in substandard housing. According to 1990 census data, rural renters were more than twice as likely to live in substandard housing as people who owned their own homes. With lower median incomes and higher poverty rates than homeowners, many renters are simply unable to find decent housing that is affordable. RHS's rental housing programs are some of the few resources that enable the very low-income renters in rural America to access decent, safe, sanitary and affordable housing. In many of America's rural communities, there are simply no other safe and sanitary alternatives for very low-income people.

Through public and private partnerships, RHS enables limited profit and nonprofit developers to build rental housing for low-income and very low-income tenants across rural America. The $11.8 billion portfolio of 444,000 units and nearly 17,400 projects often provides the only decent, affordable rental housing available in rural areas. The program provides affordable rental housing to very low income and low-income rural families, to handicapped and to elderly residents. The average tenant has an adjusted income of $8,105.

This direct loan program employs a public-private partnership by providing subsidized loans at an interest rate of 1 percent to developers to construct or renovate affordable rental complexes in rural areas. This 1 percent loan keeps the debt service on the property sufficiently low to support below-market rents affordable to low-income tenants. Many of these projects also utilize low-income housing tax credit proceeds. This program is typically used in conjunction with RHS section 521 Rental Assistance, which provides project-based rental assistance payments to property owners to subsidize tenants' rents to an affordable level. With rental assistance, tenants pay 30 percent of income towards their rent (including utilities). Some 515 projects also utilize HUD's Section 8 project-based assistance, which enables additional very low-income families to be served.

Goals of the Regulatory Streamlining Process

This proposed rule is a result of RHS's pledge to make its programs more customer-friendly, streamline the processes, reduce costs to the taxpayer, and increase the Agency's level of customer service. This goal was accomplished through the input and commitment that resulted from numerous stakeholder meetings with recognized leaders in the multi-family industry. These leaders included borrowers, management agents identified by industry groups and tenant representatives. Representatives of state housing finance agencies, accounting firms and the USDA Office of Inspector General also participated. Through these meetings, we were able to draw a vast amount of expertise and knowledge to meet the following objectives of MFH streamlining and consolidation: Assure affordable safe, decent and sanitary housing for very low and low-income residents of rural America.

• Consolidate and simplify 13 regulations into one regulation for rural rental housing, farm labor housing and rental assistance.

• Develop an efficient loan application process that supports the creation of partnerships and leveraging with local, state and other federal entities.

• Clarify our existing policies and procedures to reflect the best practices within the Agency and within the multi-family field.

• Improve efficiency and service to our customers, correcting past problems and addressing concerns raised by our stakeholders so that particularly complex processes, such as preservation, work better.

• Make much of the farm labor housing review and approval processes the same as those for rural rental housing.

• Create a series of handbooks available to the field staff and to our

applicants, borrowers and partners that will give clear guidance on policies, such as project budget approvals, determining project feasibility, and servicing actions.

Streamlining and Consolidation

The Proposed Regulation

RHS has undertaken a major redevelopment and consolidation of Rural Development regulations affecting the sections 514, 515, 516, and 521 Multi-Family Housing (MFH) programs. The result of the streamlining and consolidation is a proposed rule that revises and consolidates Agency regulations affecting the section 514, 515, 516, and 521 Multi-Family Housing (MFH) Programs. This rule consolidates the policies outlined in 13 separate regulations and a number of administrative notices into one regulation and moves the procedural guidance to program handbooks. A list of the regulations being consolidated follows:

• 7 CFR part 1806, subpart A—Real Property Insurance.

• 7 CFR part 1930, subpart C—Management and Supervision of Multi-Family Housing Borrowers and Grant Recipients.

• 7 CFR part 1944, subpart D—Farm Labor Housing Loan and Grant Policies, Procedures, and Authorizations.

• 7 CFR part 1944, subpart E—Rural Rental and Rural Cooperative Housing Loan Policies, Procedures and Authorizations.

• 7 CFR part 1951, subpart D—Final Payment on Loans.

• 7 CFR part 1951, subpart K—Predetermined Amortization Schedule System (PASS) Account Servicing.

• 7 CFR part 1951, subpart N—Servicing Cases Where Unauthorized Loan or Other Financial Assistance Was Received—Multi Family-Housing.

• 7 CFR part 1955, subpart A—Liquidation of Loans Secured By Real Estate and Acquisition of Real and Chattel Property.

• 7 CFR part 1955, subpart B—Management of Property.

• 7 CFR part 1955, subpart C—Disposal of Inventory Property.

• 7 CFR part 1956, subpart B—Debt Settlement Farm Loan Programs and Multi-Family Housing.

• 7 CFR part 1965, subpart B—Security Servicing for Multiple Housing Loans.

• 7 CFR part 1965, subpart E—Prepayment and Displacement Prevention of Multi-Family Housing Loans.

These changes have two clear benefits. First, the consolidated streamlined regulation makes information easier to access. Answers to policy questions are found in one document that has been shortened from over 1,500 pages to approximately 180 pages. Similarly, answers to process and implementation questions are found in three handbooks. These handbooks provide “how-to” guidance on loan origination, asset management, and loan servicing. Agency staff, property owners, property managers, and residents can look for most of their answers to day-to-day questions in the handbooks where they will find plain English explanations and examples. If the regulatory basis for a procedure is in question, that information can be easily found in the streamlined regulation. The increased ease of finding information should help improve public understanding of the rules and eliminate inconsistencies in interpretation.

Second, the division of policy and procedure gives the agency more flexibility to update and revise program procedures. For example, as automation changes the way program reporting occurs, relevant procedures can be updated in the handbooks without going through a complex process of changing the regulation. This will make the agency more responsive to changes in the business environment, an important initiative as the Federal Government strives to have more of its business conducted on-line and through electronic submissions.

The paperwork burden reduction resulting from the proposed rule would be approximately 25 percent. This estimate is derived from the Paperwork Burden Report that RHS prepared.

The Proposed Handbooks

As stated above, the Agency is developing three separate handbooks that will present the reader with the administrative guidance on matters. One handbook will be devoted entirely to General Requirements and Loan Origination Requirements. It will instruct the reader on procedures and provide information on matters such as what forms must be filed, where to submit loan requests and the agency's internal processing procedures. The same principles will be followed in the publication of the Asset Management Handbook and the Project Servicing Handbook respectively. The handbooks will not be published in the

Federal Register

but will be available to the public at no cost.

RHS is currently developing the proposed Handbooks while aggressively analyzing all existing burden imposed upon the public to obtain and retain MFH program assistance. The Handbooks will be available on RHS's Web site at

http://www.rurdev.usda.gov/rhs/index.html.

Access to the Handbooks will also be available through the local RHS servicing office.

Current Regulations and Notices

Current regulations may be found on RHS's Web site at

http://rdinit.usda.gov/regs/index.html

or in the Code of Federal Regulations.

Exhibits

Many of the exhibits that are part of the current regulations may be found in the three companion handbooks to 7 CFR part 3560: Loan Origination, Asset Management, and Project Servicing. The Loan Origination Handbook will provide RHS multifamily housing staff with the guidance needed to originate loans and grants efficiently and effectively. The Asset Management Handbook will provide RHS multifamily housing staff with guidance about the Agency's procedures for overseeing borrowers' performance in meeting their responsibilities under the program. The Project Servicing Handbook will provide Loan Servicers with guidance about the Agency's procedures for servicing actions involving borrowers receiving loans or grants for multifamily housing projects. As an example, Exhibit A-13 of 7 CFR part 1944, subpart E will be found in Attachment 6-B to Chapter 6 of the Loan Origination Handbook and Exhibit B-1 of 7 CFR part 1930, subpart C will be found in Exhibit 3-1 of Chapter 3 of the Asset Management handbook.

Changes to the Rule With Significant Impact

Reserve Requirements for Project Improvements

This proposed rule will require an annual minimum of 1 percent of total development cost to be put in a reserve account, with a maximum reserve requirement up to the level needed to assure resources being available to maintain the housing at Agency standards.

Current regulations include standards for physical condition, maintenance, and reserve levels to address the physical condition of the property. However, projects are experiencing physical maintenance problems due to their average age. One of the sources of this problem is that project reserves are inadequate to cover ongoing capital needs. Current regulations require that borrowers contribute initially 1 percent annually of total development costs toward a reserve for project

improvements until a total of 10 percent is reached. While borrowers are permitted to request adjustments to their reserve contributions, there is no systematic provision for reevaluating reserves over the life of the project. A recent study found that while an average MFH project has accumulated $5,000 in reserves per unit at the end of 10 years and maintained at that level thereafter, the full cost of rehabilitation is likely to be close to $16,000 per unit. When rehabilitation is needed and the reserve is inadequate to meet the need, the project owner usually applies for a subsequent loan, which, if received, requires that rents be increased. In recent years, RHS has been experiencing a growing number of requests for subsequent loans and rent increases to cover costs of rehabilitation, while funding for such loans has been limited.

Increasing the reserve requirements would be appropriate to address the physical needs and the life expectancy of most MFH projects. It will help reduce the need for subsequent loans or servicing actions, and improve the long-term physical condition of projects and help protect the MFH portfolio from defaults. In existing projects where RHS is taking servicing actions, the proposed rule would help ensure that each project's physical needs are addressed in current servicing actions and, thus, reduce the need for attention at a later date. Such servicing actions include write-downs of existing loans. Thus, it is possible that the proposed rule would result in additional write-downs as a means of addressing the need for the project improvements. To date, RHS has written-down only a limited number of MFH loans. Further, the additional reserve requirement will be reflected in project costs, which means that rents will increase, and the amount of rental assistance payments needed to maintain existing contracts for such assistance will increase.

Investment Earnings on Reserve Account Funds

RHS has found that most project owners are putting their reserve funds in accounts that earn no or minimal income. The average reserve account has been earning only 2 percent interest annually. Project owners indicate that, under current regulations and tax rules, they have few options for investing these funds and face a strong disincentive for investing them in a manner that maximizes their return. The disincentive is due to Internal Revenue Service (IRS) rules that treat income earned on reserve accounts as investment income for the owner and, thus, taxable, rather than project income.

The proposed rule makes two changes to address these limitations. First, it allows a greater number of investment options. These options include relatively conservative investment vehicles that are used by other public agencies and are not expected to pose a significant increased risk to the funds. This change would give owners more flexibility for investing their reserve funds and is expected to result in greater returns on these funds and thus more income to be put toward better project operations and capital improvements. The increase in interest income would lower the amount needed from tenant rents and rental assistance to meet project needs.

Second, the rule addresses the issue of “phantom income,” the interest income earned on reserve accounts. This income is committed to the project but not accessible to the owner. To ease the burden of paying taxes on this “phantom income,” the rule allows owners, with RHS’ approval, to withdraw up to 25 percent of the annual interest income earned on the reserves to cover the tax expense. The 25 percent allowance was determined to be a reasonable estimate of the tax rate for the average investor. It was decided to use a single rate for all owners to simplify the administration of this feature. RHS also consulted with OIG and the American Institute of Certified Public Accountants (AICPA) in arriving at the 25 percent figure.

Prepayment Policies and Procedures

The agency, borrowers, and tenant advocates agreed that the prepayment request process is a difficult and confusing process. Agency staff in the National Office recognized that they were spending a great deal of time providing technical assistance to Field Offices in responding to prepayment requests. Borrowers commented that the process was unduly burdensome to borrowers who were within their rights to request prepayment. Tenant advocates pointed out that tenants are virtually excluded from the process because the process complexity makes it difficult for tenants to take action. Discussion of these concerns at the stakeholders meetings indicated that RHS needed to clarify many of the policies toward prepayment and where possible, make policy changes that would help simplify the process. Consequently, the proposed rule includes changes to agency policy regarding tenant notification and projects on the waiting list for incentives.

Tenant Notifications

Stakeholders suggested changes to the content and timing of tenant notifications to provide tenants with the information they need to participate in the prepayment process. The proposed rule replaces the requirement for one early tenant notification with a series of notifications aimed at keeping the tenants informed of the Agency's and the borrower's decisions throughout the process.

Waiting List

One of the most common complaints heard about the prepayment process is its open-ended nature. Borrowers who are approved for incentives and agree to stay in the program in exchange for incentives may have to wait years before the funds for the incentives become available. The current waiting list includes requests for incentives dating back to 1996. The proposed rule establishes a maximum time on the waiting list of 15 months and allows borrowers three choices at the end of that time: (1) Stay on the waiting list and continue waiting for the incentives, (2) withdraw from the list and continue operating the property for program purposes, or (3) offer to sell the property to a nonprofit organization. This last option may allow some properties, eventually to prepay if they complete the process involved in offering the project for sale and fail to receive a bona fide offer. However, this option responds to the reality that the agency may not always have the resources to keep borrowers in the program indefinitely and that costly legal battles are likely if they do not allow the borrowers other options. Currently, the prepayment waiting list contains approximately 15 properties that have exceeded the 15-month time period. However, this number would be expected to grow appreciably over the next few years without a significant increase in funding for incentives to accommodate the anticipated increase in number of projects meeting the 20-year statutory restrictions on use.

Further, it is believed that many borrowers have not applied for prepayment incentives and joined the waiting list because of the extended time period they must currently remain on the list. If the 15-month maximum time period is implemented, a greater number of these borrowers may seek prepayment with the expectation that they will be allowed to exercise one of the three options at the end of the 15-month time period. If borrowers do prepay and convert their apartment complexes to market rate units, RHS

will take measures to protect the tenants at these properties by providing them a letter of priority entitlement (LOPE) that gives them priority in agency-financed housing elsewhere. However, if alternative vacant RHS financed rental housing is not available in the market, the impacted tenants face displacement or rent overburden if they remain in place.

Incentives

The proposed rule clarifies the Agency's policy on incentives and adds several requirements to help ensure that the limited amount of funding available for incentives, as discussed in the overview section of this analysis, is used efficiently to benefit the program. For example, the proposed rule outlines the process a borrower must follow when requesting permission to prepay and be eligible to receive incentives.

