# Single Family Housing Guaranteed Loan Program

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-29084

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 9, 2013
- **Citation:** 78 FR 73928

## Text

DEPARTMENT OF AGRICULTURE
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency
7 CFR Part 1980
Rural Housing Service
7 CFR Part 3555
RIN 0575-AC18
Single Family Housing Guaranteed Loan Program

AGENCY:

Rural Housing Service, Rural Business-Cooperative Service, Rural Utilities Service, and Farm Service Agency, USDA.

ACTION:

Interim final rule.

SUMMARY:

The Rural Housing Service (RHS) is streamlining and reengineering its Single Family Housing Guaranteed Loan Program (SFHGLP) regulation. This action is taken to reduce regulations, improve customer service, achieve greater efficiency, flexibility, and effectiveness in managing the program. The effect of this action is to provide better service to participating lenders and investors by removing Rural Development internal administrative procedures and make the necessary adjustments to reduce SFHGLP risk of loss.

DATES:

Effective date:
September 1, 2014.

Comment date:
Written comments on the interim final rule must be received on or before January 8, 2014.

ADDRESSES:

You may submit comments on this interim final rule by any one of the following methods:

•
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments electronically.

•
Mail:
Submit written comments via the U.S. Postal Service to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence Ave. SW., Washington, DC 20250-0742.

•
Hand Delivery/Courier:
Submit written comments via Federal Express mail, or other courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street SW., 7th Floor, Washington, DC 20024.

All written comments will be available for public inspection during regular work hours at the 300 7th Street SW., 7th Floor address listed above.

FOR FURTHER INFORMATION CONTACT:

Debra Terrell, Senior Loan Specialist, Single Family Housing Guaranteed Loan Division, Stop 0784, Room 2250, USDA Rural Development, South Agriculture Building, 1400 Independence Avenue SW., Washington, DC 20250-0784, telephone (202) 720-1452 or (918) 331-9404, email is
debra.terrell@wdc.usda.gov.

SUPPLEMENTARY INFORMATION:

Executive Order 12866—Classification

This final rule has been reviewed under Executive Order (EO) 12866 and has been determined to be significant by the Office of Management and Budget. The EO defines a “significant regulatory action” as one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this EO.

The Agency conducted a regulatory impact analysis to fulfill the requirements of EO 12866. In this analysis, the Agency identifies potential benefits and costs of continued homeownership assistance in rural areas. Revising the regulation and creating handbook materials to further detail procedures should lead to improved performance, both by lenders and Agency staff. Ambiguities in program requirements will be eliminated and written guidance in one collective publication will be provided to help lenders and Agency representatives make sound programmatic decisions. Time savings for the Agency should result in a more efficient streamlined delivery of lender guarantee requests and reduced administrative costs to the Agency. Cost savings will be continuous each year and can be measured in terms of Agency staff time, equipment and associated costs. Workload efficiency is also expected to increase by delegating servicer authority to qualified lenders. The regulatory impact analysis estimates the Agency can save over $14,000 in each dedicated staff time by streamlining the procedures and $393,000 in staff time for each servicing lender that is delegated authority to approve loss mitigation and property disposition plans. In addition, by revising the requirements for interest on Real Estate Owned properties to allow for property disposition within 90 days of acquisition will save the federal government an estimated $9.6 million annually.

The analysis also discusses the benefits of changes like the new single close loan feature. The new process will eliminate the need for an interim loan, which will promote new construction in rural areas. Adjustments to qualifications for eligible lenders should also allow more program participation in underserved rural areas.

Other federal assistance is concentrated in urban areas. The disparity between metropolitan homeowners who have financed with federal programs compared to non-metropolitan rural homeowners indicates the guaranteed program has a positive impact in increasing the level of federal assistance available to low- and moderate-income rural households interested in pursuing homeownership. The impacts of changes to the rule are positive to the federal budget, local economic impact and housing market. Changes are intended to streamline the program, reduce regulations, improve customer service and strengthen the Agency's ability to achieve greater efficiency, flexibility and effectiveness in managing the program. None of the proposed changes is expected to have a significant economic impact on lenders, borrowers, or the U.S. Treasury. The monetary impact of this rule is based on the overall program costs. The estimated overall program costs burden is $2,200 for applicants/borrowers, and $125,000 for lender entities. The administrative cost to the Agency for implementation of the rule is approximately $250,000.

Executive Order 12788—Civil Justice Reform

This final rule has been reviewed under Executive Order 12788, Civil Justice Reform. In accordance with this rule: (1) All state and local laws and regulations that are in conflict with this rule will be preempted; (2) no retroactive effect will be given to this rule; and (3) administrative proceedings in accordance with the regulations of the Department of Agriculture National Appeals Division (7 CFR part 11) must be exhausted before bringing suit in court challenging action taken under

this rule unless those regulations specifically allow bringing suit at an earlier date.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1996 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effect of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, the RHS generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, or tribal governments, in the aggregate, or to the private sector, of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of the UMRA generally requires RHS to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, most cost-effective, or least burdensome alternative that achieves the objectives of this rule.

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

National Environmental Policy Act

We have analyzed this rule in accordance with the criteria of the National Environmental Policy Act (NEPA) (42 U.S.C. 4332(c)), the Council on Environmental Quality's Regulations for Implementing the Procedural Provisions of NEPA (40 CFR parts 1500-1508), and7 CFR part 1940, subpart G, “Environmental Program.” It is the determination of Rural Development that this action is categorically excluded from NEPA documentation requirements consistent with 7 CFR 1940.310 for financial assistance for the purchase of an existing dwelling. An existing property purchase does not impose a significant effect on human environment. Therefore neither an Environmental Assessment nor an Environmental Impact Statement is required for this rule.

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 States, or on the distribution of power and responsibilities among the various levels of government. Nor does this rule impose substantial direct compliance costs on States and local governments. Therefore, consultation with the States is not required.

Regulatory Flexibility Act

In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-612) the undersigned has determined that this rule will not have a significant economic impact on a substantial number of small entities. This rule does not impose any significant new requirements on Agency applicants, borrowers or lenders and the regulatory changes affect only Agency determination of program benefits for guarantees on loans made to individuals.

Executive Order 12372—Intergovernmental Consultation

This program/activity is excluded from the provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials.

Executive Order 13175, Consultation and Coordination With Indian Tribal Governments

This executive order imposes requirements on Rural Development in the development of regulatory policies that have tribal implications or preempt tribal laws. Rural Development has determined that the rule does not have a substantial direct effect on one or more Indian tribe(s) or on either the relationship or the distribution of powers and responsibilities between the Federal Government and the Indian tribes. Thus, the rule is not subject to the requirements of Executive Order 13175. Tribal Consultation inquiries and comments should be directed to Rural Development's Native American Coordinator at
aian@wdc.usda.gov
or (720) 544-2911.

Programs Affected

This program is listed in the Catalog of Federal Domestic Assistance under 10.410, Very low- to Moderate-Income Housing Loans.

Paperwork Reduction Act

The information collection requirements contained in this interim rule have been submitted to the Office of Management and Budget (OMB) for review and approval.

E-Government Act Compliance

The Rural Housing Service is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

Background

On December 15, 1999, RHS published a proposed rule with request for comments for the Single Family Housing Guaranteed Loan Program (SFHGLP) (64 FR 70123-70144). Rural Development received comments from sixty-three respondents. Comments were from Agency employees or employee groups, lenders, secondary market sources, builders, and various other interest groups.

The 180 day effective date of this rule will allow Rural Development the opportunity to provide training to participating lenders and allow time for computer system changes. Rural Development recognizes the general need to make the program more “user-friendly” and more compatible with existing mortgage lending practices. Many of the comments received addressed these issues.

With this rule, Rural Development is attempting to meld the better features of conventional loan programs and other Government loan programs to make the SFHGLP as easy for lenders to use as possible. Rural Development believes that loan product which is easier for lenders to use will help in increasing the number of rural families served by the program. This approach is supported by Section 706(d) of the Cranston-Gonzales National Affordable Housing Act (Pub. L. 101-625), which provided in developing the guaranteed loan regulations. Rural Development must ensure that guaranteed loans:

• Are made in a manner that is cost-effective; and

• Reduce, to the extent practicable, the burden of administration and paperwork for borrowers and lenders.

In the past, SFHGLP regulations and instructions have been the same. Lenders participating in the program have criticized this approach as not meeting their needs. This regulation omits the detailed internal agency administrative instructions used to administer the program. Several commenters welcomed the change in the regulatory process.

The Agency will continue to publish all substantive policy that provides a benefit, imposes an obligation on the public, establishes eligibility criteria, or information necessary for members of the public to understand their responsibilities. Rural Development will continue to improve the clarity of the regulations and attempt to meet the needs of the program participants and general public. Any substantive changes in the regulation will continue to be

published in the
Federal Register
and each Agency field office will have a copy of the administrative instruction (a handbook).

The handbook will be available on the Internet at
http://www.rurdev.usda.gov/Handbooks.html
and a copy can be obtained by sending a written request to: Rural Development, Stop 0784, Room 2250, South Agriculture Building, USDA, 1400 Independence Avenue SW., Washington, DC 20250-0784.

One respondent suggested the public have an opportunity to comment on the handbook. The Proposed Rule provided that the handbook will be available for public comment with regard only to its information collection requirements. The handbook is internal guidance and, therefore, not subject to comment.