In addition, the proposed rule clarifies that third-party equity loans are an option for borrowers who are seeking equity loans through the prepayment process. The use of third-party equity funding stretches RHS incentive funds by providing resources from alternative funding sources. However, it should be noted that debt costs from other sources might be higher than financing received under the Section 515 program. For example, Section 515 funding is lent at an effective 1 percent interest rate and amortized for 50 years, whereas, third-party funds may be lent at rates ranging from interest free to market rate depending upon the source of the funds, with amortization periods ranging from fully deferred to 30 years. All proposed third-party incentive loans must be underwritten and reviewed to the same standard as RHS Section 515 lending to ensure that no project is made financially unfeasible as a result of a third party loan.

Initial Operating Capital

Under current regulations, borrowers are required to pay the equivalent of 2 percent of the cost of developing a project into an account for initial operating costs. They earn no interest on this account, which also receives funds from other sources including rental income. If, within 2 years, the project is operating successfully and there is sufficient capital in the operating account to maintain the financial soundness of the account, the borrower may take out up to the full amount of his /her contribution. While on deposit in the operating account, the borrower receives no return on investment for the funds. After 2 years, any portion of the contribution that is still in the account must remain there for meeting ongoing operating capital needs.

During the stakeholder meetings, borrowers expressed concern that the current regulation does not allow them sufficient time to recover their contribution, even when a project is functioning well and no longer needs the additional capital. RHS determined that the 2-year limit was originally due to difficulties in tracking the funds within the projects overall budget, and that its new ADP system, MFIS III, has the capacity to provide better tracking and disclosure of these funds. Therefore, RHS has included a provision in the proposed rule that would extend the time limit for the recovery of initial operating capital from 2 to 7 years. In selecting 7 years for the new limit, RHS received input from field staff and industry groups indicating that the prospects for recovery after 7 years were minimal, either because financial soundness could not be established or the owner was willing to leave his/her contribution in the account.

This change would allow more borrowers to fully recover the payments they made to initial operating capital accounts. It is uncertain how many borrowers would benefit from the change and how many dollars these borrowers would be allowed to recover from these accounts. Because of the limitation on recovery from only financially sound accounts, it is unlikely that there would be immediate, negative impacts on the performance of the MFH programs. However, it should be noted that by allowing borrowers to recover funds from initial operating capital accounts, these funds would not be available for ongoing capital needs. The potential withdrawal of initial operating capital is not considered to have significant impacts on rents and, thus, costs to the Government and tenants. While it would tend to make it more difficult to avoid rent increases, it is far outweighed by other changes in the proposed rule, specifically, the raising of reserve requirements and additional earnings on reserve accounts.

Other Changes to the Rule

Conventional Rents for Comparable Units

RHS has developed the concept “Conventional Rents for Comparable Units” (CRCU). This is one of the most comprehensive policy issues that 7 CFR part 3560 will introduce. The concept is applicable to loan origination, budgets, loan servicing, replacement reserve set-asides, preservation, and other program areas. In essence, rents will be capped at conventional rents for comparable units in the area where the housing is located. Comparable units would be those equivalent to RHS financed units in terms of quality and amenities. If no such units are located in the same community, units from a similar community could be used for comparison. Comparable units also means that the units the Agency finances would meet a standard of economical development,

i.e.

, modest in size, facilities and design, yet compatible with the community.

RHS will continue to require that rents be based on the project's operating costs. However, under the proposed rule, RHS would not approve project proposals, servicing actions, or prepayment incentives that involve rents above the CRCU, except in exceptional circumstances, where such rents are determined to be in the best interest of the Government and the tenants of the project.

By placing an upper limit on rents, RHS expects to protect the Government from investing in projects that may be wasteful or fraudulent, and to ensure that projects are competitive so that vacancy and other market-driven problems can be avoided. In this way, the CRCU should improve the long-term viability of MFH projects, limit the costs of RA, and reduce the risk of defaults.

However, the proposed rule maintains flexibility for serving areas where MFH projects provide the only decent, safe and sanitary rental housing in a local housing market, or where a significant amount of the substandard housing rents for less than the cost of operating an MFH project. In such cases, RHS may base the CRCU on rents outside the local community. It may also grant an exemption for exceptional circumstances.

CRCU will create a definitive underwriting standard. It will apply to leveraging other low-interest loan funds or paying for additional owner contributions (up to 3 percent return on investment (ROI) over required contribution); improving project design and amenities (within the definition of economical development); and adjusting reserves or other serving actions. In areas where rents are below CRCU, Rental Assistance (RA) costs and loan levels may increase. However, it will also ensure “marketable units” should the Agency lose RA.

The Agency is asking public input on whether exclusions to CRCU may be needed in certain areas of the country where conventional rents may not be adequate to fund operation and maintenance, debt service and replacement reserve expenses plus an

aged upon owner's return on investment.

Cost Reasonableness Basis for Evaluation of Project Proposals

The proposed rule also includes changes related to evaluating the cost reasonableness of project proposals. Under current regulations, the agency has applied a policy of cost containment when evaluating whether the costs of the proposed design for new projects are reasonable. While this policy has effectively held down construction costs for new projects, agency field staff and borrowers report that lower-cost project design features are not always cost-effective over the long term. They report that while certain design features reduce initial construction costs, they actually cost more over the life of the project because the components used require higher levels of maintenance and more frequent replacement.

Projects with these design features experience higher routine maintenance costs, higher expenditures of project reserves, and a greater need for subsequent financing for rehabilitation. The result is an upward pressure on project rents and increased use of rental assistance payment assistance. To the extent a project cannot support the rent increases needed to cover these costs, the project faces an increased risk of financial failure or compliance violations due to physical deficiencies.

Currently, RHS has no process for conducting life cycle analyses. The proposed requirement for a life cycle cost analysis will be used for new and existing facilities. The requirement is intended to assure quality construction as well as long-term viability of complexes. Reserve levels would be set based on life cycle costs to provide necessary resources when needed to replace essential building components. Existing loan agreements are to be modified as needed by an addendum properly executed by the borrower. Under the proposed rule, the agency would change its policy for evaluating project proposals to consider the life cycle costs of proposed project designs. Under this policy, the agency may approve a proposed project design that is not the lowest cost if a life cycle cost analysis prepared by the project architect reveals that the design achieves the lowest overall cost over the life of the project. Industry standards will be used for the analysis. To assure that new projects are affordable and appropriate to the local housing market, the proposed rule restricts the agency from approving project designs that would cause rents to exceed the market standard (except in exceptional circumstances where such costs are determined to be in the best interest of the Government and the tenants). Examples of two design features that may cost more initially but decrease operating expenses over the life of the project are brick exteriors and increased thermal standards. In the past, many projects were built using a popular exterior plywood siding. These buildings are now requiring replacement of the original siding. Similar buildings that utilized brick as an exterior finish or partial finish are not having similar expenses, therefore, decreasing demands on the reserve accounts. Thermal standards in RHS financed projects often exceed local codes. By building RHS projects more energy efficient, tenant and owner utility expenses are kept lower, thereby, decreasing the need for rent increases or tenant utility allowance increases. By avoiding the additional rent and utility allowance increases, tenant rent overburden is avoided, as is additional drain on scarce rental assistance resources.

Because this change will allow for more costly designs, the agency expects the size of initial loans and initial rents to grow slightly. However, higher up-front costs would be offset by lower long-term costs. The agency expects that new projects receiving funding under this policy will have lower maintenance and rehabilitation needs, leading to lower project rents and lower use of agency rental assistance over the life of the project. Lower maintenance expenses, resulting in rents essentially the same as projects built under cost containment guidelines, would offset the increased debt service due to higher construction costs. This change will also lower demand for subsequent loans from the agency in a time when additional loan funds are increasingly scarce.

Management Certification

Under current regulations, RHS must approve the management agreement between the borrower and the management entity for a project. This approval is designed to ensure that the management agent is also accountable for meeting program requirements. However, the agency has found that this policy results in a time-consuming approval process because these agreements frequently include complex contractual language that is difficult to evaluate. Further, OIG has found that many management agreements and plans lack the specificity to accurately describe how project and management agency costs are prorated between expenses paid by the project and those that are paid by the management fee.

The proposed rule eliminates agency approval of management agreements and requires borrowers to submit a management certification in an agency-approved format. In submitting this document, borrowers certify that their agreement with the management entity for the project obligates that entity to comply with program requirements, establishes sanctions for failure to comply with these requirements, including termination of the agent, and specifies penalties for false certifications. This change eliminates the administrative burden on RHS for approving management agreements, while strengthening the agency's ability to hold borrowers and their agents accountable for their management responsibilities. In addition, revisions to management fee policy, discussed below, allow for a more definitive method to differentiate between project and management agent expenses.

Management Plan

Under current regulations, borrowers are also required to obtain RHS’ approval of the management plans for their projects. The purpose of this policy is to provide the agency assurance that the borrower and management entities have adequate systems in place to comply with program requirements. However, experience has shown that these plans are time consuming to process. The requirement to obtain agency approval for updates only adds to the burden for agency staff and borrowers. This policy also leaves the agency in an awkward position when borrowers with sound projects have changed their operations, but not updated their management plan. OIG has reported audit findings where borrowers and management agents have not been operating the properties in conformance with the executed management plan. While this is true, when examined, it has been found that the practice the agent and owner have engaged in is not improper, just not documented correctly in the management plan. The OIG has agreed that had the practice been correctly disclosed in the management plan, the practice would not have been listed as an audit finding. OIG has worked with the RHS during the stakeholder process and subsequently to eliminate this particular area of confusion. The result of the change will be that RHS will not be required to micromanage borrower and management agent business practices when the practice is one that is beneficial to the tenants and the project. Additionally, fewer OIG

findings will result, requiring less OIG and RHS staff time to resolve.

The proposed rule eliminates agency approval of project management plans and requires instead that borrowers submit a management plan that addresses a specified list of operational areas. RHS staff would review the plan to see if the required areas have been covered in the plan but will not approve the plan. The plan will be used to monitor project performance, but discrepancies between project operations and the plan will not constitute a violation of program requirements unless the discrepancies affect program performance. This change reduces the administrative burden on RHS staff and borrowers. It also provides borrowers with greater flexibility to make sound changes in project operations without creating a performance concern.

Management Fees

Current program regulations require that management fees for projects be reasonable and competitive. However, OIG staff found that the management fees approved for projects varied significantly, ranging from as low as $25 per unit per month to $55 per unit per month across States. This led OIG to question whether the higher fees found in some instances was reasonable. As with management plans, the OIG expressed concern that current regulations were neither clear nor consistent concerning what services were to be included in the management fee. In some States, many of the maintenance services provided by management company staff were included in the management fees and in other States, the charges were not. Another example is that in some States, insurance and tax costs for project employees were included in management fees while in other States the costs were billed directly to the project. Comments by agency staff at stakeholder meetings revealed that the variations were often due to differences in field office interpretations about the bundle of services covered by the management fee. They noted that services not covered by the fee were paid for as a line item on the budget. When management fees plus other fees for services were accounted for, management compensation was consistent.

Together with representatives of the property management industry and OIG, RHS developed the bundle of management services that is a part of this regulatory change. By moving to a standardized grouping of services that is to be included in the management fee, RHS and OIG believe that the change will greatly improve consistency between areas of the country and RHS offices. As stated in the previous paragraph, as these services were all being provided previously but charged to the project on different lines of the operating budget, the grouping of these expenses in a different manner would neither increase nor decrease the overall cost to the project or the rents being charged.

The proposed rule and accompanying handbooks address the inconsistencies in fees by establishing a standard bundle of services covered by the management fee and a framework for setting standard adjustments for project characteristics that warrant slightly higher fees, such as for a new management agent taking over a troubled property. However, the proposed rule should improve RHS' ability to document that the management fees for projects are reasonable. It should also ensure consistency between RHS field offices in interpretation of services included in fees. Additionally, the number of OIG findings should be reduced, requiring less OIG and RHS staff time to resolve.

Standards for Physical Conditions at Projects

Current regulations establish the borrower's responsibility to maintain their projects in decent, safe, and sanitary condition. However, the OIG raised concerns about consistency in the implementation of this standard.

Therefore, the proposed rule establishes specific standards for physical conditions that clarify the conditions that constitute decent, safe, sanitary housing. These standards do not represent a change in agency policy. Rather, they make agency expectations explicit and thus improve the agency's ability to enforce physical standards, thereby improving the quality of living conditions for tenants and better preserving the security for agency loans.

Recertifications of Tenant Eligibility

Recertifications are used to document a tenant's income for the purpose of determining eligibility to live in an MFH unit and qualify for rental assistance payments. Current regulations require both an annual recertification and an interim recertification whenever the tenant's income changes. Stakeholders indicated that the recertification process is time consuming for tenants, borrowers, and the agency.

The proposed rule simplifies the process by eliminating the requirements for an interim recertification for tenant income changes that have an impact on the rent of $25 or less. RHS arrived at the $25 threshold by comparing the cost of re-certifying a tenant with the benefit either the Government or the tenant would receive as a result of increased or decreased rent. Based on consultation with industry groups and OIG, RHS determined that the cost to re-certify a tenant was about $150. Assuming that any change would apply for only 6 months of the year, the $150 figure was converted to a monthly figure of $25, which became the threshold. The regulations allow a tenant to request a recertification any time their income decreases. This provision was included in order not to negatively impact tenants with the lowest income for which the $25 per month figure may constitute a significant portion of income for which the $25 per month figure may constitute a significant portion of income.

While a detailed analysis of how the impact of the $25 threshold might be distributed between the Government and tenants was not completed, recent OIG audits have indicated the current recertification process produces approximately the same amount of rent increases as rent decreases, and thus results in little or any overall change in rental assistance payments.

The proposed rule also adds a requirement for electronic reporting of information, including tenants' income. The faster transmission of this information provides RHS with more time for analyzing the information. Consequently, the proposed rule extends by 10 days the period for submitting recertifications, giving borrowers more time to comply with agency requirements, thus improving customer service while maintaining program performance.

Lease Protection

The proposed rule would require that leases for rental units that receive rental assistance include a clause that specifies that the tenant's contribution to rent will not increase if rental assistance is terminated due to actions by the borrower/owner. This requirement is not contained in current regulations. RHS estimates that there have been two to four incidents a year in which a borrower/owner has attempted to make up for the loss of rental assistance payments due to a default on his/her part, by raising tenants' rents. Such action usually occurs in a contentious situation, with the borrower/owner already in default and uncooperative. Consequently, requiring that the lease include a clause specifically prohibiting such action may not resolve all cases. However, it would provide tenants with

a regulatory and lease citation that could be used in bringing court proceeding against an abusive borrower/owner. Further, it would provide RHS with an additional instance of non-compliance with regulations that could be used against the owner in a liquidation action or criminal or civil court case. However, it is uncertain whether cases could be resolve more quickly at less cost to the Government.

While the proposed rule offers some additional protection to tenants and imposes some additional responsibility on borrower/owners, it is difficult to place a monetary value on these impacts. Each case is likely to be different, and the resolutions uncertain. The low incidence, however, suggests that the impacts would not be significant in value.

Application Process for Rental Subsidies

Rental subsidies provide critical funds for housing very low-income tenants. Projects that receive RHS' rental assistance, including interest subsidy and rental assistance payments, depend on the continued availability of these subsidies to maintain in-place tenants in their units.

Under the current regulations, borrowers must complete full rental assistance requests to renew expiring subsidies. Stakeholders noted that the agency gathers sufficient information through the budget approval process to assess project needs for rental assistance.

Therefore, the proposed rule states that expiring subsidies will be renewed, at the existing number of units; to the extent sufficient funds are available. To indicate that rental assistance units are needed, the borrower must fill in a single check box on the project budget form (which must be filed annually) instead of completing a separate form as currently required. These changes relieve borrowers of the burden of applying and the agency the burden of reviewing the requests. The review can instead be accomplished as part of the budget approval process. The change has no effect on project or program budgets, as it does not change the agency determination about rental subsidies, it simply streamlines the process.

Budget Approval

RHS requires its borrowers to submit an annual budget, which is used in setting rents. Approximately 92 percent of these budgets arrive for approval at the same time because most owners operate on a calendar year basis and their schedules for developing budgets is about the same. Budget approval is a time-consuming process that taxes RHS staff resources in times of high volume and forces borrowers to operate for extended periods of time with unapproved budgets while the review process is underway. Current regulations require that all budgets be reviewed in the same way, regardless of whether they represent no real change from the previous year or contain significant and potentially controversial changes. The proposed rule establishes an expedited review for those budgets that are within a certain threshold requiring little or no increase in rents. The threshold will be based on data to be obtained from the MFIS III ADP system on area-wide norms for projects within RHS’ MFH portfolio as well as commercially-available family income and expense surveys. Details on how the threshold will be computed will be contained in a handbook rather than the proposed rule. This will facilitate making any necessary adjustments in the threshold to meet changing conditions.

The new process could improve program performance by allowing RHS to focus its review on those budgets that contain significant changes while expediting approval of those with little or no change. However, it is unlikely that the new process would have measurable budget impacts, such as reduced rental assistance costs or fewer defaults, because the decisions RHS makes on whether or not to approve a budget will most likely be the same under the new process as under the existing system. Those decisions will, however, be reached in a more efficient manner.

Annual Financial Reporting

Under the current regulations, the agency requires that for all projects of 25 units or more, the owner contract with a CPA perform an audit in accordance with generally accepted government auditing standards (GAGAS). Because a large percentage of the Agency's portfolio consists of projects with between 16 and 24 units, audited financial statements have not been prepared for a substantial number of projects financed by the Agency. In addition, the current audit guide currently does not require the auditor to provide information that is of specific importance to the agency, such as information on Identity-of-Interest transactions.

Under the proposed regulation, large MFH projects, defined as projects with 16 or more units, will be required to submit a GAGAS audit prepared by an independent CPA. The audit guide, which is currently being revised, will provide specific instructions on how the auditor should handle compliance issues. The audit must be completed using “agreed upon procedures” that help meet certain performance standards. It must be initiated by the borrower using an engagement letter, which will either:

• Reference the Audit guide, which will specify the program compliance issues that the Agency wants the CPA to address, and guidelines for testing compliance; or

• State the list of compliance issues that the Agency wants the CPA to address.

Small projects, defined as projects with fewer than 16 units, must submit annual financial statements that are prepared in a manner consistent with the agency's audit guide and that is accompanied by a certification signed by the borrower. The annual financial statements may be prepared by a CPA or other individual with the training and experience to prepare the report. The information presented in the annual financial statements must be prepared in a manner consistent with the requirements of the audit guide.

In response to OIG concerns, the agency is proposing to implement these changes to the annual financial reporting system to ensure that a higher percentage of projects are prepared by CPAs, that GAGAS principles are followed in the preparation of these audits, and that the auditors are made aware of specific concerns of the agency, to ensure that project funds are spent appropriately.

Special Servicing, Enforcement, Liquidation, and Other Actions

In response to stakeholder, OIG and agency staff comments, the agency made a number of changes to strengthen agency servicing. None of the changes to the regulation on servicing constitute changes in policy; rather they address a lack of clarity in existing rules and incorporate policies that previously existed only in administrative notices. As such, the changes are not anticipated to have either a negative or positive budget impact.

For example, the proposed rule clarifies the definition of “default” by spelling out specific actions that an owner may take or fail to take that would cause the agency to determine that the loan is at risk. The proposed rule also simplifies the submission requirements for transfers of project ownership. Other changes serve to simplify servicing actions in an effort to enhance the agency's flexibility to address servicing issues.

These changes would allow swifter and more consistent action to address troubled projects. For example, focusing action for the agency and the borrower. This would help to avert more serious problems in the long term and allow agency staff to concentrate their efforts on other portfolio management issues.

Management and Disposition of Real Estate Owned Properties

The proposed rule consolidates current regulations regarding real estate owned (REO) property and clarifies the specific requirements that apply to multifamily housing properties. Current regulations address many different types of REO properties acquired by USDA, including MFH properties. Often, the guidance provided is generic or relates to non-MFH properties. The proposed rule would provide specific guidance to MFH properties, taking into consideration the physical condition of the property, occupancy status of the property by eligible program tenants, and determinations of whether the property is still needed under the program.

The proposed rule also adds flexibility to the agency's requirements for selling the property. The change allows the sale to be conducted taking into account local market conditions. It also provides the field offices several options in selling REO properties, giving them authority that previously rested with the national office. With more options and flexibility, processing and sales times will be reduced.

Farm Labor Housing

The proposed regulation consolidates separate program regulations for the Farm Labor Housing Program along with separate regulations for the other MFH programs. It does, however, maintain separate subparts for off-farm labor housing and on-farm labor housing. This was necessary to preserve the distinction between off-farm labor housing consisting of multi-unit housing operated by nonprofit corporations or public bodies who receive loans or both loans and grants under the 514 and 516 programs, and on-farm labor housing consisting of single or small multi-family housing operated by farm operators who receive only loans. Several statutory changes to the Farm Labor Housing Program have been made over the past 4 years. The current regulations have been modified to incorporate those changes prior to the drafting of this proposed rule. As those changes are currently in place, they are not addressed again in this analysis. No further program changes other than regulation consolidation are included.

Office of Rental Housing Preservation

Recent changes to the 1949 Housing Act required the establishment of an Office of Rental Housing Preservation within RHS for handling matters relating the preservation on the agency's MFH portfolio. RHS recently established this office within its Multi-Family Housing Portfolio Management Division. The office has a Director of the Office and a Senior Loan Specialist. Additional positions within the office are to be filled.

The Office of Rental Housing Preservation has already taken steps to enhance the agency's consistency in the review of prepayment requests and the offer of incentives by making a single entity responsible for coordinating all preservation actions. The proposed rule recognizes the establishment of this office and defines its responsibility to coordinate, direct and monitor the RHS’ multifamily housing preservation activities. This addition to the rule complies with the statute and clarifies the role of the national office in the preservation process.

Unauthorized Assistance

When tenants receive unauthorized assistance through their own error, the agency has a duty to try to recapture the assistance. Under current regulations, much of this responsibility is put on project owners. The process is both time consuming and burdensome. Furthermore, project owners as well as RHS, have only limited ability to collect unauthorized assistance and, in many cases, the cost of pursuing unauthorized assistance has outweighed the funds collected.

Recognizing these circumstances, the proposed rule relieves project owners of the responsibility of recovering unauthorized assistance due to tenant error once the tenant has moved out. It also provides for RHS to determine whether or not unauthorized assistance should be pursued. These changes give the agency greater flexibility to apply resources cost effectively toward cases that most deserve to be pursued, and relieve project owners of the burden of pursuing tenants who no longer live in their projects. The proposed rule also brings RHS into compliance with the Debt Collection Improvement Act by allowing the use of collection agencies and offsets to collect unauthorized assistance from project owners and tenants.

Changes in Definitions

Basic Rent

Under the current regulations, basic rent is determined on the basis of operating the project with payments of principal and interest on a loan to be repaid over a 30-year or longer period at 1 percent per annum and covering budgeted project expenses. Basic rent also means basic occupancy charge. This definition does not take into consideration conventional rents for comparable units, and in effect, does not put any limitation on operating costs and rents.

The definition under the proposed regulation is similar to the definition shown above. However, it also takes into consideration, if appropriate, a return on the borrower's equity in a project. Further, the proposed definition states that basic rent must not exceed conventional rents for comparable units at the time the rent is established. This will prevent project rents from becoming excessively high and will cap the amount of RA that the agency is required to provide.

Disability

Agency regulations currently have separate definitions for the terms “Individual with disability” and “Individual with handicap.” The definition of the term “Individual with disability” is, in large part, taken from section 501(b) of the Housing Act of 1949. The definition of the term “Individual with handicaps” is taken from the Fair Housing Act. Other civil rights laws, such as the Americans with Disabilities Act and Section 504 of the Rehabilitation Act of 1973, utilized the term “disability” rather than handicap; however, they define it in the same manner as the Fair Housing Act defines handicap.

Rather than having two separate terms, the Agency will only use the term “Disability” and it will be considered equivalent to the term “Handicap.” If a person meets either the Housing Act of 1949's definition of handicap or the Fair Housing Act's definition of handicap, they will be considered to be disabled.

Participation With Other Funding or Financing Sources

7 CFR 3560.66 encourages participation from public and private sources. The section 515 policy of restricting rental assistance to basic rents that do not exceed what they would have been had the Agency provided full financing is still maintained. Because the Agency is delivering financing at 1 percent, this provision would be difficult for an applicant to meet under the most aggressive leveraging or other low-interest loan funds financing package. Therefore, the Agency is inviting comment as to whether it would serve

the public to expand the underwriting standard of CRCU to guide the Agency in determining basic rent guidelines for Rental Assistance.

30-Year Term and 50-Year Amortization Period

Though not a new issue or policy, the reform regulations require that new loans have a 30-year term with a 50-year amortization schedule. The new regulation will make clear that, at end of 30 years, the borrower has the option to pay-off the residual balloon with no restrictive use on the property, and the Agency has the option to refinance (or not) for the facility's remaining economic life. In effect, loans will have a 30-year use restriction, versus the current 50-year, with additional use restrictions only should the Agency refinance.

Conforming Household Income Calculation to Industry Standards

By changing the calculation of tenant household income and assets to be consistent with other funding sources in the MFH industry, RHS has made a significant contribution to reducing paperwork burden to the public. No longer will a separate calculation have to be made for a MFH loan when a separate calculation was already executed for Low-Income Housing Tax Credit (LIHTC) or another affordable housing program. Tenant income and assets will be calculated in accordance with 24 CFR 813.106 and 24 CFR 813.102, which are regulations published by the U.S. Department of Housing and Urban Development.

Electronic Submission of Certifications/Recertifications

The proposed rule adds a requirement for electronic reporting of information, including tenants' income. The faster transmission of this information provides RHS with more time for analyzing the information. Consequently, the proposed rule extends by 10 days the period for submitting recertifications, giving borrowers more time to comply with agency requirements, thus improving customer service while maintaining program performance.

Regulatory Crosswalk

The following is a crosswalk that shows where the content of the 13 regulations that are being consolidated can be found in 7 CFR part 3560.

BILLING CODE 3410-XV-P

EP02JN03.003

EP02JN03.004

EP02JN03.005

EP02JN03.006

EP02JN03.007

BILLING CODE 3410-XV-C

List of Subjects in 7 CFR Part 3560

Accounting, Accounting servicing, Administrative practice and procedure, Aged, Farm labor housing, Foreclosure, Grant programs—Housing and community development, Government acquired property, Government property management, Handicapped, Insurance, Loan programs—Agriculture, Loan programs—Housing and community development, Low and moderate income housing, Low and moderate income housing—Rental, Migrant labor, Mortgages, Nonprofit organizations, Public housing, Rent subsidies, Reporting and recordkeeping requirements, Rural areas, Rural housing, Sale of government acquired property, Surplus government property.

Therefore, chapter XXXV, title 7, Code of Federal Regulations is proposed to be amended as follows:

CHAPTER XXXV—RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

1. Part 3560, consisting of subparts A through P, is added to read as follows:

PART 3560—DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS

Subpart A—General Provisions and Definitions

Sec.

3560.1

Applicability and purpose.

3560.2

Civil rights.

3560.3

Environmental requirements.

3560.4

Compliance with other federal requirements.

3560.5

State, local or tribal laws.

3560.6

Borrower responsibility and requirements.

3560.7

Delegation of responsibility.

3560.8

Administrator's exception authority.

3560.9

Reviews and appeals.

3560.10

Conflict of interest.

3560.11

Definitions.

3560.12-3560.49

[Reserved]

3560.50

OMB control number.

Subpart B—Direct Loan and Grant Origination

3560.51

General.

3560.52

Program objectives.

3560.53

Eligible use of funds.

3560.54

Restrictions on the use of funds.

3560.55

Applicant eligibility requirements.

3560.56

Processing section 515 housing proposals.

3560.57

Designated places for section 515 housing.