Other respondents focused on the lack of detailed administrative instructions. Detailed administrative guidance has been removed from the regulation and is provided in the program handbook.

Several respondents noted that requiring compliance with Year 2000 (Y2K) requirements is dated and suggested removal from the regulations. Rural Development concurs and has removed this requirement.

Specific public comments and substantive changes from the proposed rule are addressed below in general order of appearance in the regulation, not based on order of importance.

Purpose (§ 3555.2)

One respondent suggested removal of the reference to “persons who do not own adequate housing” since the rule also provides that current homeowners may obtain loans through the Single Family Housing Guaranteed Loan Program (SFHGLP). The Agency agrees that current homeowners may obtain a SFHGLP loan in certain situations, for example, to make needed repairs to the dwelling. This suggestion is adopted and the reference is removed.

A provision has been added to specifically permit limited demonstration programs as allowed by law. The objective of these demonstration programs will be to test new approaches to financing housing under the statutory authority granted to the Secretary of Agriculture (hereafter referred as the Secretary). This provision is similar to other Rural Development programs, such as the Section 502 Direct Program, found at § 3550.7.

Mediation and Appeals (§ 3555.4)

One respondent suggested eliminating mediation and Alternative Dispute Resolution (ADR) stating that neither process works well with the SFHGLP. Rural Development must comply with statutory requirements in 7 U.S.C. 6995 and the National Appeals Division regulation, 7 CFR 11.5, granting participants the right to use available ADR or mediation programs to resolve adverse decisions by the Agency. No change is made in this provision.

Environmental Requirements (§ 3555.5)

Lenders must comply with all State and local laws and regulations under 7 CFR 3555.6. The proposed rule stated that Rural Development will take into account potential environmental impacts of proposed projects by working with applicants, other Federal agencies, American Indian tribes, State and local governments, and interested citizens and organizations in order to formulate actions that advance the program's goals in a manner that will protect environmental quality. The SFHGLP does not have any provision for working on proposed housing projects. The program guarantees loans made by private lenders to purchase, build, or repair a home. The private lender may be involved in proposed housing projects, however, and would be responsible for compliance with all applicable environmental quality requirements.

Several respondents expressed concern regarding environmental requirements relative to flood insurance. Two respondents were in favor of providing financing in Special Flood Hazard Areas (SFHAs); one stated that there is no risk to Rural Development or lender when proper flood insurance is obtained and one stated that flood insurance should not be required if the site is located in a SFHA but not the dwelling. Four respondents recommended that loans be prohibited if the subject site is located in a SFHA. The National Flood Insurance Act of 1968, specifically, 42 U.S.C. 4012, prohibits Agency-assisted financing of dwellings on a site identified as located in a SFHA when flood insurance is available but has not been obtained on the building and/or personal property associated with the assistance. Rural Development will guarantee loans for existing homes in an SFHA provided the borrower obtains flood insurance at, or prior to, loan closing and maintains flood insurance for the life of the loan. The lender must be listed as a loss payee. Rural Development may guarantee loans for new or proposed homes in an SFHA, even with flood insurance, except under limited circumstances, such as when Federal Emergency Management Agency (FEMA) has issued a Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR) or if the lender obtains a FEMA National Flood Insurance Elevation Certification indicating the lowest habitable floor (including the basement) of the residential building and all related improvements/equipment are built at or above the 100-year flood elevation. The proposed rule did not contain any provisions for such situations. This change is made to achieve consistency with other Federally insured or guaranteed single-family mortgage programs like those offered by the Department of Housing and Urban Development (HUD) and Veterans Affairs (VA).

Enforcement (§ 3555.9)

Language has been added concerning the possible assessment of civil monetary penalties. This penalty is authorized by section 543 of the Housing Act of 1949 (42 U.S.C. 1490s) and 7 CFR 3.91. The Agency does not have a notice and hearing process, as required by the authorizing statute, for the imposition of civil monetary penalties, but the authority has been noted in the rule for future use.

Definitions (§ 3555.10)

One respondent stated the term “acceleration” is not a conventional lending term. The term is used in the mortgage lending business, and no change is made in the definition or term.

The term “amortization” was added to describe the gradual reduction of the mortgage debt over the term of the loan.

The term “Area Median Income” was added for clarity to describe the median income in a specific location, as determined by the HUD in order to determine borrow eligibility. This term is used in section 502(h)(3) of the Housing Act of 1949 (42 U.S.C. 1472(h)(3)).

The term “condominium project” was added for clarity to describe a particular form of construction development.

The term “combination construction and permanent loan” was added based on a respondent's comments on 7 CFR 3555.101. More fully explained in (§ 3555.101) of the preamble, a “combination construction and permanent loan” is a guaranteed loan on which the Rural Development guarantee becomes effective at the time construction of an eligible single family housing project begins.

The term “dealer-contractor” was removed since Rural Development will no longer review and approve or disapprove manufactured housing dealer-contractors under the SFHGLP.

The term “escrow account” was revised to clarify a common mortgage

industry term for the trust account typically established by lenders to hold funds collected from a borrower in order to pay real estate taxes, insurance premiums, and other similar expenses as they come due.

There were several comments on the definitions for “existing dwelling” and “new dwelling.” These definitions are used in determining property eligibility, inspection, and home warranty requirements. One respondent suggested adding wording that if the dwelling is less than one year old and has been occupied, then it is an existing dwelling. One respondent suggested the wording might be incorrect as it relates to the requirement for the new home warranty. Some respondents suggested alternative wording to the definition of “new dwelling.” One respondent suggested adding “less than one-year old and never occupied.” One respondent suggested permitting financing of spec-built dwellings without interim construction inspections and without a 10 year, new home warranty if the construction standards exceed the national building code. When the dwelling is less than one year old and has never been occupied, then it is a new dwelling and a new home warranty must be in place. Rural Development agrees that if the dwelling has been occupied, regardless of its age, then it is an existing dwelling, and a new home warranty is not required. The regulation and handbook have been clarified accordingly in response to the comments.

One respondent suggested that the definition for a “first-time homebuyer” should be broadened to include a divorced individual who does not have children, arguing that in most divorces, the wife gets the home if she desires, and can thus argue for custody of the children because the husband does not own a home. The Housing Act of 1949, as amended, provides a definition for a first-time homebuyer. As written in this rule, the definition of first-time homebuyer closely follows the definition in the statute; therefore, no change is made. The Agency notes that the situation provided may fall within this definition depending on other factors, such as if the divorced individual was a homemaker.

The term “Fannie Mae” was added, which is synonymous with the Federal National Mortgage Association.

The term “FHLB” was added as the acronym for the Federal Home Loan Bank.

The term “Freddie Mac” was added, which is synonymous with the Federal Home Loan Mortgage Corporation.

The term “Ginnie Mae” was added, which is synonymous with the Government National Mortgage Association.

The term “loan modification” was added to describe changes to promissory note characteristics such as the interest rate, loan term, and monthly payments.

The term “manufactured home” was changed to more succinctly describe structures built on a permanent chassis according to Federally Manufactured Home Construction and Safety Standards established by HUD and found at 24 CFR part 3280.

The term “moderate income” was amended to include a 2000 statutory change (Pub. L. 106-387, section 751) providing that anyone who does not meet the greater of 115 percent of the U.S. median family income, the average of the state-wide and state non-metro median family income, or 115/80ths of the area low-income adjusted for household size for the county or MSA where the property is, or will be located meets the income eligibility criterion of 42 U.S.C. 1472(h)(2). The definition is consistent with the Agency's current income policy.

One respondent suggested that the reference to Rural Development's thermal performance standards be deleted from the definition for manufactured home. Rural Development agrees that a change to this requirement is needed to be consistent with manufactured housing industry standards and is in the best interest of the program. A change, therefore, is made to this definition to adopt the thermal standard (and other home construction and safety standards) for manufactured housing established by the HUD. These HUD standards can be found at 24 CFR part 3280 or on the Internet at
http://www.hud.gov/library/index.cfm.

Several respondents commented on the definition of “modest housing.” Some suggested removing the reference to section 203(b) of the National Housing Act. Several suggested removal of the reference to in-ground swimming pools as it is not listed as a restriction in 7 CFR 3555.102. Rural Development concurs that, because a SFHGLP loan applicant's household adjusted income must not exceed the moderate-income limit for the area, the applicant's repayment ability is the determining factor in ensuring that the modest housing requirements in section 517 of the Housing Act of 1949 are met. This guaranteed loan standard for “modest housing” is different from the Section 502 Direct Loan program which generally defines modest housing as having a market value which does not exceed the applicable area loan and must not have prohibited features. (See 7 CFR 3550.10). For Section 502 Direct loans, the applicable area loan limits are established by each Rural Development State Office, but will not exceed the local HUD 203(b) limit in effect. This difference between the SFHGLP and the Section 502 Direct Loan program is acceptable because of the difference between the programs' income limits. Applicants for the Section 502 Direct Loan program must have very low or low incomes; a SFHGLP loan applicant's household adjusted income must not exceed the applicable moderate-income limit as defined at 7 CFR 3555.10 of this rule. For SFHGLP purposes, the definition of “modest housing” will be the housing that a low- or moderate-income borrower can afford based on their repayment ability.

The low- or moderate-income applicant's repayment ability will be the determining factor in ensuring that the modest housing requirements in section 517 of the Housing Act of 1949 are met. The reference to section 203(b) of the National Housing Act is removed from the regulation. This is permissible since eligible housing for the SFHGLP need not be eligible under that statute according to section 502(h)(4)(B) of the Housing Act of 1949.