3560.58

Site requirements.

3560.59

Environmental requirements.

3560.60

Design requirements.

3560.61

Loan security.

3560.62

Technical, legal, insurance, and other services.

3560.63

Loan limits.

3560.64

Initial operating capital contribution.

3560.65

Reserve account.

3560.66

Participation with other funding or financing sources.

3560.67

Rates and terms for section 515 loans.

3560.68

Permitted return on investment (ROI).

3560.69

Supplemental requirements for congregate housing and group homes.

3560.70

Supplemental requirements for manufactured housing.

3560.71

Construction financing.

3560.72

Loan closing.

3560.73

Subsequent loans.

3560.74

Loan for final payments.

3560.75-3560.99

[Reserved]

3560.100

OMB control number.

Subpart C—Borrower Management and Operations Responsibilities

3560.101

General.

3560.102

Housing project management.

3560.103

Maintaining housing projects.

3560.104

Fair housing.

3560.105

Insurance and taxes.

3560.106-3560.149

[Reserved]

3560.150

OMB control number.

Subpart D—Multi-Family Housing Occupancy

3560.151

General.

3560.152

Tenant eligibility.

3560.153

Calculation of household income and assets.

3560.154

Tenant selection.

3560.155

Assignment of rental units and occupancy policies.

3560.156

Lease requirements.

3560.157

Occupancy rules.

3560.158

Changes in tenant eligibility.

3560.159

Termination of occupancy.

3560.160

Tenant grievances.

3560.161-3560.199

[Reserved]

3560.200

OMB control number.

Subpart E—Rents

3560.201

General.

3560.202

Establishing rents and utility allowances.

3560.203

Tenant contributions.

3560.204

Security deposits and membership fees.

3560.205

Rent and utility allowance changes.

3560.206

Conversion to Plan II (Interest Credit).

3560.207

Annual adjustment factors for Section 8 units.

3560.208

Rents during eviction or failure to recertify.

3560.209

Rent collection.

3560.210

Special servicing note rate rents (SNRs).

3560.211-3560.249

[Reserved]

3560.250

OMB control number.

Subpart F—Rental Subsidies

3560.251

General.

3560.252

Authorized rental subsidies.

3560.253

Allocation and prioritization of Agency rental assistance.

3560.254

Eligibility for rental assistance.

3560.255

Requesting rental assistance.

3560.256

Rental assistance payments.

3560.257

Assigning rental assistance.

3560.258

Terms of agreement.

3560.259

Transferring rental assistance.

3560.260

Rental subsidies from non-Agency sources.

3560.261

Improperly advanced rental assistance.

3560.262-3560.299

[Reserved]

3560.300

OMB control number.

Subpart G—Financial Management

3560.301

General.

3560.302

Accounting, bookkeeping, budgeting, and financial management systems.

3560.303

Housing project budgets.

3560.304

Initial operating capital.

3560.305

Return on investment.

3560.306

Reserve account.

3650.307

Reports.

3560.308

Annual financial reports.

3560.309-3560.349

[Reserved]

3560.350

OMB control number.

Subpart H—Agency Monitoring

3560.351

General.

3560.352

Agency monitoring scope, purpose, and borrower responsibilities.

3560.353

Scheduling of on-site monitoring reviews.

3560.354

Borrower response to monitoring review notifications.

3560.355-3560.399

[Reserved]

3560.400

OMB control number.

Subpart I—Servicing

3560.401

General.

3560.402

Loan payment processing.

3560.403

Account servicing.

3560.404

Final loan payments.

3560.405

Borrower organizational structure or ownership interest changes.

3560.406

Multi-family housing ownership transfers or sales.

3560.407

Sales or other disposition of security property.

3560.408

Lease of security property.

3560.409

Subordinations or junior liens against security property.

3560.410

Consolidations.

3560.411-3560.449

[Reserved]

3560.450

OMB control number.

Subpart J—Special Servicing, Enforcement, Liquidation, and Other Actions

3560.451

General.

3560.452

Monetary and non-monetary defaults.

3560.453

Workout agreements.

3560.454

Special servicing actions related to housing operations.

3560.455

Special servicing actions related to loan accounts.

3560.456

Liquidation.

3560.457

Negotiated debt settlement.

3560.458

Special property circumstances.

3560.459

Special borrower circumstances.

3560.460-3560.499

[Reserved]

3560.500

OMB control number.

Subpart K—Management and Disposition of Real Estate Owned (REO) Properties

3560.501

General.

3560.502

Tenant notifications and assistance.

3560.503

Disposition of REO property.

3560.504

Sales price and bidding process.

3560.505

Agency loans to finance purchases of REO properties.

3560.506

Conversion of single family type REO property to multi-family housing use.

3560.507-3560.549

[Reserved]

3560.550

OMB control number.

Subpart L—Off-Farm Labor Housing

3560.551

General.

3560.552

Program objectives.

3560.553

Loan and grant purposes.

3560.554

Use of funds restrictions.

3560.555

Eligibility requirements for off-farm labor housing loans and grants.

3560.556

Application requirements and processing.

3560.557

[Reserved]

3560.558

Site requirements.

3560.559

Design and construction requirements.

3560.560

Security.

3560.561

Technical, legal, insurance and other services.

3560.562

Loan and grant limits.

3560.563

Initial operating capital.

3560.564

Reserve accounts.

3560.565

Participation with other funding or financing sources.

3560.566

Loan and grant rates and terms.

3560.567

Establishing the profit base on initial investment.

3560.568

Supplemental requirements for seasonal off-farm labor housing.

3560.569

Supplemental requirements for manufactured housing.

3560.570

Construction financing.

3560.571

Loan and grant closing.

3560.572

Subsequent loans.

3560.573

Rental assistance.

3560.574

Rental structure and changes.

3560.575

Occupancy restrictions.

3560.576

Tenant priorities for labor housing.

3560.577

Financial management of labor housing.

3560.578

Servicing off-farm labor housing.

3560.579-3560.599

[Reserved]

3560.600

OMB control number.

Subpart M—On-Farm Labor Housing

3560.601

General.

3560.602

Program objectives.

3560.603

Loan purposes.

3560.604

Restrictions on use of funds.

3560.605

Eligibility requirements.

3560.606

Application requirements and processing.

3560.607

[Reserved]

3560.608

Site and construction requirements.

3560.609

[Reserved]

3560.610

Security.

3560.611

Technical, legal, insurance and other services.

3560.612

Loan limits.

3560.613

[Reserved]

3560.614

Reserve accounts.

3560.615

Participation with other funding sources.

3560.616

Rates and terms.

3560.617

[Reserved]

3560.618

Supplemental requirements for on-farm labor housing.

3560.619

Supplemental requirements for manufactured housing.

3560.620

Construction financing.

3560.621

Loan closing.

3560.622

Subsequent loans.

3560.623

Housing management and operations.

3560.624

Occupancy restrictions.

3560.625

Maintaining the physical asset.

3560.626

Affirmative Fair Housing Marketing Plan.

3560.627

Response to resident complaints.

3560.628

Establishing and modifying rental charges.

3560.629

Security deposits.

3560.630

Financial management.

3560.631

Agency monitoring.

3560.632—3560.649

[Reserved]

3560.650

OMB control number.

Subpart N—Housing Preservation

3560.651

General.

3560.652

Prepayment and restrictive-use categories.

3560.653

Prepayment requests.

3560.654

Tenant notification requirements.

3560.655

Rural Housing Service requested extension.

3560.656

Incentive offers.

3560.657

Processing and closing incentive offers.

3560.658

Borrower rejection of the incentive offer.

3560.659

Sale or transfer to nonprofit organizations and public bodies.

3560.660

Acceptance of prepayments.

3560.661

Sale or transfers.

3560.662

Restrictive-use provisions and agreements.

3560.663

Post-prepayment responsibilities for loans subject to continued restrictive-use provisions.

3560.664—3560.669

[Reserved]

3560.700

OMB control number.

Subpart O—Unauthorized Assistance

3560.701

General.

3560.702

Unauthorized assistance sources and situations.

3560.703

Identification of unauthorized assistance.

3560.704

Unauthorized assistance determination notice.

3560.705

Recapture of unauthorized assistance.

3560.706

Offsets.

3560.707

Program participation and corrective actions.

3560.708

Unauthorized assistance received by tenants.

3560.709

Demand letter.

3560.710—3560.749

[Reserved]

3560.750

OMB control number.

Subpart P—Appraisals

3560.751

General.

3560.752

Appraisal use, request, release, and review.

3560.753

Agency appraisal standards and requirements.

3560.754

Non-completion of appraisal assignment.

3560.755—3560.799

[Reserved]

3560.800

OMB control number.

Authority:

42 U.S.C. 1480

Subpart A—General Provisions and Definitions

§ 3560.1

Applicability and purpose.

(a) This part sets forth requirements, policies, and procedures for multi-family housing direct loan and grant programs to serve eligible very-low, low- and moderate-income households. The programs covered by this part are authorized by title V of the Housing Act of 1949 and are:

(1) Section 515 Rural Rental Housing, which includes congregate housing, group homes, and Rural Cooperative Housing. Section 515 loans may be made to finance multi-family units in rural areas as defined in § 3560.11.

(2) Sections 514 and 516 Farm Labor Housing loans and grants. Housing under these programs may be built in any area with a need and demand for housing for farm workers.

(3) Section 521 Rental Assistance. A project-based tenant rent subsidy which may be provided to Rural Rental Housing and Farm Labor Housing facilities.

(b) The programs covered by this part provide economically designed and constructed rural rental, cooperative, and farm labor housing and related facilities operated and managed in an affordable, decent, safe, and sanitary manner.

§ 3560.2

Civil rights.

(a) All actions taken by recipients of loans and grants will be conducted without regard to race, color, religion, sex, familial status, marital status, national origin, age, or disability. These actions include any actions in the sale, rental, or advertising of the dwellings, in the provision of brokerage services, or in residential real estate transactions involving RHS assistance. It is unlawful for a borrower or grantee or an agent of a borrower or grantee:

(1) To refuse to make accommodations in rules, policies, practices, or services that would provide a person with a disability an opportunity to use or continue to use a dwelling unit and all public and common use areas; or

(2) To refuse to provide a reasonable accommodation at the borrower's expense that would not cause an undue financial or administrative burden, or to refuse to allow an individual with a disability to make reasonable modifications to the unit at their own expense with the understanding that the owner may require the tenant to return the unit to its original condition when the unit is vacated by the tenant making the modifications (see § 3560.104(c)).

(b) Any tenant or prospective tenant seeking occupancy in or use of a multi-family housing project or related facility for which a loan or grant has been provided by the Rural Housing Service and who believes they are being discriminated against because of race, color, religion, sex, familial status,

marital status, national origin, age, or disability may complain to the Secretary of Agriculture, U.S. Department of Agriculture, Washington, DC 20250, or the Secretary of Housing and Urban Development, U.S. Department of Housing and Urban Development, Washington, DC 20410.

(c) Borrowers or grantees that fail to comply with the requirements of title VIII of the Civil Rights Act are subject to sanctions authorized by law.

§ 3560.3

Environmental requirements.

The Rural Housing Service (RHS) will consider environmental impacts of proposed housing as equal with economic, social, and other factors. By working with applicants, federal agencies, Indian tribes, State and local governments, interested citizens, and organizations, RHS will formulate actions that advance program goals in a manner that protects, enhances, and restores environmental quality. Loan and grant processing and servicing actions taken by RHS under this part are subject to an environmental review conducted in accordance with 7 CFR part 1940, subpart G.

§ 3560.4

Compliance with other federal requirements.

RHS is responsible for ensuring that the application is in compliance with all applicable federal requirements, including the following specific requirements:

(a)

Intergovernmental review.

7 CFR part 3015, subpart V, or any successor regulation, including the Agency supplemental administrative instruction, RD Instruction 1940-J, available in any Rural Development office.

(b)

National flood insurance.

The National Flood Insurance Act of 1968, as amended by the Flood Disaster Protection Act of 1973; the National Flood Insurance Reform Act of 1994; and 7 CFR part 1806, subpart B.

(c)

Clean Air Act and Water Pollution Control Act Requirements.

For any contract, all applicable standards, orders or requirements issued under section 306 of the Clean Air Act; section 508 of the Clean Water Act, Executive Order 11738, and 40 CFR part 32.

(d)

Historic preservation requirements.

The provisions of 7 CFR part 1901, subpart F.

(e)

Lead-based paint requirements.

The provisions of 7 CFR part 1924, subpart A.

§ 3560.5

State, local or tribal laws.

Applicants must comply with all applicable State and local laws, and laws of federally-recognized Indian tribes to the extent they are not inconsistent with this part.

§ 3560.6

Borrower responsibility and requirements.

(a) Borrower responsibilities and requirements specified in this part may be carried out by an individual or entity designated by the borrower to act on behalf of the borrower such as a resident manager or management agent. Ultimate accountability to the Agency, however, is with the borrower whether or not the borrower designated another person or entity to act on the borrower's behalf.

(b) Borrowers who have not executed a loan agreement, and who were not required to execute a loan agreement by the regulations in effect at the time of their loan closing are exempt from the requirements of subparts D through G of this part, as long as the borrower is not in default of any applicable requirement, security instrument, payment, or any other agreement with the Agency. Such borrowers must provide evidence of tenant income eligibility in accordance with § 3560.152(a), except in Farm Labor Housing where the tenant is not paying shelter cost.

§ 3560.7

Delegation of responsibility.

The Rural Housing Service Administrator may delegate, on an individual or other basis, any decision-making responsibility for RHS programs, unless otherwise noted.

§ 3560.8

Administrator's exception authority.

The RHS Administrator may make an exception to any provision of this part or address any omissions provided that the exception or other action is consistent with the applicable statute and is in the best financial interest of the Federal government. Exception requests presented to the RHS Administrator must have the concurrence of a Rural Development State Office or a Deputy Administrator in the RHS National Office.

§ 3560.9

Reviews and appeals.

Rural Housing Service decisions may be appealed pursuant to 7 CFR part 11.