The term “mortgage credit certificate” was amended to fully describe a Federal tax credit which reduces a borrower's Federal income tax liability and improves his or her repayment ability.

The term “MSA (Metropolitan Statistical Area)” was added as it is a term the Office of Management and Budget has prescribed for use by Federal agencies to collect, tabulate, and publish Federal statistics.

The term “new dwelling” was amended to achieve consistency with other Agency program regulations and to better conform to widely accepted mortgage industry standards. A dwelling that has been completed for more than one year and that has never been occupied is considered an existing home.

The term “pre-foreclosure sale” was added to describe a loss mitigation technique which reduces the cost of liquidating a property the lender is considering for a foreclosure.

The term “primary residence” was added, which is synonymous with the term “principal residence.”

The term “principal residence” was added as it is the language included in the Housing Act of 1949, as amended, to describe eligible housing. For the property to be eligible, it must be a single family dwelling, must be modest, located in a rural area, and be used by

the borrower as their principal residence.

The term “qualified alien” was amended to achieve a more complete description consistent with Section 401 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) at 8 U.S.C. 1641, which describes the class of non-U.S. citizens who are eligible for Federal assistance in the form of a loan, grant, or guarantee.

Two comments were received on the definition for “rural area.” Both respondents suggested expanding the population base arguing that doing so would make the program more competitive and reduce lender confusion. These comments are beyond the scope of this regulation as section 520 of the Housing Act of 1949 defines the term. The Agency has no authority for expanding the population base for Single Family Housing programs as suggested. The definition in this rule has been updated to refer to section 520 of the Housing Act, as amended.

The term “settlement date” was added to clarify when additional interest on an unsatisfied principal balance begins to accrue for loss claim payment purposes under 7 CFR 3555.352. The definition takes into account certain state-required redemption or confirmation periods, as well as general industry standards and loss mitigation techniques. Therefore, the settlement date, for the purpose of calculating a loss payment, is the later of the actual foreclosure date, the closing date if the property sold to a third party at the foreclosure sale, the date the borrower with lender concurrence sold the property to a third party in order to avoid or cure a default situation, and when title is acquired to the security following the expiration of any state-required redemption or confirmation period.

The term “short sale” was added to describe a loss mitigation technique which reduces the cost of liquidating a property the lender is considering for a foreclosure.

The term “SFHGLP” was added as the acronym for the Single Family Housing Guaranteed Loan Program of USDA, Rural Development that is authorized under section 502 of the Housing Act of 1949, as amended.

The term “U.S. non-citizen national” was added to be consistent with Section 341(b)(2) of the Immigration and Nationality Act, 8 U.S.C. 1452(b)(2) to describe a class of applicants who may be considered eligible for Federal assistance in the form of a loan, grant, or guarantee.

The following terms are introduced in § 3555.10 as a result of the addition of a new section § 3555.304 regarding special servicing options “Extended-term loan modification,” “Maximum allowable interest rate,” “Mortgage payment to income ratio,” “Mortgage recovery advance,” and “Total debt to income ratio.”

Lender Eligibility (§ 3555.51)

Several respondents expressed interest in this section. Some expressed concern regarding the lender eligibility requirement to underwrite and service single family housing loans and questioned whether lenders presently approved and not meeting these conditions will be permitted to continue as approved lenders. Lenders who no longer meet the requirements, however, will cease to be eligible to participate, as has been the case in the past under 7 CFR 1980.309(h). Since categories of eligible lenders are being expanded, however, eligible lenders should increase not decrease. The same respondents indicated the requirements of meeting HUD's direct endorsement authority as a supervised or non-supervised mortgagee are too strict, citing that some rural lenders would not meet the net worth requirements. The conditions outlined for lender approval are the same as currently in place, but with some modification to expand eligibility while maintaining the integrity of the program. The requirements have been expanded to include as eligible those lenders supervised by Federal regulatory entities, or which are Government sponsored enterprises. Acceptable Federal supervisory entities which have been added for eligibility purposes include the Federal Deposit Insurance Corporation, the Federal Reserve System, the National Credit Union Administration, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Federal Housing Finance Board. The latter regulates banks within the Federal Home Loan Bank (FHLB) System. These Federal entities supervise their lenders, impose capital and net worth requirements, and periodically conduct audits and examinations of the lenders for the purposes of safety, soundness, and compliance with their Federal requirements. Rural Development believes these requirements will protect the integrity of the program and promote loan quality. The final rule is amended accordingly.

One respondent noted the proposed rule omitted default and status reporting from the regulations. 7 CFR 3555.51 (b) (8) requires the lender to cooperate with Agency reporting requirements. This reference includes both monthly default and quarterly status reporting, etc. as specified in the Agency handbook. The handbook guidance uses the industry standard for investor and guarantor reporting requirements. Specifically, investor and guarantor reporting are now done through an Electronic Data Interchange (EDI) or other electronic methods. The lender's agreement also provides for reporting requirements as needed to monitor lender performance. As a related issue, the Agency has noticed that not all sales, transfers, or change of servicers are reported to the Agency in a timely manner. The Agency is not able to track the performance and status of the Guaranteed portfolio unless lenders report all sales, transfers or changes in servicers; hence, the language in 7 CFR 3555.51(b)(10) has been changed to specifically list these existing requirements.

Other respondents were concerned about Rural Development requiring a fidelity and omissions policy listing Rural Development as loss payee. Rural Development has reviewed this proposal and determined that it is not consistent with the mortgage industry and agrees to remove. To be eligible, the lender must have a demonstrated ability to underwrite and service single-family loans and must meet standards established by a Government Sponsored Enterprise (GSE) or a similar organization or Federal entity. The fidelity and omissions policy requiring Rural Development to be listed as a loss payee, therefore, is not needed to protect the Government.

One respondent recommended establishing a delinquency goal to improve and monitor a lender's servicing performance. While Rural Development agrees that the performance of the serviced portfolio is important, we believe that a delinquency goal in itself is not adequate to assess lender performance. Further guidance regarding acceptable overall lender performance and Agency monitoring procedures are addressed in the handbook. Lender participation requirements are covered in subpart B of this part. No change has been made in response to this comment.

One respondent inquired as to why Ginnie Mae was not included as an eligible entity to purchase guaranteed loans. Ginnie Mae is not a holder of loans, but acts on behalf of a holder by guaranteeing “pools” of securitized loans in case of default. Ginnie Mae does not purchase individual loans. Therefore, no change has been made in response to this comment.

One respondent expressed a concern regarding the amount of paperwork and materials to be submitted by the lender to Rural Development and the extent to which Rural Development reviews or underwrites the loan. Lenders currently have sole responsibility for underwriting the loan and will continue to assume this responsibility with implementation of the final rule. Rural Development, however, reviews the loan for program compliance prior to issuing a Conditional Commitment. The loan submission and review process is covered in 7 CFR 3555.107 and is detailed more extensively in the handbook.

Lender Approval (§ 3555.52)

For several years, Rural Development has required that lenders undergo an online training that is available on demand in order to become an approved lender. This requirement has been stated in the rule.

Provisions proposed describing possible suspension and debarment proceedings after termination or withdrawal of lender approval have been removed from the final rule, as unnecessary since it is covered by separate regulations, 2 CFR parts 180 and 418. This section has been clarified to state that any termination of approval will be conducted in accordance with the terms of the lender's agreement. The Agency may take any corrective action or seek any remedy authorized by law.

Loan Purposes (§ 3555.101)

Several respondents requested clarification on reasonable and customary expenses related to obtaining the loan, recommending that the regulations be more specific on allowable fees and charges. One respondent stated that they support Rural Development's objective to eliminate blatant excesses and abuse by lenders in this area, but that the dynamics of the free market economy would be the best check against excessive lender fees and charges. Rural Development supports the benefits provided to SFHGLP loan applicants due to market competition, but recognizes that the SFHGLP is different than most other programs in that the program permits long-term financing of most, if not all, closing costs charged by the lender. Not only is the SFHGLP borrower negatively affected by excessive fees and charges, Rural Development pays higher claims on defaulted loans than necessary when excessive fees and charges are financed in the mortgage loan. Rural Development, therefore, has clarified this section to state that reasonable and customary closing costs include lender fees and charges that do not exceed those charged other applicants by the lender for similar types of transactions. For many lenders, the most similar type of transaction is another housing loan with Federal insurance or guarantee. Lenders that do not participate in other government insurance or guarantee programs may use for comparison a loan program that has conventional insurance or guarantee. Lenders will ensure that their fees and charges meet these requirements and will make their records available upon request.

Other respondents suggested a change to allow discount points as a permissible loan purpose for moderate-income applicants. Discount points are paid to obtain a lower interest rate. Rural Development disagrees that moderate-income applicants should be allowed to finance the cost to “buy down” the interest rate. The need to obtain a lower interest rate by paying additional points is less acute for moderate-income applicants than for low-income applicants, and not paying discount points keeps financed closing costs at a lower level. The treatment of discount points remains the same as under the prior regulation. The proposed provision that allows only low-income applicants to include reasonable discount points in their loan amount therefore, remains unchanged.

Based on comments received and Rural Development's belief that homeownership education is a worthwhile expense for all homebuyers, Rural Development has elected to continue to allow the payment of homeownership education fees from loan funds. The restriction of this coverage to first-time homebuyers has been removed.