§ 3560.10

Conflict of interest.

To reduce the potential for employee conflict of interest, all RHS activities will be conducted in accordance with 7 CFR part 1900, subpart D.

§ 3560.11

Definitions.

Unless otherwise noted, terms listed in this part shall be defined as follows:

Administrator.

The head of the Rural Housing Service (RHS) who reports directly to the Under Secretary for Rural Development in the U.S. Department of Agriculture.

Agency.

The Rural Housing Service within the Rural Development mission area of the U.S. Department of Agriculture.

Amortization.

Payment of debt in regular, periodic installments of principal and interest, as opposed to interest only payments.

Assistance.

Financial assistance in the form of a loan, grant, interest credit, or rental assistance.

Association of farmers.

Two or more farmers acting as a single legal entity. Association members may include the individual members of farming partnerships or corporations.

Basic rent.

The rent necessary to cover expenses in a housing project's approved budget and the required loan payment set in the borrower's promissory note reduced by the interest credit agreement.

Borrower.

An individual, partnership, cooperative, trust, public agency, private or public corporation, or other entity which has received a loan from the Agency.

Caretaker.

An individual employed by a borrower or a management agent to handle routine interior and exterior maintenance and upkeep of a multi-family housing project.

Congregate housing.

A housing program authorized by section 515 of the Housing Act of 1949 which provides housing for elderly persons, individuals with disabilities, and families who require some supervision and central services but are otherwise able to care for themselves.

Consumer cooperative.

A corporation organized under the cooperative laws of a State or Federally recognized Indian tribe which will own and operate the housing on a cooperative basis solely for the benefit of its members.

Conventional rents for comparable units (CRCU).

Market rents for comparable rental units in non-government assisted conventional housing in the same geographic area as the RHS project.

Current appraisal.

An appraisal of a multi-family housing project's value which is no more than 1 year old.

Daily Interest Accrual System (DIAS).

A system where interest is charged daily on outstanding principal. Level loan payments are made by the borrower. The amount of interest due on any date is equal to the unpaid daily interest that has accrued.

Default.

Failure by a borrower to meet monetary or non-monetary obligations or terms of a loan, grant, or other agreement with the Agency within 30 days of the date such obligation is due

or required to be paid or performed, or within time periods specified in notices of compliance violations.

Delinquent account.

An account with a payment more than 10 days past due from the payment due date under the terms of a note or loan agreement.

Disability.

The term disability is considered equivalent to the term handicap. Eligibility requirements for fully accessible units are contained in §§ 3560.154(g)(1)(i) and 3560.155(b). A person is considered to have a disability if either of the following two situations occur:

(1)

As defined in section 501(b) of the Housing Act of 1949.

The person is the head of household (or his or her spouse) and is determined to have an impairment which:

(i) Is expected to be of long-continued and indefinite duration;

(ii) Substantially impedes his or her ability to live independently; and

(iii) Is of such a nature that such ability could be improved by more suitable housing conditions, or if such person has a developmental disability as defined in section 102(7) of the Developmental Disability and Bill of Rights Act (42 U.S.C. 6001(7)).

(2)

As defined in the Fair Housing Act; the Americans with Disabilities Act; and Section 504 of the Rehabilitation Act of 1973.

The person has a physical or mental impairment which substantially limits one or more of such person's major life activities; a record of such impairment; or being regarded as having such an impairment. The term does not include current, illegal use of or addiction to a controlled substance. As used in this definition, physical or mental impairment includes:

(i) Any physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one or more of the following body systems: neurological; musculoskeletal; special sense organs; respiratory, including speech organs; cardiovascular; reproductive; digestive; genito-urinary; hemic and lymphatic; skin; and endocrine; or

(ii) Any mental or psychological disorder, such as mental retardation, organic brain syndrome, emotional or mental illness, and specific learning disabilities. The term “physical or mental impairment” includes, but is not limited to, such diseases and conditions as orthopedic, visual, speech and hearing impairments, cerebral palsy, autism, epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, diabetes, Human Immunodeficiency Virus infection, mental retardation, emotional illness, drug addiction (other than addiction caused by current, illegal use of a controlled substance), and alcoholism.

(iii) Major life activities means functions such as caring for one's self, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, and working.

(iv) Has a record of such an impairment means has a history of, or has been misclassified as having, a mental or physical impairment that substantially limits one or more major life activities.

(v) Is regarded as having an impairment means:

(A) Has a physical or mental impairment that does not substantially limit one or more major life activities but that is treated by the borrower or management agent as constituting such a limitation;

(B) Has a physical or mental impairment that substantially limits one or more major life activities only as a result of the attitudes of others toward such impairment; or

(C) Has none of the impairments described in this definition but is treated by another person as having such an impairment.

Domestic farm laborer.

An individual or an immediate family member residing with an individual who, consistent with the requirements in § 3560.575(b)(2), receives a substantial portion of his or her income from farm labor employment (not self-employed) in the United States, Puerto Rico, or the Virgin Islands and either is a citizen of the United States or resides in the United States, Puerto Rico or the Virgin Islands after being legally admitted for residence.

Due diligence on hazardous substances.

Due diligence is the process of inquiring into the environmental conditions of real estate, in the context of a real estate transaction to determine the presence of contamination from hazardous substances, and to determine the impact such contamination may have on the market value of the property.

Elderly person.

A person who is at least 62 years old. The term also means a person with a disability as separately defined in this paragraph, regardless of age.

Elderly household or individual with a handicapped household.

A household in which the tenant or co-tenant of the household is 62 years old or older or is an individual with a disability. An elderly household may include persons younger than 62 years old and the household of an individual with a handicap may include persons without disabilities.

Engagement.

An Agency defined financial review of a housing project's financial status which a borrower will contract with a certified public accountant to perform. An engagement will result in annual financial reports for use by the Agency as described in § 3560.308.

Familial status.

A classification granted to an individual who has not attained the age of 18 years domiciled with persons having legal custody of such individual or with persons having the written permission of the persons having legal custody. The protection against discrimination afforded by familial status shall apply to any person who is pregnant or is in the process of securing legal custody of any individual who has not attained the age of 18 years.

Family farm corporation or partnership.

A private corporation or partnership involved in agricultural production in which at least 90 percent of the stock or interest is owned and controlled by persons related by blood, which shall include parents, siblings, and children, or law. If more than three separate households are supported by the farming operation, the family farm corporation or partnership must be:

(1) Legally organized and authorized to own and operate a farm business within the State,

(2) Legally able to carry out the purposes of the loan, and

(3) Prohibited from the sale or transfer of 90 percent of the stock or interest to other than family members by either the articles of incorporation, bylaws or by agreement between the stockholders or partners and the corporation or partnership.

Farm labor.

Services in connection with cultivating the soil, raising or harvesting any agriculture or aquaculture commodity; or in catching, netting, handling, planting, drying, packing, grading, storing, or preserving in the unprocessed stage any agriculture or aquaculture commodity; or delivering to storage, market, or a carrier for transportation to market or to processing any agricultural or aquacultural commodity in its unprocessed stage.

Farm labor contractor.

A person—other than an agricultural employer, a member of an agricultural association, or an employee of an agricultural employer or agricultural association—who recruits, solicits, hires, employs, furnishes, or transports any year-round or seasonal migrant farm laborer for money or other valuable consideration.

Farm labor housing.

On-farm or off-farm housing for farm laborers authorized by section 514 and section 516 of the Housing Act of 1949.

Farmer.

A person involved in day to day on-site operations of a farm as defined in 7 CFR 1941.4, and who devotes a substantial amount of personal time to operation of a “family farm,” as defined in 7 CFR 1941.4.

Farm owner.

An individual who meets the requirements as defined in 7 CFR part 1941, subpart A.

Foreclosure.

A proceeding in or out of court to extinguish all rights, title, and interest of the owners of property in order to sell the property to satisfy a lien against it.

General overhead.

Includes general operation items necessary for the contractor to be in business. They may include, but are not limited to the following: Tools and minor equipment; worker's compensation and employer's liability; unemployment tax; Social Security and Medicare; manager's, clerical, and estimator's salaries; pension and bonus plans; main office insurance, rental, utilities, miscellaneous expenses; general liability insurance; legal, accounting, and data processing; automotive and light truck expense; vehicle expenses; depreciation of overhead capital expenditures; and office equipment maintenance.

General requirements.

Include items that are required in the construction contract for the contractor to provide for the specific project. They do not include items that pertain to a specific trade nor overhead expenses of the contractor's general operation. Items may include, but are not limited to, the following: Field supervision; field engineering; field office, sheds, toilets, phone; performance and payment or latent defects bonds; cost certification; building permits; site security; temporary utilities; property insurance; and cleaning or rubbish removal.

Grantee.

An entity that has received a grant from the Agency.

Group home.

Housing that is occupied by elderly persons or individuals with disabilities who share living space within a rental unit and in which a resident assistant may be required.

Home base state.

The state which a farm laborer claims as their domicile.

Household.

The tenant or co-tenant and the persons or dependents living with a tenant or co-tenant, but not including a resident assistant.

Household furnishings.

Basic durable items such as stoves, refrigerators, drapes, drapery rods, tables, chairs, dressers and beds.

Housing project.

A property with two or more affordable, decent, safe and sanitary rental units and related facilities operated under one management plan and financed with funds appropriated under the authority of sections 515, 514, or 516 of the Housing Act of 1949.

Identity-of-Interest (IOI).

A relationship between applicants, borrowers, grantees, management agents, or suppliers of materials or services described under, but not limited to, any of the following conditions:

(1) There is a financial interest between the applicant, borrower, grantee and a management agent or the supplying entity;

(2) One or more of the officers, directors, stockholders or partners of the applicant, borrower, or management agent is also an officer, director, stockholder, or partner of the supplying entity;

(3) An officer, director, stockholder, or partner of the applicant, borrower, or management agent has a 10 percent or more financial interest in the supplying entity;

(4) The supplying entity has or will advance funds to an applicant, borrower, or management agent;

(5) The supplying entity provides or pays on behalf of the applicant, borrower, or management agent the cost of any materials or services in connection with obligations under the management plan or management agreement;

(6) The supplying entity takes stock or a financial interest in the applicant, borrower, or management agent as part of the consideration to be paid them; or

(7) There exists or come into being any side deals, agreements, contracts or understandings entered into thereby altering, amending, or canceling any of the management plan, management agreement documents, organization documents, or other legal documents pertaining to the property, except as approved by the Agency.

Indian tribe.

The term

Indian tribe

means any Indian tribe, band, group, and nation, including Alaskan Indians, Aleuts, and Eskimos, and any Alaskan Native Village, of the United States, which is considered an eligible recipient under the Indian Self-Determination and Education Assistance Act (Pub. L. 93-638) or under Chapter 67 of Title 31 prior to repeal of such chapter.

Interest credit.

A form of assistance available to eligible borrowers that reduces the effective interest rate of the loan.

Land lease.

A written agreement between a land owner and a borrower stipulating the terms for possession and use of land for a specified period of time.

Lease.

A contract setting forth the rights and obligations of a tenant or cooperative member and a property owner, including charges and terms under which a tenant or cooperative member will occupy or use the housing or related facilities.

Legal or qualified alien.

Legal or qualified alien refers to any person lawfully admitted to the country who meets the criteria in section 214 of the Housing and Community Development Act of 1980, 42 U.S.C. 1436a.

Letter of Priority Entitlement (LOPE).

A letter issued by the Agency providing a tenant with priority entitlement to rental units in other Agency-financed housing projects for 120 days from the date of the LOPE.

Leveraged participation loan.

A loan made in conjunction with an Agency loan by a lender other than the Agency to finance a multifamily housing project.

Life cycle cost.

The Life Cycle Cost has 2 purposes:

(1) To determine the expected usable life (utility) of a building component or furnishing and

(2) To determine which building components or furnishings are the most cost efficient over the life of the building. Cost efficient is not to be construed to mean the least initial cost.

Life Cycle Cost Analysis.

(1) Life cycle cost analysis is the comparison of different materials to examine anticipated useful life and the cost of using a specific material or building component. The analysis has multiple uses, such as:

(i) To conduct a cost efficiency comparison between products,

(ii) For developing component replacement time tables, and

(iii) For estimating future component replacement costs.

(2) Life cycle cost analysis can be accomplished through various methods, such as: insurance actuary tables or Agency documentation of a component's life expectancy.

(3) Life cycle cost analysis is conducted by a design professional. For Agency financed projects, a life cycle cost analysis is to be conducted for specific components:

(i) Drives and parking,

(ii) Roofing system and roofing material,

(iii) Exterior finishes, and

(iv) Energy source items.

Limited Liability Company (L.L.C.).

An unincorporated organization of one or more persons or entities established in accordance with applicable state laws and whose members may actively participate in the organization without being personally liable for the debts,

obligations or liabilities of the organization.

Limited partnership.

An ownership arrangement consisting of general and limited partners; general partners manage the business, while limited partners are passive and liable only for their own capitol contributions.

Loan agreement.

A written agreement between the Agency and the borrower which sets forth the borrower's responsibilities with respect to Agency financing.

Low-income household.

A household that has an adjusted income that is greater than the Department of Housing and Urban Development's (HUD) established very-low income limit, but that does not exceed the HUD established low-income limit (generally 80 percent of median income adjusted for household size for the county where the property is or will be located).

Low-Income Housing Tax Credit (LIHTC).

A federal tax credit allowed for investment in qualified low-income housing administered by the Internal Revenue Service (IRS) under section 42 of the Internal Revenue Code.

Management agent.

A firm or individual employed or designated by a borrower to act on the borrower's behalf in accordance with a written management agreement.

Management agreement.

A written agreement between a borrower and a management agent setting forth the management agent's responsibilities and fees for management services.

Management fee.

The compensation provided to a management agent for services provided in accordance with a management agreement.

Management plan.

A detailed description of the policies and procedures to be followed by the borrower in managing a multi-family housing project.

Maximum debt limit.

The maximum amount that the Agency will lend or grant for a multi-family housing project based on the appraised value or total development cost excluding costs ineligible for payment from loan or grant funds, whichever is less, reduced by all funding available to the borrower from sources other than the Agency, multiplied by 95, 97, or 102 percent depending upon the applicant entity and their use of the low-income housing tax credit, in accordance with § 3560.63(b).

Member or co-member.

A stockholder or other person who has executed documents or stock pertaining to a cooperative housing type of living arrangement and has made a commitment to upholding the cooperative concept.

Migrants or migrant agricultural laborers.

Individuals performing agriculture work and their family dependents who establish a temporary residence at one or more locations away from their home base state, excluding day-haul agricultural workers whose travels are limited to work areas within one day of their residence.

Minor.

An individual under 18 years of age who is a dependent of a tenant or an individual age 18 or older who is a full-time student and a dependent of a tenant.

Moderate-income household.

A household that has an adjusted income that is greater than the HUD-established low-income limit but does not exceed the low-income limit by more than $5,500.

Mortgage.

A legal document pledging a described property for repayment of a loan under certain terms or conditions.

Net recovery value.

The value realized from the Government's acquisition of security property in a default situation after subtracting all costs, actual or anticipated, from acquiring, holding, and disposing of the security property.

New construction.

A multi-family housing project being constructed to be occupied for the first time.

NOFA.

A “Notice of Funding Availability” issued by the Agency to inform interested parties of the availability of assistance and other matters pertinent to the program.

Nonprofit organization.

A private organization that:

(1) Is organized under State or local laws;

(2) Has no part of its net earnings inuring to the benefit of any member, founder, contributor, or individual; and

(3) Is neither controlled by, nor under the direction of, individuals or entities seeking to derive profit or gain from the organization although a nonprofit organization may be sponsored or created by a for-profit entity provided—

(i) The for-profit entity is not an entity whose primary purpose is the development or management of housing, such as a builder, developer, or real estate management firm,

(ii) The for-profit entity does not have the right to appoint more than one-third of the membership of the organization's governing body,

(iii) The board members appointed by the for-profit entity are not permitted to appoint the remaining two-thirds of the board members, and

(iv) The local nonprofit organization is free to contract for goods and services from vendors of its own choosing;

(4) Has documentation of tax exempt status under section 501(c)(3) or (4) of the Internal Revenue Code of 1986, from the Internal Revenue Service;

(5) Does not include a public body as one of its members; although a state or local government chartered organization may qualify as a local nonprofit organization;

(6) Has standards of financial accountability that conform to 24 CFR 84.21;

(7) Has among its purposes the provision of decent housing that is affordable to very-low, low, and moderate-income persons, as evidenced in its charter, articles of incorporation, resolutions or by-laws;

(8) Maintains accountability to low-income community residents by—

(i) Maintaining at least one-third of its Board of Director's membership for residents of low-income neighborhoods, other low-income community residents, or elected representative of low-income neighborhood organizations, and

(ii) Providing a formal process for low-income program beneficiaries to advise the organization in its decisions regarding the design, siting, development, and management of affordable housing;

(9) Has a capacity for developing and operating affordable rural housing as demonstrated by hiring experienced key staff members who have successfully completed similar projects, or by contracting with a consultant with housing experience and a plan to train appropriate key staff members of the organization; and

(10) Has a history of serving the community within which housing to be assisted is to be located as demonstrated by being able to show 1 year of the organization's service in the community or 1 year of service to the community by members of the organization's governing board, prior to receiving an Agency loan or grant or by demonstrating that its parent organization has at least 1 year of service to the community.

Nonprofit organization of farm workers.

A nonprofit organization which is incorporated with the State, Puerto Rico, or the Virgin Islands, which has local representation in the membership and whose membership is composed of at least 51 percent farm workers.

Note.

The rent necessary to cover expenses in a housing project's approved budget and the required loan payment set in the borrower's promissory note.

Occupancy agreement.

A contract establishing the rights and obligations of the cooperative member and the cooperative, including the amount of the monthly occupancy charge and the

other terms under which the member will occupy the housing.

Occupancy charge.

The amount of money charged a cooperative member to cover their proportional share of the cooperative's operating costs and cash requirements.

Office of the General Counsel (OGC).

The USDA Office of the General Counsel, including the Regional Attorney, Associate Regional Attorney, or Assistant Regional Attorney.

Office of Inspector General (OIG).

The USDA Office of Inspector General.

Overage.

That portion of a tenant's net rent contribution that exceeds basic rent up to note rate rent. Full overage is an amount equal to the difference between the note rate rent for a unit and the basic rent.

Patronage capital refund.

Amounts received by a cooperative in excess of operating costs and expenses which have been assigned to members' patronage capital accounts each year of membership in the cooperative.

Plan I.

A type of interest subsidy available to borrowers prior to October 27, 1980. Budgets and rental rates developed for Plan I loans are based on a 3 percent loan amortization.

Plan II.

A type of interest subsidy available to borrowers operating on a limited profit basis. Budgets and rental rates developed for Plan II loans are based on both the loan being amortized at the interest rate shown on the promissory note and at a 1 percent subsidized rate.

Predetermined Amortization Schedule System (PASS).

A system where loan payments are applied based on an amortization schedule.

Prepayment.

Payment in full of the outstanding balance on an Agency loan prior to the note's maturity date.

Program requirements.

All provisions related to multi-family housing contained in the loan document, grant agreement, statute, regulation, handbook, or administrative notice.

Promissory note.

A legal document containing conditions (interest rate and timing) for repayment of indebtedness.

Real estate owned (REO) property.

The real estate owned by the Agency acquired through voluntary conveyance, foreclosure or other court action.

Related facilities.

Facilities in a multi-family housing project that are related to the housing and are in addition to rental units, (

e.g.

, community rooms or buildings, cafeterias, dining halls, infirmaries, child care facilities, assembly halls, and essential service facilities such as central heating, sewerage, lighting systems, clothes washing facilities, trash disposal and safe domestic water supply).

Renovation.

Renovation is when the remodeling of a property is of a complex nature involving structural repairs; or when two or more of the life cycle cost components are included in the remodeling of a property. Examples: changing the use of a building, replacing wall or floor system members, altering a building that has shifted due to settlement, remodeling an entire property that includes new roofing and siding.

Rent.

The amount established as a charge for occupancy in a rental unit of Agency-financed multi-family housing. The following terms are used to describe rents for various program purposes.

(1)

Note rate rent

is the rental charge established to cover expenses in the housing project's approved budget and the required loan payment set at the interest rate shown in the promissory note.

(2)

Basic rent

is the rental charge established to cover expenses in the housing project's approved budget and the required loan payment contained in the promissory note reduced by the interest credit agreement.

(3)

HUD contract rent

is the rental charge established for housing receiving project-based Section 8 rental subsidies in accordance with 24 CFR part 880 or part 884, as applicable.

(4)

Low-income housing tax credit (LIHTC) rent

is the rental charge established in accordance with LIHTC requirements.

Rental assistance (RA).

The portion of the approved shelter cost paid by the Agency to compensate a borrower for the difference between the approved shelter cost and the tenant contribution.

Rental assistance obligation.

The number of rental assistance units and dollar amounts of rental assistance specified in a rental assistance agreement between the Agency and a borrower for a multi-family housing project.

Rental assistance units.

Dwelling units in a multi-family housing project qualified for rental assistance. There are three types of rental assistance units.

(1) New construction units are units provided in conjunction with initial loans for construction or substantial rehabilitation of the multi-family housing projects.

(2) Replacement units are Agency-funded rental assistance units which replace units with expiring rental assistance agreements or which replace Section 8 units which have expired under the Section 8 contract.

(3) Servicing units are units provided to an operational multi-family housing project provided as an incentive to avert prepayment of a loan or as part of a debt forgiveness package.

Repair and replacement.

Repair and replacement is the restoration of minor building materials, elements, components, equipment and fixtures. Examples: painting, carpeting, appliances, cabinets, and other fixtures.

Resident assistant.

A person residing in a rental unit who is essential to the well-being and care of an elderly person or an individual with a disability, but who:

(1) Is not obligated for the tenant's financial support;

(2) Would not be living in the unit except to provide the needed services;

(3) May be a family member, but is not a dependent of the tenant for tax purposes;

(4) Is not subject to the eligibility requirements of a tenant; and

(5) Is not considered a household member in the determination of household income.

Resident or site manager.

The individual employed by the borrower and who is responsible for the day-to-day operations of the housing.

Retired domestic farm laborer or domestic farm laborer with a farm labor-related disability.

An individual who is at least 55 years of age and who has spent the last 5 years prior to retirement as a domestic farm laborer or spent the majority of the last 10 years prior to retirement as a domestic farm laborer

or

an individual with a disability as separately defined in this paragraph and who was a domestic farm laborer prior to becoming disabled.

Return on Investment (ROI).

The annual amount of profit an owner operating on a limited or full profit basis may withdraw from a project, as established in the loan agreement. The amount is calculated as a percentage of the owner's investment in the project.

Rural area.

(1) Any open country, or any place, town, village, or city which is not (except in the cases of Pajaro, in the state of California, and Guadalupe, in the State of Arizona) part of or associated with an urban area and which:

(i) Has a population not in excess of 2,500 inhabitants, or

(ii) Has a population in excess of 2,500 but not in excess of 10,000 if it is rural in character, or

(iii) Has a population in excess of 10,000 but not in excess of 20,000 and:

(A) Is not contained within a standard metropolitan statistical area; and

(B) Has a serious lack of mortgage credit for lower and moderate-income families, as determined by the Secretary and the Secretary of Housing and Urban Development.

(2) For purposes of this part, any area classified as “rural” or a “rural area” prior to October 1, 1990, and determined not to be “rural” or in a “rural area” as a result of data received from or after the 1990 decennial census shall continue to be so classified until the receipt of data from the decennial census in the year 2000, if such area has a population in excess of 10,000, but not in excess of 25,000, is rural in character, and has a serious lack of mortgage credit for lower and moderate-income families. Notwithstanding any other provision of this paragraph, the city of Plainview, Texas, shall be considered a rural area for purposes of this part, and the city of Altus, Oklahoma, shall be considered a rural area for purposes of this part until the receipt of data from the decennial census in the year 2000.

Rural Cooperative Housing (RCH).

A housing program authorized under section 515 of the Housing Act of 1949, in which a consumer cooperative, organized and operating on a nonprofit basis, may own and operate a multi-family housing development.

Rural Housing Service (RHS).

The Agency within the Rural Development mission area of the U.S. Department of Agriculture or its successor agency which administers programs authorized by sections 514, 515, 516, and 521 of the Housing Act of 1949, as amended.

Rural Rental Housing (RRH).

A housing program authorized by section 515 of the Housing Act of 1949 to provide rental housing in rural areas for persons of very low, low and moderate income.

Seasonal housing.

Housing operated on a seasonal basis, typically for migrants or migrant agricultural laborers as opposed to year round.

Security deposit.

A one-time fee charged a tenant prior to occupancy of a unit to cover possible loss or damage to the housing unit caused by the tenant.

Self-employed.

A person who meets the IRS definition of self-employed at 26 CFR 1.401-10.

Service agreement.

A written agreement between a borrower and a service provider establishing the specific service to be provided to a multi-family housing project, the cost of the service, and the length of time the service will be provided.

Service plan.

A written plan describing how services will be provided to a multi-family housing project and which, at a minimum, must specify the services to be provided, the frequency of the services, who will provide the services, how tenants will be advised of the availability of services, and the staff needed to provide the services.

Service provider.

A person who signs a written agreement with a borrower to provide services to a multi-family housing project.

Servicing note rent (SNR).

A rental rate charged at a Plan II project experiencing vacancies that is less than note rent but higher than basic rent.

Shelter costs.

Basic or note rate rent plus the utility allowance, when used, or the occupancy charge plus the utility allowance. If the utility costs are included in the rent, the rent will equal shelter costs.

Sources and Uses Comprehensive Evaluation (SAUCE).

A computer software program used by the Agency to analyze the total funds provided to a multi-family housing project to ensure that the Agency is not providing excess assistance.

Tenant or co-tenant.

An individual who signs a lease and occupies or will occupy a rental unit in a multi-family housing project. The term tenant or co-tenant also refers to a member of cooperative housing occupying or planning to occupy a dwelling unit in cooperative housing.

Tenant contribution.

The net or gross amount due from a tenant to pay for occupancy of a rental unit in a multi-family housing project.

(1) Net tenant contribution equals the amount of rent paid by a tenant from the tenant's own resources.

(2) Gross tenant contribution equals the amount of rent plus the utility allowance paid by tenants from their own resources.

Total development cost (TDC).

The cost of constructing, purchasing, improving, altering, or repairing multi-family housing and related facilities, buying household furnishings (for sections 514/516 only), and purchasing or improving the necessary land, including architectural, engineering, or legal fees, and charges and other technical and professional fees and charges, but excluding fees, charges, or commissions such as payments to brokers, negotiators, or other persons for the referral of prospective applicants or solicitations of loans. Although a developer's fee is part of the project's development cost for purposes of tax credit calculations basis, such fees are not eligible for payment from Agency loan or grant funds and are not included in determining the Agency authorized development cost.

Utility allowance.

An amount determined by a borrower as the amount to be considered a tenant's portion of utility cost in the calculation of a tenant's total shelter cost when utility costs are not included in the rent.

Very low-income household.

A household that has an adjusted income that does not exceed the HUD established very low-income limit (generally 50 percent of median income adjusted for household size in the county where the property is or will be located).

Workout agreement.

An agreement between a borrower and the Agency listing actions to be taken over a period of time to prevent or correct a compliance violation or to cure a monetary or non-monetary default.

§§ 3560.12-3560.49

[Reserved]

§ 3560.50

OMB control number. [Reserved]

Subpart B—Direct Loan and Grant Origination

§ 3560.51

General.

This subpart contains the Agency's loan origination requirements for multi-family housing direct loans for Rural Rental Housing, Rural Cooperative Housing, and Farm Labor Housing. Additional requirements for farm labor housing loans and grants are contained in subpart L for Off-Farm Labor Housing and subpart M for On-Farm Labor Housing.