One respondent suggested adding ovens, wall-to-wall carpeting, flooring, heating and cooling equipment to 7 CFR 3555.101(b)(5) to be consistent with those purposes stated for manufactured housing. In 7 CFR 3555.101, paragraph (b) had been revised and paragraph (c) has been redesignated. The suggested items have been included in the newly revised paragraph (b)(1).

One respondent suggested a “one-time close” provision for combined construction to permanent loans. Rural Development has been testing such a program, agrees with the respondent, and includes a provision for combination construction and permanent financing as an acceptable loan purpose in the final rule. Conditions for such loans are listed in newly revised 7 CFR 3555.105. The criteria for a “one-time close” provision reflect those that have been successfully tested by Rural Development and are substantially similar to comparable “one-time close” programs already prevalent in the mortgage industry today. The following limitations reduce the risk to the Government on these projects. Lenders must have at least two years of experience making and administering construction loans and will be responsible for reviewing and approving construction contractors or builders, including due diligence such as conducting background checks, ensuring the builder has two or more years of experience in constructing single family dwellings, and that the builder possesses the appropriate licenses, insurances, etc. As is the case with similar combined construction to permanent loan programs in the mortgage industry today, lenders will finance the price of the lot as well as reasonable and customary closing costs, and loan proceeds will be escrowed and funds paid out in draws during construction. Draws clarify for the builder and borrower when and how payment will be made during the construction period. Once construction is complete, the loan will be modified and re-amortized to achieve full repayment within the loan's remaining term, not to exceed 30 years. Rural Development reserves the right to limit the number of loans guaranteed under this section based on market conditions and/or loan performance.

Some respondents suggested that the regulations should be revised to permit refinancing of existing Section 502 guaranteed and direct loans with Section 502 guaranteed loans. At the time the proposed rule was published, Rural Development did not have the statutory authority to refinance existing Section 502 direct and guaranteed loans. However, Rural Development now has the statutory authority to do so under 42 U.S.C. 1472(h)(14). The regulation is revised accordingly in § 3555.101(d) to incorporate the Agency policy on refinancing existing Section 502 direct and guaranteed loans. For these types of refinancing, the interest rate must be fixed and least 100 basis points below the original loan rate; the security must be the same property as for the original loan which still serves as the principal residence for the borrower; the borrower must have kept the account current for at least 180 days prior to application for refinance; borrowers may be deleted and qualified borrowers may be added; and the new loan amount cannot exceed the balance of the existing loan, interest, guarantee fee and reasonable closing costs. Borrowers with existing guaranteed loans may use a streamlined

option for refinancing, which does not require a new appraisal. Borrowers with existing direct loans must use the non-streamlined option and obtain a new appraisal, because direct loans are subject to recapture and the recapture calculation requires a current appraisal value. Documentation, costs and underwriting requirements of subparts D, E, and F of this part apply to refinances, unless otherwise provided by the Agency. Given housing market fluctuations, the Agency needs to be capable of reacting quickly to changing housing needs. The Agency may limit the number of guaranteed loans made for refinancing purposes based on market conditions and other appropriate factors in accordance with section 502(h)(17)(f) of the Housing Act.

One respondent recommended correcting 7 CFR 3555.101(c) (2) (iii) to read that refinancing is permitted in the case of a loan for a site without a dwelling if a dwelling “will be” constructed on the site. Rural Development concurs and the regulation is so clarified.

Loan Restrictions (§ 3555.102)

One respondent questioned whether the intent of 7 CFR 3555.102(b) was to require a determination whether the applicant intends to use the land or buildings for a business. The intent of the regulation is to prohibit guaranteeing loans to purchase land or buildings typically used primarily for income-producing purposes and the section has been revised for clarification.

One respondent encouraged Rural Development to establish a maximum amount for property seller financing concessions to prevent over-inflated property values. This change is adopted, and the regulations have been revised to state that the property seller, or other interested party, may contribute up to 6 percent of the property's sale price toward the purchaser's financing costs. The 6 percent provision is consistent with present HUD guidelines. This amount may change periodically based upon the performance of the portfolio, changing mortgage industry standards, and the level of exposure the Agency is willing to assume to excess risk by creating incentives which may increase the appraised value of a property.

Maximum Loan Amount (§ 3555.103)

No comments were received on this section; however, the section has been re-written to clarify that the maximum loan amount cannot exceed the lesser of the market value of the property as determined by an appraisal that meets Agency requirements plus the amount of the loan guarantee fee required by newly redesignated 7 CFR 3555.107(f), or the total of the purchase price and all eligible acquisition costs as permitted by 7 CFR 3555.101. The change was made to account for statutory authorities granted after the proposed rule was published. 42 U.S.C. 1472(h)(7)(C) includes the ability to exceed a 100 percent loan-to-value to the extent that the guarantee fee is included in the loan amount, and no longer references HUD loan limit restrictions under section 203(b) of the National Housing Act.

The proposed rule inadvertently omitted language limiting the maximum loan amount to 90 percent of the present market value for new construction when the requirements of § 3555.202(a) regarding plan certifications, inspections and warranties cannot be met. The final rule corrects this omission and contains language substantially similar to that in current regulations, 7 CFR 1980, part D.

Loan Terms (§ 3555.104)

Several comments were received on the proposal to establish a maximum interest rate allowable for the SFHGLP and the method of notification to participating lenders. Some respondents suggested letting the market set the rate while others commented that a maximum rate should be established due to limited competition in rural areas. Others were concerned that establishing the rate cap at 125 basis points over the Fannie Mae 90-day rate would be detrimental to the applicants and ultimately to Rural Development in higher default and loss rates. Most of the respondents agreed there must be flexibility in the rate and, that changes to the rate not disrupt the lender community or secondary market. After full consideration of the comments and the issues and risks involved, Rural Development agrees that the rate can be based on market competition, but that there should be a maximum interest rate to protect borrowers who may not be very experienced with mortgage financing. Permitting the lender to establish the interest rate by means of publishing a VA rate is objective, not subjective, so the proposed provision to establish the Rural Development rate was removed from the final rule. Substantially consistent with the proposed rule, the interest rate may be established based on market competition, provided the rate does not exceed the greater of:

• The current Fannie Mae posted yield for 90-day delivery (actual/actual) for 30-year fixed rate conventional loans plus 1 percent, rounded up to the nearest one-quarter of 1 percent.

• The current Freddie Mac required net yield for 90-day delivery for 30-year fixed rate conventional loans plus 1 percent, rounded up to the nearest one-quarter of 1 percent.

Previously, only mortgages with 30-year terms were permitted. Lesser loan terms may be used as Rural Development completes changes to its systems and subsidy rate models in order to accommodate loan terms of less than 30 years. Under the Housing Act of 1949, as amended, loan terms may be up to 30 years, but not greater. Updates to the interest rate limits are available in any Rural Development State Office or online at
http://www.rurdev.usda.gov/regs/regs/pdf/04401.pdf
.

Interest Assistance (§ 3555.105) and Recapture (§ 3555.106)

A suggestion was made to remove requirements from the regulation since the interest assistance program is not funded nor is funding proposed. Since there are fewer than 50 outstanding loans receiving this assistance, the suggestion was adopted and a decision was made to include these policies in the handbook to continue administering existing interest assistance obligations. 7 CFR 3555.105 has been revised and 7 CFR 3555.106 has been reserved.

Application for and Issuance of the Loan Guarantee (§ 3555.107)

Three respondents addressed concerns regarding issuance of the conditional commitment. All three recommended that in order for borrower costs to be reduced and the loan process to be efficient and streamlined, property inspections, such as a well test or construction phase inspections must be treated as conditions to loan closing. Rural Development does not intend that a borrower incur unnecessary costs prior to issuance of the conditional commitment, and has clarified the regulations to state that the lender may obtain evidence of required property inspections not needed for environmental compliance and any necessary repairs after issuance of the conditional commitment, but prior to submitting the request for the loan guarantee.

Some respondents requested clarification on the amount of the guarantee fee. By statute, the up-front guarantee fee must be based on the principal loan amount obligated. (See 502(h)(8) of the Housing Act of 1949.) If the up-front guarantee fee is included in the loan amount, the loan amount increases along with a corresponding increase to the fee. Assuming for illustration purposes that the guarantee

fee is 2 percent, the following formula applies:

loan amount ÷ 0.98 = loan amount, including guarantee fee

e.g. $100,000 ÷ 0.98 = $102,2040.82 (includes the guarantee fee)

Rural Development will provide additional comprehensive examples of how to calculate the guarantee fee in the handbook.

In addition, Rural Development added in this section that, when a shortage of funds is projected or anticipated during the fiscal year, funding will be restricted to first-time homebuyers or veterans. This is consistent with sections 502(h)(5) and 507 of the Housing Act of 1949, as amended, which gives priority to first-time homebuyers and veterans. A determination that a shortage of funds will be made if, based on current obligation rates, funds will be projected to run out before the end of the fiscal year.

Note that an annual fee is now authorized by Section 201 of Public Law 111-212, 42 U.S.C. 1472(h)(8). Under that statute, the Secretary is authorized to collect from the lender an annual fee not to exceed 0.5 percent of the outstanding principal balance of the loan for the life of the loan. The Agency published a final rule regarding the annual fee on July 11, 2012 in the
Federal Register
(77 FR 40785). The intent of the annual fee is to make the SFHGLP subsidy neutral, thus eliminating the need for taxpayer support of the program. The annual fee will be applicable to purchase and refinance loan transactions.