§ 3560.52

Program objectives.

The Agency uses appropriated funds to finance the construction, rehabilitation of program properties, or purchase and rehabilitation of multi-family housing and related facilities to serve eligible persons in rural areas. The Agency encourages the use of such financing in conjunction with funding or financing from other sources.

§ 3560.53

Eligible use of funds.

Funds may be used for the following purposes.

(a)

Construct housing.

Funds may be used to construct multi-family housing.

(b)

Purchase and rehabilitate buildings.

Funds may be used to purchase and rehabilitate buildings that have not been previously financed by the Agency.

(1) Rehabilitation must meet the definition of either moderate or substantial rehabilitation as defined in 7 CFR part 1924, subpart A.

(2) The building to be rehabilitated must be structurally sound and the improvements to the building must be necessary to meet the requirements of decent, safe, and sanitary living units.

(3) The total development cost (TDC) for the purchase and rehabilitation of existing buildings must not be more than the estimated TDC for construction

of a similar type and unit size property in the same area.

(c)

Subsequent loans.

Funds may be used to provide subsequent loans in accordance with the provisions of § 3560.73.

(d)

Purchase and improve sites.

Funds may be used to purchase and improve the site on which multi-family housing will be located, provided that the amount of loan funds used to purchase the site does not exceed the appraised market value of the site immediately prior to purchase.

(e)

Develop and install necessary systems.

Funds may be used to install streets, a water supply, sewage disposal, heating and cooling systems, electric, gas, solar, or other power sources for lighting and other features necessary for the housing. If such facilities are located off-site, loan funds may only be used if the following additional requirements are met:

(1) The loan applicant will hold title to the facility or have a legal right to use the facility for a period of at least 50 percent longer than the term of the loan or grant and the title or right is transferable to any subsequent owner of the housing.

(2) The facilities will either be provided for the exclusive use of the proposed housing project, or Agency funds are limited to the prorated part of the total cost of the facility according to the use and benefit to the multi-family housing project. If entities other than the housing project financed by the Agency use the facilities on a reimbursable fee basis, the loan applicant must agree, in writing, to apply any fees collected in excess of operating expenses to their Agency loan account as an extra loan payment.

(f)

Landscaping and site development.

Funds may be used to provide landscaping and site development related to a multi-family housing project such as lighting, walks, fences, parking areas, and driveways.

(g)

Tenant-related facilities.

Funds may be used to develop tenant-related facilities appropriate to the size, economics, and prospective tenants of a multi-family housing project, such as a community room, development of space for education and training purposes for tenants, central laundry facility, outdoor seating, space for passive recreation, tot lots, and a small emergency care infirmary. In congregate housing and group homes, funds may be used for central cooking and dining areas.

(h)

Management-related facilities.

Funds may be used to develop management-related facilities appropriate to the size and economics of a multi-family housing project such as a maintenance workshop, storage facilities, office, and living quarters for a resident manager and other personnel.

(i)

Purchase and install equipment and appliances.

Funds may be used to purchase and install equipment and appliances affixed to the property as customary and appropriate for the area in which the housing is located.

(j)

Household furnishings (Section 514/516).

For farm labor housing sections 514 and 516 only, funds may be used to purchase household furnishings.

(k)

Initial operating capital.

Loan funds equal to 2 percent of total development cost or appraised value, whichever is less, may be used by a state or political subdivision thereof, Indian tribe, consumer cooperative, or any public or private nonprofit borrower who is not receiving LIHTC, to make the initial operating capital contribution required by § 3560.64. Other borrowers must use their own resources to make the required initial operating capital contribution and may not use loan funds for that purpose.

(l)

Builder's profit, overhead and general requirements.

Subject to the following limits, funds may be used for builder's profit, overhead and general requirements.

(1) Up to 10 percent of the construction contract may be used for builder's profit.

(2) Up to 4 percent of the construction contract may be used for general overhead.

(3) Up to 7 percent of the construction contract may be used for general requirements.

(m)

Legal, technical and professional services.

Funds may be used for the costs of legal, technical, and professional services related to the borrower's multi-family housing project, including appraisals, environmental documentation, and due diligence reports.

(n)

Permit and application fees.

Funds may be used for required multi-family housing permits and application fees.

(o)

Reimbursement to nonprofit organizations and public bodies.

Funds may be used to reimburse a nonprofit organization or public body for costs that are reasonable and typical for the area, up to 2 percent of total development costs for section 515, or up to 4 percent of total development costs for off-farm labor housing, of:

(1) Development and packaging of a loan application and a multi-family housing proposal, and

(2) Legal, technical, and professional fees incurred in the formation of the loan application and multi-family housing proposal; or

(3) Technical assistance from another nonprofit organization to assist in the organization's formation and in the development and packaging of a loan application and multi-family housing proposal.

(p)

Educational programs.

Funds may be used for educational programs related to owning and managing a cooperative housing project for the board of directors of a housing cooperative during the first year of the housing operation. Such funds will be available from the initial operating account. The amount of the funds disbursed will be subject to RHS approval and availability of financial resources from the project.

(q)

Interest and customary charges.

Funds may be used for interest accrued and customary charges necessary to obtain interim financing.

(r)

Purchase housing from an interim lender.

Funds may be used to purchase multi-family housing from an interim lender that holds fee simple title to Agency-financed housing upon which construction commenced and a letter of commitment had been issued by the Agency but the original applicant for whom funds were obligated will not or cannot continue with construction of the housing. In order for the purchase to take place, there must be no outstanding unpaid obligations in connection with the housing.

(s)

Uniform Relocation Assistance and Real Property Acquisition Act of 1970.

Funds may be used for necessary costs incurred to comply with the Uniform Relocation Assistance and Real Property Acquisition Act of 1970.

(t)

Demonstration programs.

With the RHS Administrator's approval, funds may be used to construct demonstration housing involving innovative units and systems which do not meet existing published standards, rules, regulations, or policies but meet the intent of providing affordable, decent, safe, and sanitary rural housing, and are consistent with the requirements of title V of the Housing Act of 1949.

(u)

Conversion of section 502 properties.

In accordance with § 3560.506, loan funds may be used to finance the conversion of real estate owned units originally financed under section 502 of the Housing Act of 1949, to multi-family housing authorized by section 515 of the Housing Act of 1949.

§ 3560.54

Restrictions on the use of funds.

(a)

Ineligible uses of funds.

Funds may not be used for:

(1) Housing intended to serve temporary and transient residents, with the exception of housing to serve

migrant farm workers in accordance with § 3560.554;

(2) Special care facilities or institutional-type homes;

(3) Facilities which are not in compliance with the design requirements specified in § 3560.60;

(4) Any costs associated with space in a housing project that is leased for commercial use or any commercial facilities except essential service-type facilities when otherwise not conveniently available;

(5) Specialized equipment for training and therapy;

(6) Operating capital for a central dining facility or any items which do not become affixed to the real estate security with the exception of household furnishings for farm labor housing units financed under sections 514 and 516;

(7) Compensation to a loan applicant for value of land contributed in excess of the equity contribution requirements in § 3560.63(c);

(8) Refinancing of an applicant's debt except when the debt involves interim financing or when refinancing is necessary to obtain a release of an existing lien on land owned by a nonprofit organization;

(9) Payment of any fee, charge, or commission to a broker or anyone else as a developer's fee or for referral of a prospective loan applicant or solicitation of a loan;

(10) Payment to any officer, director, trustee, stockholder, member, or agent of an applicant; or

(11) Purchasing land for a site in excess of what is needed, except when:

(i) The applicant cannot acquire an alternate site or cannot acquire the needed land as a separate parcel;

(ii) The applicant agrees to sell the excess land as soon as practical and to apply the proceeds to the loan; and

(iii) Program site density requirements are met in accordance with the site requirements established under § 3560.58.

(b)

Obligations incurred before loan approval.

Funds may not be used for expenses incurred by an applicant prior to approval except when all the following conditions are met:

(1) The debts were incurred for eligible purposes;

(2) Contracts, materials, construction, and any land purchased meet Agency standards and requirements;

(3) Payment of the debts will remove any attached liens and any basis for liens that may attach to the property on account of such debts; and

(4) The appropriate level of environmental review in accordance with 7 CFR part 1940, subpart G has been completed.

§ 3560.55

Applicant eligibility requirements.

Applicants for off-farm labor housing loans and grants should also refer to § 3560.555, and applicants for on-farm labor housing loans should refer to § 3560.605.

(a)

General.

To be eligible for Agency assistance, applicants must meet the following requirements:

(1) Be a U.S. citizen or qualified alien(s); a corporation; a state or local public Agency; an American Indian tribe as defined in § 3560.11; or a limited liability company (LLC), nonprofit organization, consumer cooperative, trust, partnership, or limited partnership in which the principals are U.S. citizens or qualified aliens;

(2) Be unable to obtain similar credit elsewhere at rates that would allow for rents within the payment ability of eligible residents;

(3) Possess the legal and financial capacity to carry out the obligations required for the loan or grant;

(4) Be able to maintain, manage, and operate the housing for its intended purpose and in accordance with all Agency requirements;

(5) With the exception of applicants who are a nonprofit organization, housing cooperative or public body, be able to provide the borrower contribution from their own resources (this contribution must be in the form of cash, or land, or a combination thereof);

(6) Have or be able to obtain a minimum of 2 percent of the total development costs for use as initial operating capital (for nonprofit organizations, cooperatives, or public bodies, this amount may be financed through Agency funds); and

(7) Not be suspended, debarred, or excluded based on the “List of Parties Excluded from Federal Procurement and Nonprocurement Programs.” The list is available to Federal agencies from the U.S. Government Printing Office. Non-federal parties should contact the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, (202) 512-1800.

(8) Not delinquent on Federal debt or a Federal judgment debtor, with the exception of those debtors described in § 3560.55(b).

(b)

Additional requirement for applicants with prior debt.

If an applicant has a prior or existing Agency debt, the following additional requirements must be met.

(1) The applicant must be in compliance with any existing loan or grant agreements and with all legal and regulatory requirements or must have an Agency-approved workout agreement and be in compliance with the provisions of the workout agreement. The Agency may require that applicants with monetary or non-monetary deficiencies be in compliance with an Agency-approved workout agreement for a minimum of 6 consecutive months before becoming eligible for further assistance.

(2) The applicant must be in compliance with the Civil Rights Act of 1964 and all applicable civil rights laws.

(c)

Additional requirements for nonprofit organizations.

In addition to the eligibility requirements of paragraphs (a) and (b) of this section, nonprofit organizations must meet the following criteria:

(1) The applicant must have received a tax-exempt ruling from the IRS designating the applicant as a 501(c)(3) or 501(c)(4) organization.

(2) The applicant must include as part of its organization purposes the provision of decent, safe, and sanitary housing that is affordable to very-low, low- and moderate-income persons.

(3) No part of the applicant's earnings may benefit any of its members, founders, or contributors.

(4) The applicant must be legally organized under state and local law.

(5) The applicant's membership should be composed of:

(i) At least one-third representatives of the low-income community.

(ii) No more than one-third representatives of the public sector.

(d)

Additional requirements for limited partnerships.

In addition to the applicant eligibility requirements of paragraphs (a) and (b) of this section, limited partnership loan applicants must meet the following criteria:

(1) The general partners must be able to meet the equity contribution requirements if the partnership is not able to do so at the time of loan request.

(2) The general partners must maintain a minimum 5 percent financial interest in the residuals or refinancing proceeds in accordance with the partnership organizational documents.

(3) The partnership must agree that new general partners can be brought into the organization only with the prior written consent of the Agency.

(e)

Additional requirements for Limited Liability Companies (LLCs).

In addition to the applicant eligibility requirements of paragraphs (a) and (b) of this section, LLC loan applicants must meet the following criteria.

(1) One member who holds at least a 5 percent financial interest in the LLC must be designated the authorized agent to act on the LLC's behalf to bind the LLC and carry out the management functions of the LLC.

(2) No new members may be brought into the organization without prior consent of the Agency.

(3) The members must commit to meet the equity contribution requirements if the LLC is not able to do so at the time of loan request.

§ 3560.56

Processing section 515 housing proposals.

Processing requirements for farm labor housing proposals are found in subpart L for Off-Farm and subpart M for On-Farm.

(a)

Notice of Funding Availability (NOFA) responses.

(1) The Agency will publish an annual NOFA with deadlines and other information related to submission of new construction multi-family housing proposals, including expansion of existing multi-family housing in designated places selected in accordance with § 3560.57.

(2) To be eligible for funding consideration, multi-family housing proposals must be submitted in accordance with the NOFA and must provide information requested in the NOFA for the Agency to score and rank the proposals.

(3) Multi-family housing proposals needing rental subsidies must include requests for Agency rental assistance or a description of any non-Agency rental subsidy to be used with the proposal and must provide information required by § 3560.260(c).

(4) The Agency will consider housing proposals requesting rental assistance in rank order to the extent rental assistance is available. When there is no rental assistance available, the Agency will consider only those housing proposals in rank order which do not require rental assistance.

(b)

Preliminary proposal assessment.

The Agency will make a preliminary assessment of the application using the following criteria and will reject those applications which do not meet all of these criteria:

(1) The proposal was received by the submission deadline specified in the NOFA;

(2) The proposal is complete as specified in the NOFA;

(3) The proposal is for an authorized purpose; and

(4) The applicant meets Agency eligibility requirements.

(c)

Scoring and ranking project proposals.

The Agency will score and rank each housing proposal which meets the criteria of paragraph (b) of this section.

(1) The following criteria will be used to score housing proposals as more completely established in the NOFA:

(i) The presence and extent of leveraged assistance in the proposal for the units that will serve tenants meeting Agency income limits at basic rents comparable to what the rent would be if the Agency provided full financing.

(ii) The proposal will provide rental units in a colonia, tribal land, Rural Economic Area Partnership (REAP) community, Enterprise Zone or Empowerment Community (EZ/EC) or in a place identified in the state Consolidated Plan or a state needs assessment as a high need community for multi-family housing.

(iii) The proposal supports Agency initiatives announced in the NOFA.

(iv) The proposal uses a donated site which meets the following conditions:

(A) The site is donated by a state, unit of local government, public body or a nonprofit organization;

(B) The site is suitable for the housing proposals and meets Agency requirements;

(C) Site development costs do not exceed what they would be to purchase and develop an alternative site;

(D) The overall cost of the multi-family housing is reduced by the donation of the site; and

(E) A return on investment is not paid to the borrower for the value of the donated site nor is the value of the site considered as part of the borrower's contribution.

(2) The Agency will rank housing proposals based on their scoring.

(i) When proposals have an equal score, preference will be given to Indian tribes as defined in § 3560.11 and local nonprofit organizations or public bodies whose principal purposes include low-income housing that meet the conditions of § 3560.55(c) and the following conditions.

(A) Is exempt from Federal income taxes under section 501(c)(3) or 501(c)(4) of the Internal Revenue Code;

(B) Is not wholly or partially owned or controlled by a for-profit or limited-profit type entity;

(C) Whose members, or the entity, do not share an identity of interest with a for-profit or limited-profit type entity;

(D) Is not co-venturing with another entity; and

(E) The entity or its members will not be receiving any direct or indirect benefits pursuant to LIHTC.

(ii) A drawing will be held in the event of a tie score, first for proposals from applicants who meet the conditions of paragraph (c)(2)(i) of this section and next for proposals from applicants for which paragraph (c)(2)(i) of this section is not applicable. Each proposal will be numbered in the order in which it is drawn.

(3) The Agency will request initial loan applications from parties who submitted the housing proposals with the highest ranking, taking into consideration available funds. The Agency will notify non-selected parties with the reasons for their non-selection, and the process that may be used to seek a review of the non-selection decision.

(d)

Processing initial loan applications.

The Agency will review all initial loan applications submitted in accordance with Agency requirements to further evaluate the eligibility and feasibility of the housing proposals. This determination will include:

(1) A review of the preliminary plans and cost estimates;

(2) A market feasibility review;

(3) An Agency site visit to gather preliminary environmental information and determine that the proposed site meets the site requirements of § 3560.58;

(4) A review of the Affirmative Fair Housing Marketing Plan;

(5) An analysis of current credit reports; and

(6) A review of Civil Rights Impact Analysis in accordance with 7 CFR part 2006, subpart P.

(7) Completion of the appropriate level of environmental review in accordance with 7 CFR part 1940, subpart G.

(e)

Processing order of initial loan applications.

The Agency will process initial loan applications in rank order, taking into account available funds. If any initial loan applications are withdrawn, rejected, or delayed for a period of time that will not permit funding in the current funding cycle, the Agency will process, in rank order, the next initial loan application as funding levels permit.

(f)

Other assistance.

During each stage of loan application processing, loan applicants must notify the Agency of all other assistance, including other Federal Government assistance proposed or approved for use in connection with the loan application.

(g)

Proposal withdrawal or rejection.

An applicant may withdraw a housing proposal, an initial loan application, or a final loan application at any time during the Agency review process with a written request. The Agency may reject a housing proposal, an initial loan application, or a final loan application at any time during the Agency review process when an applicant fails to provide information requested by the Agency within the time frame specified by the Agency.

(h)

Final applications.

Applicants, with initial loan applications that are selected by the Agency for further processing, must submit a final

application, with any additional information requested by the Agency, to confirm and document a housing proposal's eligibility and feasibility. The Agency will notify applicants with initial loan applications that are not selected for further processing of their non-selection, the reasons for their non-selection, and the process that may be used to seek a review of the non-selection decision.

(i)

Rural cooperative housing proposals.

Rural cooperative housing loan proposals will be solicited through a NOFA and will be assessed and processed in the same manner described in paragraphs (a) through (h) of this section.

§ 3560.57

Designated places for section 515 housing.

(a)

Establish a list of designated places.

The Agency will establish a list of designated places from which loan proposals will be accepted. The list is updated each fiscal year and is available when the Notice of Funding Availability (NOFA) is published. The NOFA provides information on obtaining the list. This list will be developed from a list of rural places which the Agency identifies as having the greatest need for multifamily housing based on the following factors:

(1) Qualification as a rural area as defined in § 3560.11;

(2) Lack of mortgage credit;

(3) Demonstrated need for multi-family housing based on:

(i) The incidence of poverty;

(ii) The existence of substandard housing;

(iii) The lack of affordable housing; and

(iv) The following high need areas:

(A) Places identified in the state Consolidated Plan or similar state plan or needs assessment report;

(B) Indian reservations or communities located within the boundaries of tribal allotted or trust land; and

(C) EZ/EC or REAP communities.

(b)

Establishing partnership designated place list.

The Agency, in states with an active leveraging program and formal partnership agreement with the state agency, may establish a partnership designated place list consisting of places identified by the partnership as high need areas based on criteria consistent with the Agency's and the state's authorizing statutes. The partnership agreement and partnership designated place list must have the concurrence of the Administrator.

(c)

Administrator's discretion.

The Administrator may add to the list of designated places any place that is determined to have a compelling need for multi-family housing, for example, a place that has had a substantial increase in population not reflected in the most recent Census data, or a place that has experienced a loss of affordable housing because of natural disaster.

(d)

Restrictions on loans in certain designated places.

(1) Initial loan applications will not be requested and final loan applications will not be closed for housing proposals in designated places where any of the following conditions exist.

(i) The Agency has selected another multi-family housing proposal in the designated place for processing.

(ii) A previously funded Agency, HUD, low-income housing tax credit or other similar assisted multi-family housing in the designated place has not been completed or has not reached projected occupancy levels.

(iii) Existing assisted multi-family housing in the designated place is experiencing high vacancy levels.

(iv) A special note rate rent or other loan servicing tool is pending or in effect for other assisted housing in the designated place, or

(v) The need in the market area is for additional rental assistance and not additional rental units.

(2) Exceptions to the provisions in § 3560.57(d)(1) may be made:

(i) When a group home is proposed for persons with disabilities in an area where the existing multi-family housing is insufficient or unavailable for their needs; or

(ii) There is a compelling need for additional multi-family housing, for example when the units that have been approved or are under development represent only a small portion of the total units needed in the community.

§ 3560.58

Site requirements.

(a)

Location.

(1) New construction section 515 loans will be made only in designated places selected by the Agency in accordance with the requirements of § 3560.57.

(2) Agency-financed multi-family housing must be located in residential areas as part of established rural communities, except as permitted in § 3560.58(b), and for farm labor housing units financed under sections 514 and 516, which may be developed in any area where a need for farm labor housing exists.

(3) Communities in which Agency-financed multi-family housing is located must have adequate facilities and services to support the needs of tenants.

(4) Housing complexes will not be located in areas where there are undesirable influences such as high activity railroad tracks; adjacent to or near industrial sites; bordering sites or structures which are not decent, safe, or sanitary; or bordering sites which have potential environmental concerns such as processing plants. Sites which are not an integral part of a residential community and do not have reasonable access, either by location or terrain, to essential community facilities such as water, sewerage removal, schools, shopping, employment opportunities, medical facilities, are not acceptable. Consistent with Federal law and Departmental Regulation, the Agency must conduct an environmental assessment and a civil rights impact analysis before a site can be accepted. Sites may be found as unacceptable if any of the above concerns exist.

(b)

Structures located in central business areas.

The Agency will consider financing construction or the purchase and substantial rehabilitation of an existing structure located in the central business area of a rural community. With prior consent from the Agency, a portion of such a structure may be designated for commercial use on a lease basis. RHS funds may not be used to finance any cost associated with the commercial space.

(c)

Site development costs and standards.

The cost of site development must be less than or comparable to the cost of site development at other available sites in the community and the site must be developed in accordance with 7 CFR part 1924, subpart C and any applicable standards imposed by a state or local government.

(d)

Densities.

Allowable site densities will be determined based on the following criteria:

(1) Compatibility and consistency with the community in which the multi-family housing is located;

(2) Impact on the total development costs; and

(3) Size sufficient to accommodate necessary site features.

(e)

Flood or mudslide-prone areas.

(1) The Agency will not approve sites subject to 100-year floods when non-floodplain sites exist. The environmental review process will assess the availability of a reasonable site outside the 100-year floodplain.

(2) Sites located within the 100 year floodplain are not eligible for federal financial assistance unless flood insurance is available through the National Flood Insurance Program (NFIP). The Agency will complete FEMA Form 81-93, Standard Flood Hazard Determination, to document the site's location in relation to the

floodplain and the availability of insurance under NFIP.

§ 3560.59

Environmental requirements.

Under the National Environmental Policy Act, the Agency is required to assess the potential impact of the proposed action on protected environmental resources. Measures to avoid or at least mitigate adverse impacts to protected resources may require a change in the site or project design. Therefore, a site cannot be approved until the Agency has completed the environmental review in accordance with 7 CFR part 1940, subpart G, or any successor regulation. Likewise, the applicant should be informed that the environmental review must be completed and considered before the Agency can make a commitment of resources to the project.

§ 3560.60

Design requirements.

(a)

Standards.

All Agency-financed multi-family housing will be constructed in accordance with 7 CFR part 1924, subpart A and will consist of two or more rental units plus appropriate related facilities. Single family structures may be used for group homes and cooperative housing. Also, manufactured homes may be used to create multi-family housing and single family housing originally financed through section 502 of the Housing Act of 1949 may be converted to multi-family housing. Maintenance requirements are listed in § 3560.103(a)(3).

(b)

Residential design.

All multi-family housing must be residential in character, except as provided for in § 3560.58(b), and must meet the needs of eligible residents.

(c)

Economical construction, operation and maintenance.

Taking into consideration life-cycle costs, all housing must be economical to construct, operate, and maintain and must not be of elaborate design or materials.

(1) Economical construction means construction that results in housing of at least average quality with amenities that are reasonable and customary for the community and necessary to appropriately serve tenants.

(2) Economical operating and maintenance means housing with operational and maintenance costs that allow a basic rent structure less than or consistent with conventional rents for comparable units in the community or in a similar community.

(3) In meeting the Agency objective of economical construction, operation and maintenance, housing proposals must:

(i) Contain costs without jeopardizing the quality and marketability of the housing;

(ii) Employ life cycle cost analysis acceptable to the Agency to determine the types of materials which will reduce overall costs by lowering operation and maintenance costs, even though their initial costs may be higher; and

(iii) Provide assurances that costs will be reduced when the Agency determines that housing costs are not economical. If assurances cannot be provided, funding may be withdrawn.

(4) The housing proposal will give maximum consideration to energy conservation measures and practices.

(d)

Accessibility.

All housing will meet the following accessibility requirements.

(1) For new construction of multi-family housing, at least 5 percent of the units (but not less than one) must be constructed as fully accessible units to persons with disabilities. The Uniform Federal Accessibility Standards (UFAS), as defined in 36 CFR part 1190, will be followed. When calculating how many accessible units are required, always round up to the next whole number to ensure the 5 percent requirement is met.

(2) For existing properties that do not have fully accessible units, the 5 percent requirement will apply when making substantial alterations as defined by UFAS. The UFAS defines substantial alteration as alteration to any building or facility is to be considered substantial if the total cost for a twelve month period amounts to 50 percent or more of the full and fair cash value of the building * * * UFAS further defines full and fair cash value as the assessed valuation of a building or facility as recorded in the assessor's office of the municipality and as equalized at one hundred percent (100%) valuation, or the replacement cost, or the fair market value. The 5 percent rule will also apply to repair or renovation work on a single unit. For instance, if a unit is damaged by fire and extensive repair is necessary, to the extent possible the unit is to be converted to a fully accessible unit.

(3) The variety of bedroom sizes of fully accessible units will be comparable to the variety of bedroom sizes of units which are not fully accessible. Borrowers will not, however, be required to exceed the 5 percent requirement simply to have an accessible unit of each bedroom size. In addition, accessible units should be distributed throughout the complex so not to segregate the units in one location.

(4) All multi-family housing must meet:

(i) The accessibility requirements as contained in section 504 of the Rehabilitation Act of 1973;

(ii) The requirements of the Fair Housing Amendments Act of 1988;

(iii) The requirements of the Americans with Disabilities Act of 1990, as applicable; and

(iv) All other Federal, State, and local requirements. When architectural standards differ, the most stringent standard will be followed.

§ 3560.61

Loan security.

(a)

General.

Each loan made by the Agency will be secured in a manner that adequately protects the financial interest of the Federal Government throughout the period of the loan based on a value-in-use appraisal consistent with the requirements of subpart P of this part.

(b)

Lien position.

(1) The Agency will seek a first or parity lien position on Agency-financed property in all instances. The Agency may accept a junior lien position if the Federal government's interests are adequately secured.

(2) The Agency will seek a first or parity lien on revenue from rent; Agency, HUD, state or private rental subsidy payments; chattels; assignments; and operating and reserve accounts. The Agency will accept a junior lien position if the Federal Government's interests are adequately secured.

(c)

Liability.

Personal liability will be required of all individual borrowers. Personal liability will not be required for the members or stockholders of any corporation or trust or any partners in a limited partnership.

(d)

Housing and land ownership.

Applicants must own the multi-family housing and related land for which the loan is being requested, or become the owner when the loan is closed or have a leasehold interest in the land. Use of leased land for MFH projects is limited to loan applicants who are nonprofit bodies, states, political subdivisions, public bodies, public agencies, and American Indian tribes where land is not available for purchase. If an applicant is not the owner of the housing and the related land, the following conditions must be met prior to or at loan closing.

(1) A recorded mortgage on the improvements is given as collateral.

(2) The amount of the loan against the collateral does not exceed its estimated market value.

(3) The unexpired term of the lease on the date of loan closing is at least 50 percent longer than the term of the loan and rent charged for the lease does not

exceed the rate being paid for similar leases in the area.

(4) The applicant's leasehold interest is not subject to summary foreclosure or cancellation.

(5) The lease permits:

(i) The Agency to foreclose the mortgage and to transfer the lease;

(ii) The Agency to bid at a foreclosure sale or to accept voluntary conveyance of the security in lieu of forec

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