The paragraph on proper closing (§ 3555.107(i)) has been revised to clarify the Agency's policy in allowing “self-certified” lenders to submit minimal documentation to evidence a properly closed loan. To obtain “self-certification” authorization from the Agency, the lender must actively originate SFHGLP loans and have demonstrated consistent successful loan closings with full documents. Self-certified lenders must still submit the promissory note and settlement statement to the Agency.

Full Faith and Credit (§ 3555.108)

The proposed regulations inadvertently omitted a section explaining the “Full faith and credit” provisions of the Loan Note Guarantee. The final rule corrects this omission and contains language substantially similar to that in the current regulation. New language in this section introduces indemnification when a lender fails to originate a loan in accordance with the requirements in this subpart and possible action the Agency may take as a result of that determination. The proposed rule did not contain language regarding indemnification. This language is added as a result of a final rule published May 31, 2011 (76 FR 31217-31220).

Eligibility Requirements (§ 3555.151)

Three respondents suggested bringing underwriting standards regarding credit reports, credit scores, and repayment ability in line with the private industry. Certain organizations such as VA, Fannie Mae, Freddie Mac, and others in the mortgage industry have instituted a single debt-to-income ratio requirement of 41 percent for low-or-no-down payment affordable housing loans. The Agency is concerned that if a single ratio of 41% were adopted, the potential is that a borrower with limited income may be permitted to have mortgage payments of up to 41 percent of their income if they happened to apply during a debt free timeframe. The concern is that the borrower would be fully encumbered by their mortgage payment and would become over extended if faced with the need for a new car loan, for example. However, the Agency will maintain its current policy of using a dual ratio approach—a monthly housing expense ratio of 29 percent or less and a total debt-to-income ratio of 41 percent—until sufficient data analysis permits the adoption of the single ratio approach and the Agency determines that a single debt ratio approach is prudent given current market conditions. The Agency reserves the right to adopt the single ratio approach once data analysis supports that a single debt ratio approach does not incur more risk.

Other respondents recommended that the maximum debt to income ratio for repayment ability be raised for loans to purchase energy-efficient homes, such as loans to purchase homes built to energy-efficient standards. The respondents indicated it is industry standard to allow for increased debt ratios on energy-efficient home loans. HUD, VA, Fannie Mae, and Freddie Mac all allow for increased debt ratios for energy-efficient home loans. The rationale is that energy-efficient homes cost less to heat and cool, and the reduced costs make a higher mortgage payment may be more affordable to the borrower. Rural Development agrees some flexibility may be warranted when purchases involve homes built to energy-efficient standards. Further guidance surrounding flexibilities for increased debt ratios for energy-efficient home loans will be addressed in the handbook. Energy efficient homes are properties which are built or retro-fitted to the standards of the most recent International Energy Conservation Code (IECC) are widely regarded in the mortgage industry as energy-efficient. Rural Energy Plus provisions are further described in newly designated 7 CFR 3555.209. Lenders will certify that the most recent IECC standards have been met.

Aside from energy-efficient housing, one respondent suggested it be left up to the lender to decide when to make debt ratio exceptions above the established threshold. The respondent indicated that throughout the mortgage industry the decision to make debt ratio exceptions are up to the lenders who document compensating or mitigating factors. The Agency agrees with the respondent that debt ratio exceptions are acceptable when supported by acceptable compensating factors. Further guidance on acceptable compensating factors and flexibility of a lender to make a decision regarding an increased debt ratio will be addressed in the handbook.

Several comments were received in support of Rural Development's current acceptance of alternative documentation for income verification, specifically, the use of online resources to document employment history and income. This method of verification is now generally accepted in the mortgage industry, including Rural Development. The proposed rule did not specify methods to verify income and employment, and neither is it necessary in the final rule. Since reputable online resources can change from time to time, however, guidance pertaining to electronic verification of income and employment is provided in the handbook.

One respondent suggested that the program's income limits are too low to assist many first-time homebuyers who have been unable to acquire sufficient savings for the down payment required by other mortgage programs, and that the limits need to be increased to keep pace with the cost of living. Section 502(h)(3) of the Housing Act of 1949 governs SFHGLP income limits, and Rural Development lacks the authority to increase income limits specifically to meet the needs of more first-time homebuyers. Thus, the Agency has made no changes.

Several comments were received on the eligibility of current homeowners to obtain guaranteed loans. Some respondents argued that if the applicant currently owns housing, then approval of a SFHGLP loan should not be considered. Others suggested that the current home should be sold prior to issuance of the Loan Note Guarantee.

Still, others viewed the proposed change to allow current homeownership, as long as the homeowners do not own nor are financially responsible for another home at the time the loan closes, to be positive and stated the change would allow more homes on the market for lower income families and remove the confusion regarding a deficient housing determination. Rural Development agrees that the proposed provision might prevent some applicants from obtaining homes that meet the needs of the household. The Agency, therefore, will allow current homeowners to use the program, provided: (1) They do not have another SFHGLP or Section 502 Direct Loan by the time of closing; (2) they are financially qualified to own more than one house; (3) retaining ownership of a home is limited to one single dwelling unit per household other than the one associated with the current loan request; (4) they will occupy the home financed with the SFHGLP loan as their primary residence; (5) the current home no longer adequately meets the family's needs, and (6) they are without sufficient resources or credit to obtain the dwelling on their own without the guarantee. This change is being made to enable an eligible qualified homeowner to use the SFHGLP loan program to obtain a new primary residence that the applicant believes will meet the household's needs, while ensuring that limited program funds are used within statutory authorities to assist as many qualified individuals as possible.

Four respondents commented on funded buydown accounts. One stated that the proposed rule provided a much needed definition for buydowns. Two suggested eliminating funded buydowns from the regulations stating they are not beneficial to the applicant and may encourage inflated appraisals to cover the property seller's cost of the buydown. One respondent suggested training be required. Rural Development believes that funded buydowns can be used to assist qualified applicants to qualify for home loans and temporary interest rate buydowns are a financing tool designed to reduce the borrower's monthly mortgage payment during the early years of repayment. The Agency feels the proposed SFHGLP limitations provide adequate protection against inflated appraisals. In response to these comments, the final rule has been changed to require that a lender qualify the applicant at the note rate, rather than qualify the applicant at the temporary reduced rate, to ensure the eventual increase in mortgage payments will not affect the borrower adversely and lead to default. The mortgage industry generally accepts this approach. All remaining provisions of the preliminary rule remain unchanged. Rural Development will provide training to Agency staff and lenders upon implementation of these regulation changes.

Several comments were received on credit qualifications. Some respondents expressed a concern that increasing late payments from 1 to 3 or more late payments within the last 12 months would have a potential negative impact on delinquency rates even though the change could possibly qualify an increased number of applicants. Rural Development carefully considered the comments, and in recognition of the mortgage industry's utilization of credit scores that consider the number of late payments, has changed the regulation to incorporate the use of credit scores instead of all of the separate indicators of unacceptable credit as proposed. Rural Development SFHGLP performance and mortgage industry statistics show that credit scores are a powerful indicator of the likelihood for borrowers to be successful homeowners. Credit scores take into account all the separate indicators of credit in a credit report and encapsulate them into one score. Credit scores are widely used throughout the mortgage industry and very few loan programs, if any; do not make use of them. 7 CFR 3555.151 requires a credit score or other credit qualifications satisfactory to Rural Development to show the applicants' reasonable ability and willingness to meet their debt obligations. Further information on credit scores can be found in the handbook consistent with current Agency practice.

Several comments were received on proposed § 3555.151(h)(1)(viii) relative to payment of collection accounts within 6 months of filing an application. The respondents viewed this change as negative as it requires the applicant to wait 6 months after paying a collection in full before making application for a loan. One respondent noted that credit issues should be guidelines and provide the lender some flexibility to look at compensating factors. Rural Development decided to remove this requirement from the regulation and rely on the use of credit scores and other credit qualifications to determine credit-worthiness, within statutory requirements. Rural Development has provided examples of evaluating credit in the handbook.

Rural Development proposed to make homeownership education mandatory for all first-time homebuyers. Several respondents posed questions and concerns regarding this proposal. Some respondents believe homeownership education has little or no bearing on the success of the loan, but does increase the cost of homeownership. These respondents believe that past credit history is more important in assessing future success. Still others indicated that if Rural Development requires mandatory education, that Rural Development provides a specific curriculum and evaluation criteria or consider providing the education which would alleviate the current subjective process used by lenders. Some respondents indicated there is a lack of providers in rural areas that could result in additional program barriers by delaying closings and imposing excessive travel to obtain such services. In view of the comments received, language surrounding homeownership education will remain consistent with conditions outlined for homeownership counseling currently in place.

Section 3555.151(j) states that eligible applicants be unable to secure conventional credit elsewhere without a guarantee. This policy was adopted in the early 1990's and since that time a number of loan vehicles have emerged that are marketed as “conventional,” but have incorporated features that add to the potential risk of loss to applicants, such as allowing unreasonably low down payments and higher debt ratios. Some of these loans are called interest-only payment loans, graduated payment loans, negative amortization loans, and balloon payment loans. They may require private mortgage insurance. To clarify the meaning of “conventional credit” for purposes of the SFHGLP and distinguish it from the new, non-traditional mortgage products that claim to be “conventional,” the final rule uses the term “traditional conventional credit.” The Agency currently interprets “traditional conventional credit” as a loan that has a 30-year fixed term, does not require private mortgage insurance, and where the applicant: (1) Is able to make a 20 percent down payment from personal funds; (2) able to pay all closing from personal funds; (3) has a total debt ratio of 36 percent or less; (4) has a debt ratio for principal, interest, taxes and insurance of 28 percent or less; and (5) has a good credit history consisting of at least two credit bureau trade lines open and paid as agreed for at least a 24-month period.

Calculation of Income and Assets (§ 3555.152)

Rural Development has provided clarity in § 3555.152(a)(1) and (a)(2) for income calculation. For determining

repayment income, the lender must examine the previous 2-year history of the applicant's income, as well as make a determination as to whether the income is likely to continue for at least the next 3 years. These requirements do not mean that an applicant had to maintain the same employment and earn the same amount of income for the past 2 years. The requirement merely provides a reasonable period of time over which the lender must examine the applicant's past income in determining repayment ability for the future and aligns the analysis of repayment income with other Agency programs and industry practice. For annual income the lender must examine the 2-year income history for each household member. Lenders must also estimate the expected income for the next 12 months for each household member.

Lenders may also consider the training and education of applicants in determining the continuity of income, as noted in § 3555.152(a)(1). The consideration of training and education would be most applicable to newly graduated students, or students who have completed and obtained technical degrees in various fields and are entering the workforce. While these students may not have a history of employment in their respective fields, their training and education, combined with a contract for hire, may be used to determine the stability of continuity of their income.

One respondent suggested that proposed § 3555.152(c) regarding adjusted income be revised to show an increase to the $480 deduction for each family member under 18 years of age or 18 years of age or older with a disability, or a full-time student to reflect inflationary increases of the last 10 years and to be consistent with the Internal Revenue Service allowance for dependents. Rural Development's authorizing legislation does not permit a change in this amount. This deduction for dependents is required by HUD regulation 24 CFR 5.611. No change is made to this provision.

Language was added to the final rule specifically exempting income received by live-in aides from the annual income calculation. A live-in aid is a hired employee, not a household member, whose income is not typically applied to household expenses. Accordingly, income received by a live-in aid will not be included in the annual income calculation. This is consistent with 24 CFR 5.609.

Three comments were received on proposed § 3555.152(d) concerning the calculation of income from net family assets for eligibility purposes. Two respondents indicated the requirements should be eliminated as it imposes a penalty on those applicants who manage their resources and then have it count as income. One respondent recommended implementation as proposed. Rural Development's authorizing legislation, Title V of the Housing Act of 1949, as amended, requires the calculation of income according to HUD authorities. See the definition of “income” in 42 U.S.C. 1471(b)(5). HUD authorities require consideration of family assets in income. See 42 U.S.C. 1437a(b)(4) and 24 CFR 5.609. This section, therefore, will be adopted as proposed.

Site Requirements (§ 3555.201)

One respondent indicated that prohibiting the presence of small barns on properties would eliminate from consideration many homes which would otherwise qualify, and that small barns are commonplace on many residential properties in rural areas. The regulation has been revised to clarify that vacant land or property used primarily for agriculture, farming or commercial enterprise is ineligible. This language will allow small outbuildings which are not designed to accommodate a business or income-producing enterprise may be included in the site. Only income-producing land or buildings intended to be used principally for income-producing purposes are not permitted. Further guidance will be outlined in the handbook.

The requirement that the site value not exceed 30 percent of the value of the property was removed from the final rule because it is no longer a mortgage industry standard. This matter is typically better addressed under State or local government zoning ordinances which must be met.

Dwelling Requirements (§ 3555.202)

Two respondents discussed concerns about the proposed requirement that 150 percent of development funds be placed in escrow for incomplete exterior development. Both respondents argued that Rural Development should require only 100 percent of the funds for development is placed in escrow stating that the change would permit the lender to pay out the property seller and still protect the applicant. Rural Development agrees that this adequately protects the Government and will permit the lender to place only 100 percent of the funds for final development in escrow.

The final rule similarly covers instances when there is incomplete interior development that cannot be completed until after the borrower takes title to the property. The time to complete all unfinished development was expanded from 120 to 180 days in order to accommodate delays due to inclement weather which in parts of the country can interfere with construction for extended periods of time.

The final rule has been revised in regard to minimum thermal efficiency requirements for homes financed with guaranteed loans. New homes are typically built in accordance with local housing codes that address thermal efficiency standards. The thermal efficiency of existing homes is typically considered in the valuation process but cannot always be determined accurately. The cost to alter an existing home to meet Agency thermal standards is not always cost-effective. The final rule eliminates minimum thermal efficiency requirements for existing homes financed with guaranteed loans. Note that, properties which are built or retro-fitted to the standards of the most current IECC are widely regarded in the mortgage industry as energy-efficient and permit applicants to qualify at a higher debt ratio of 43 percent.

Manufactured homes must conform to the Federal Manufactured Home Construction and Safety Standards (FMHCSS) and be constructed in compliance with the HUD's heating and cooling requirements for the State in which the unit will be located. The final rule is consistent with other federally insured or guaranteed single-family mortgage programs.

The requirement that the property be free of termites and other wood damaging pests and organisms was removed from the final rule because these issues today are addressed by State and local governments.

Ownership Requirements (§ 3555.203)

A change was made to the final rule concerning secured leasehold interests, to accommodate leases on American Indian restricted land which are for periods of 25 years and which are renewable for a second 25-year period. Such leases are permissible.

Special Requirements for Condominiums (§ 3555.205)

Several respondents questioned the requirements for condominiums. The proposed rule states that loans may be guaranteed for condominium units in condominium projects that meet the project acceptance criteria established by HUD, VA, Fannie Mae, or Freddie Mac. Rural Development has elected to not restate the project acceptance criteria of HUD, VA, Fannie Mae, or Freddie Mac in program regulations, but

has included administrative guidance for this issue in the handbook. This represents no change from Agency current practice. For further background information, the following Web sites may prove useful:
http://www.freddiemac.com/sell/factsheets/condo_projects.html; https://www.efanniemae.com/sf/index.jsp
; and
http://www.hudclips.org/cgi/.

Special Requirements for Community Land Trusts (§ 3555.206)

Some respondents argued that Rural Development should prevent terminating the land trust restrictions when the property is foreclosed. The respondents recommended the section be amended to allow a mortgage on the dwelling only and, thereby, keeping the restrictions in place upon forced sale of the dwelling. Removing or amending the requirement of terminating land trust restriction upon foreclosure would adversely affect the market ability of the property, thereby increasing the loss to the Government. Therefore, no change is made to the final rule.

Special Requirements for Manufactured Homes (§ 3555.208)

Several respondents suggested Rural Development thermal standards not be required for manufactured housing. Based on these comments, the requirement related to thermal standards is revised to adopt the standards established by HUD, as discussed above.

Construction must conform to the FMHCSS and HUD heating and cooling requirements for the State.

Others suggested accepting the manufacturer's warranty and not requiring any additional dealer warranty. After considering this comment, Rural Development decided to remove the requirement for Agency-approved dealer-contractors because no other Government insurance or guarantee program has a similar requirement, and because Rural Development's interest will be adequately protected under the warranty provisions of the final rule. This change also reduces the administrative burden and cost for lenders and borrowers while still protecting the Agency's interests. Agency warranty requirements will remain in place in order to ensure that the borrower's new manufactured home is warranted against manufacturing defects, damage incurred during transport from the dealer to the site, and defects related to faulty installation on the permanent foundation.

Required Servicing Actions (§ 3555.252)

Several comments were received on the proposal to permit the participation of some lenders that do not utilize tax and insurance escrow accounts. Six respondents disagreed with the proposal, stating that lenders that lack the means to escrow should not participate in the SFHGLP as approved lenders and that the escrowing process assists customers and ensures a greater homeownership success rate. Rural Development agrees that escrows can promote homeownership success, but the same result can be achieved without escrows if other safeguards are in place. For example, a lender can still monitor tax assessments and payments absent an escrow account and, in cases of non-payment, take appropriate actions like contacting the borrower.

Others supported the proposal as providing greater opportunity for small rural lenders to participate in the SFHGLP.

Two respondents stated that lenders who lack capacity to escrow should be accountable for any deficiency in the servicing of these accounts.

Rural Development wishes to promote the interest of the SFHGLP to eligible rural lending institutions with the capability to underwrite and service loans, but without the capacity to escrow. Therefore, the final rule requires the lender to establish and maintain insured escrow accounts to pay real estate taxes and assessments and required hazard and flood insurance premiums when due, or, if the lender does not have the capacity to escrow, then the lender must implement internal monitoring processes to ensure that the borrower pays real estate taxes and assessments and required hazard and flood insurance premiums when due. In all cases, the lender is accountable for any deficiency in the servicing of these accounts. This rule will provide flexibility to small rural lenders while protecting the interests of the borrower and Rural Development. No significant change has been made to the language proposed.

Two respondents took exception to proposed § 3555.252 requiring the lenders to ensure all repairs or replacements using insurance loss claims be planned, performed, and inspected in accordance with Agency construction requirements. Both respondents suggested Rural Development adopt a dollar amount threshold (below) which the lender would not have to manage the repairs; rather, the insurance funds could be paid directly to the homeowner according to industry standards. The respondents suggested $10,000 as the general industry standard. The Agency will adopt a “de minimis” threshold in § 3555.252 so that a specific amount may be defined in the handbook and adjusted according to changes in the industry standard. The current industry standard of $10,000 will be adopted in the handbook, subject to change based on the industry standard. If the insurance claim is beneath the de minimis threshold and other requirements are met (i.e. the account is current and there is a history of timely payments; the borrower occupies the property; and the borrower executes an affidavit agreeing to apply the funds for repairs or reconstruction of the dwelling), the funds may be released directly to the borrower.”

One respondent asked Rural Development to include guidance regarding the requirements on reporting and delinquency notification. Rural Development concurs and has provided guidance consistent with mortgage industry standards. Lenders must notify a credit repository of each new guaranteed loan, identify the loan as guaranteed by the Agency, and must report to that repository whenever any account becomes more than 30 calendar days past due. No change is needed in the proposed language. Details on lender reports to the Agency are provided in the handbook.

Borrower Actions Requiring Lender Approval (§ 3555.255)

Rural Development's final rule on partial release of security property requires, in part, that the borrower receive adequate compensation and either make a reduction to the principal balance, or make improvements to the security property, in order to maintain the current loan-to-value ratio for the guaranteed loan. If the borrower receives adequate compensation for a partial release and makes a commensurate reduction to the principal balance or makes improvements to the security property, the pre-release loan-to-value for the guaranteed loan should be preserved or improved. This clarification has been added to the final rule which otherwise remains unchanged from the proposed.

Transfer and Assumptions (§ 3555.256)

Some respondents suggested adding a section discussing the release of a co-obligor in cases of divorce. Rural Development's authorizing legislation. § 502(h)(10) of the Housing Act of 1949, as amended, prohibits this action, so this comment is not adopted.

One respondent expressed concern about transfers without triggering the

due-on-sale clause arguing that fixed rate conventional documents do not allow assumability under original mortgage terms and that the Truth in Lending documents disclose that the loan is non-assumable. This section of the rule already discusses permissible transfers subject to Section 341 of the Garn St Germain Depository Institutions Act of 1982 (Pub. L. 97-320) and no change is made on this issue.

Subpart G (§§ 3555.301 Through 3555.308)

The Agency has reorganized and renumbered subpart G in order to better organize the information and present servicing options in the order in which lenders will generally consider them.

General Servicing Techniques (§ 3555.301)

The final rule requires lenders to evaluate loss mitigation options in subpart G of the rule in an effort to resolve any repayment problems and provide borrowers with the maximum opportunity to become successful homeowners. The lender retains the discretion to choose which, if any, such options will best resolve the borrower's repayment problems while acting as a prudent lender and in the financial interests of the Government.

This section clarifies certain steps that are part of the industry standard practices the lender must take to contact a borrower who is in default, such as an initial contact to ascertain the circumstances of the default and possible resolution, and a certified letter requesting an interview with the borrower when the account becomes more than 60 days overdue. The Agency also clarifies that unless otherwise provided, Agency concurrence or a waiver is necessary for servicing plans that extend more than 90 days (§ 3555.301(h)). A waiver to the concurrence requirement may be issued if a lender demonstrates that it no longer needs oversight, which may be demonstrated by the lender's portfolio performance, such as lower than average delinquency rates, foreclosure rates, or loss claim rates. Rural Development may revoke such waiver at any time, upon notice and without appeal rights.

In order to protect the interests of the Government, the Agency will require lenders to evaluate delinquent loans to determine whether any loss mitigation plan would be appropriate. However, the initial decision whether to offer a servicing plan to the borrower continues to be within the discretion of the lender, since the lender must determine whether the borrower is eligible for a servicing plan that can feasibly cure the delinquency before submitting any servicing plan for approval in accordance with § 3555.301(h).

Protective Advances (§ 3555.302)

Two comments were received regarding protective advances. One respondent asked how the borrower would repay the advance. It is commonplace for security instruments and promissory notes to provide for protective advances to become part of the borrower's debt; hence, no change is made in response to this comment. One respondent recommended adoption of the section as proposed. Rural Development agrees with this respondent and believes the requirements related to protective advances are clear and no change is made to the regulation.

The rule further clarifies that protective advances for taxes and insurance do not require prior Agency concurrence. However, protective advances for costs other than taxes or insurance, such as emergency repairs, require Agency concurrence if the amount of the advance is significant as determined by the Agency. The handbook currently sets the threshold for significant advances to be those exceeding $2,000 and is based upon historical experience in responding to lenders who are caretaking abandoned properties in liquidation or are acquired in the lender's inventory.

Traditional Servicing Options (§ 3555.303)

The traditional servicing options—repayment agreement, special forbearance, reamortization and loan modification—previously covered in proposed §§ 3555.301, 3555.304 and 7 CFR 1980.373, have been consolidated into one section and renumbered as § 3555.303. The eligibility requirements for all traditional servicing is addressed in § 3555.303(a). Reamortization has been removed as a separate option since it is covered by loan modification.

One respondent requested clarification on extending the term of the loan. Under section 502(h)(7) of the Housing Act of 1949, as amended, the maximum loan term for SFHGLP loans is 30 years. However, section 502(h)(14(H) permits loan modification when the borrower is in default or facing imminent default, and the term of the loan may be extended up to 40 years from the date of modification. Therefore, § 3555.303(b)(3) provides that traditional servicing loan modifications may include extending the term of the loan up to 30 years from the date of modification. The guarantee is effective 30 years from the origination date, and if the loan term is extended beyond the original 30 years (i.e. for another 30-year term), the guarantee will no longer apply beyond the original 30-year loan term. A clarification has been made to the rule. Extended-term loan modifications, however, are available under § 3555.304 special servicing as discussed below in more detail.

One respondent requested clarification on allowable items for capitalization. The respondent suggested that foreclosure fees and costs, tax and insurance advances, and accrued interest be capitalized. The respondent further suggested that if the capitalization of these items results in a new loan amount that is higher than the principal loan amount originally guaranteed, the guarantee should then be based on the new and higher loan amount. Rural Development agrees that foreclosure fees and costs, tax and insurance advances, and past due principal and interest payments may be capitalized in a re-amortization designed as a loss mitigation technique. Such capitalization is consistent with mortgage industry practices and standards. Late charges or fees may not be capitalized. The amount of the guarantee, however, may not exceed the principal loan amount originally guaranteed, because the Loan Note Guarantee was issued at origination for a certain face value which cannot be amended by the lender. The regulation has been changed accordingly, and additional administrative guidance is provided in the handbook.

One respondent suggested these actions should require Agency concurrence prior to modification; failure to obtain Agency concurrence could increase loss claim exposure for Rural Development. Rural Development agrees, and the regulation has been changed accordingly in § 3555.301. Lenders will continue requesting concurrence from Rural Development to undertake modification and any other traditional servicing plans that extend more than 90 days, unless a waiver is issued pursuant to § 3555.301(h) described above.

Special Servicing Options (§ 3555.304)

A new section has been added to provide Agency policy regarding special servicing options that lenders may utilize as authorized and implemented under the final rule published on August 26, 2010 (75 FR 52429-52435). Language regarding special servicing options was not published in the proposed streamlining rule. The Agency will allow lenders to extend loans for a term of up to 40 years from the date of modification under the special servicing

options. The Agency will also allow lenders to advance funds on behalf of borrowers in amounts necessary to bring defaulted loans current, up to 30 percent of the unpaid principal balance of the loan. Upon request, the Agency will reimburse the lender for eligible advances. The intended effect of these special servicing options was to reduce mortgage foreclosures among SFHGLP borrowers and assist in stabilizing the national housing market. Before considering special servicing options, lenders must exhaust traditional servicing options or have determined that traditional servicing plans would not resolve the delinquency. The concurrence and waiver provisions of § 3555.301(h) apply to special servicing options.

Section 3555.10 is amended from the proposed rule to introduce in alphabetical order the definitions for “Extended-term loan modification,” “Maximum allowable interest rate,” “Mortgage payment to income ratio,” “Mortgage recovery advance,” and “Total debt to income ratio” as a result of this new section language.

Voluntary Liquidation (§ 3555.305)

The liquidation section under the proposed rule (previously § 3555.305) has been divided into two sections—voluntary liquidation (§ 3555.305) and liquidation (§ 3555.306). The new § 3555.305 expands upon and clarifies the eligibility requirements for and methods of voluntary liquidation.

One respondent believed the wording in proposed § 3555.305 (c) regarding lump-sum payments in order to reinstate accelerated accounts would preclude the lender's ability to utilize loss mitigation alternatives. Rural Development removed this wording to more clearly reflect the lender's ability to utilize loss mitigation alternatives.

One respondent suggested that proposed § 3555.305(e) be changed to allow for alternative methods of voluntary liquidation when acceptable to Rural Development and documented by the lender. This suggestion is adopted in order to provide Rural Development and the lender with more flexibility and is included as § 3555.305(e).

One respondent noted that there are too many borrower situations and servicing alternatives under this section for all to be included in the regulations. Rural Development agrees, and the regulation has been changed so lenders will continue requesting concurrence from Rural Development, unless a waiver is provided in accordance with § 3555.301(h), to undertake the listed voluntary liquidation actions and other methods documented to result in savings to the Government.

Liquidation (§ 3555.306)

Several respondents expressed concern about Rural Development's proposal to eliminate the submission of property disposition plans to Rural Development for concurrence prior to marketing real estate owned (REO) property. Some suggested that failure to obtain Agency concurrence could increase loss claim exposure to Rural Development or result in exorbitant selling fees. Rural Development agrees, and the regulation has been changed accordingly. Lenders will continue submitting property disposition plans to Rural Development for concurrence. As discussed above, Rural Development may provide a written waiver of this requirement to the lender, on a case-by-case basis, if the lender demonstrates that it no longer needs the oversight. In such cases, the lender is still required to prepare and maintain a disposition plan on each acquired property, and this plan must be available for Agency review upon request for monitoring lender performance.

Assistance in Natural Disasters (§ 3555.307)

A new section has been added to explain agency policy during natural disasters. Servicers will use their general procedures to service affected borrower accounts, minimize delinquency, and avoid foreclosure. Servicers will inspect security property and service the account based on whether the property can be rebuilt, the status of the mortgage, amount of insurance proceeds, and the time needed to repair or reconstruct the property.

Loan Guarantee Limits (§ 3555.351)

One respondent requested a clear explanation and calculation breakdown on guaranteed loan limits stating that this information is critical in order to streamline and submit correct loss claim documentation. This section and the calculation of the loss payment section (§ 3555.352) have been rewritten for clarity and administrative guidance about loss claim submissions is provided in the handbook.

Subject to the loan guarantee limits, the loss claim payment is the difference between the total indebtedness on the loan and the net recovery value. The total indebtedness includes the unpaid principal balance, accrued interest from the last day of borrower payment to the settlement date, any interest on the unsatisfied principal balance which accrued within 90 days from the settlement date, principal and interest for protective advances, and reasonable and customary liquidation costs such as attorney fees and foreclosure costs.

Net Recovery Value (§ 3555.353)

One respondent expressed concern about Rural Development's current acquisition resale factor in calculating net recovery value. The respondent stated the factor is inadequate to cover all marketing expenses incurred and suggested Rural Development consider reasonable allowances to arrive at the actual net recovery value similar to HUD. The acquisition resale factor is only used when the lender still has ownership of the REO property at the time of filing a loss claim for payment. The disposition cost factor is reviewed by Rural Development and adjusted as warranted on an area basis, but not on a case-by-case basis. Rural Development believes that the current factor is adequate to cover all marketing expenses incurred, and no change is made on this issue.

Loss Claim Procedures (§ 3555.354)

Several respondents commented on the requirements established regarding REO property. Several respondents commented that 90 days from the foreclosure date or the end of any applicable redemption period is insufficient to market and sell foreclosed property. Others requested guidance on filing claims. Rural Development agrees that, in many cases, 90 days will be insufficient. After further review and consideration of different economic and market conditions, the regulation has been amended so the lender must notify Rural Development if the property has not been sold within 9 months from the foreclosure date or applicable redemption period. The 9-month period should prove sufficient to market and sell foreclosed property under most economic and market conditions. Administrative procedures relative to the disposition of REO and filing claims are provided in the handbook.

One respondent requested the regulation provide evaluation criteria required to process a loss claim without a deficiency judgment. Section 3555.355 lists typical circumstances in which claims would be reduced or denied. Further processing guidance on this issue is provided in the handbook.

The period of time in which loss claims may be submitted after the property has been sold was increased in the final rule from 30 to 45 days in order to provide lenders more flexibility in submitting the claims. Late claims

submitted beyond this period of time may be rejected by Rural Development.

Future Recovery (§ 3555.356)

Three respondents discussed the calculation and administration of future recovery. One suggested that Rural Development should reimburse the lender when the sale results in a loss and two respondents requested clarification on the administrative process of calculating the amount of future recovery. Rural Development believes that since the lender controls the sale process, reimbursing the lender for a loss could encourage the lender to accept less than a fair price at the sale. Reimbursing Rural Development for a share of future recovery is justified since Rural Development's claim payment was calculated based on a liquidation appraisal and not on an actual sale. Guidance regarding the future recovery process is provided in the handbook. No change is made in the final rule.

List of Subjects

7 CFR Part 1980
Home improvement, Loan programs, Housing and community development, Mortgage insurance, Mortgages, Rural areas.

7 CFR Part 3555
Administrative practice and procedure, Conflict of interests, Credit, Environmental impact statements, Equal credit opportunity, Fair housing, Flood insurance, Home improvement, Housing, Loan programs-Housing and community development, Low and moderate income housing, Manufactured homes, Mortgage insurance, Mortgages, Rural areas, Subsidies.

Therefore, Chapters XVIII and XXXV, Title 7, Code of Federal Regulations are amended as follows:

CHAPTER XVIII—RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT OF AGRICULTURE

PART 1980—GENERAL

1. The authority citation for part 1980 is revised to read as follows:

Authority:

5 U.S.C. 301; 7 U.S.C. 1989.

Subpart D—[Removed and Reserved]

2. Subpart D of part 1980 is removed and reserved.

CHAPTER XXXV—RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

PART 3555—GUARANTEED RURAL HOUSING PROGRAM

3. Part 3555, consisting of subparts A through H, is added to read as follows:

Subpart A—General

Sec.
3555.1
Applicability.
3555.2
Purpose.
3555.3
Civil rights.
3555.4
Mediation and appeals.
3555.5
Environmental requirements.
3555.6
State and local law.
3555.7
Exception authority.
3555.8
Conflict of interest.
3555.9
Enforcement.
3555.10
Definitions and abbreviations.
3555.11-3555.49
[Reserved]
3555.50
OMB control number.

Subpart B—Lender Participation

3555.51
Lender eligibility.
3555.52
Lender approval.
3555.53
Contracting for loan origination.
3555.54
Sale of loans to approved lenders.
3555.55-3555.99
[Reserved]
3555.100
OMB control number.

Subpart C—Loan Requirements

3555.101
Loan purposes.
3555.102
Loan restrictions.
3555.103
Maximum loan amount.
3555.104
Loan terms.
3555.105
Combination construction and permanent loans.
3555.106
[Reserved]
3555.107
Application for and issuance of the loan guarantee.
3555.108
Full faith and credit.
3555.109-3555.149
[Reserved]
3555.150
OMB control number.

Subpart D—Underwriting the Applicant.

3555.151
Eligibility requirements.
3555.152
Calculation of income and assets.
3555.153-3555.199
[Reserved]
3555.200
OMB control number.

Subpart E—Underwriting the Property

3555.201
Site requirements.
3555.202
Dwelling requirements.
3555.203
Ownership requirements.
3555.204
Security requirements.
3555.205
Special requirements for condominiums.
3555.206
Special requirements for community land trusts.
3555.207
Special requirements for Planned Unit Developments (PUDs).
3555.208
Special requirements for manufactured homes.
3555.209
Rural Energy Plus loans.
3555.210-3555.249
[Reserved]
3555.250
OMB control number.

Subpart F—Servicing Performing Loans

3555.251
Servicing responsibility.
3555.252
Required servicing actions.
3555.253
Late payment charges.
3555.254
Final payments.
3555.255
Borrower actions requiring lender approval.
3555.256
Transfer and assumptions.
3555.257
Unauthorized assistance.
3555.258-3555.299
[Reserved]
3555.300
OMB control number

Subpart G—Servicing Non-Performing Loans

3555.301
General servicing techniques.
3555.302
Protective advances.
3555.303
Traditional servicing options.
3555.304
Special servicing options.
3555.305
Voluntary liquidation.
3555.306
Liquidation.
3555.307
Assistance in natural disasters.
3555.308-3555.349
[Reserved]
3555.350
OMB control number.

Subpart H—Collecting on the Guarantee.

3555.351
Loan guarantee limits.
3555.352
Loss covered by the guarantee.
3555.353
Net recovery value.
3554.354
Loss claim procedures.
3555.355
Reducing or denying the claim.
3555.356
Future recovery.
3555.357-3555.399
[Reserved]
3555.400
OMB control number.

Authority:

5 U.S.C. 301; 42 U.S.C. 1471
et seq.

Subpart A—General

§ 3555.1
Applicability.
This part sets forth policies for the Single Family Housing Guaranteed Loan Program (SFHGLP) administered by USDA Rural Development. It addresses the requirements of section 502(h) of the Housing Act of 1949, as amended, and includes policies regarding originating, servicing, holding and liquidating SFHGLP loans. Any provision regarding the expenditure of funds under this part is contingent upon the availability of funds.

§ 3555.2
Purpose.

(a)
General.
The purpose of the SFHGLP is to provide low- and moderate-income persons who will live in rural areas with an opportunity to own decent, safe and sanitary dwellings and related facilities. The SFHGLP offers applicants without sufficient resources to provide the necessary housing on their own account, and unable to secure the credit necessary for such housing from other sources upon terms and conditions, which the applicant can reasonably be expected to fulfill without the guarantee, an opportunity to acquire, build, rehabilitate, improve, or relocate dwellings in rural areas.

(b)
Demonstration programs.
Rural Development may authorize limited demonstration programs as allowed by law. The objective of these demonstration programs will be to test new approaches to offering housing under the statutory authority granted to the Secretary. Therefore, such demonstration programs may not be

consistent with all of the provisions contained in this part. However, any statutory SFHGLP requirements will remain in effect.

§ 3555.3
Civil rights.

Rural Development, lenders, and their agents must administer the program fairly, and in accordance with both the letter and the spirit of all equal opportunity, equal credit opportunity and fair housing legislation, and applicable executive orders. Loan guarantees, services, and benefits provided under this part shall not be denied to any person based on race, color, national origin, sex, religion, marital status, familial status, age (provided the applicant has the capacity to enter into a binding contract), handicap, receipt of income from public assistance, sexual orientation, or because the applicant has, in good faith, exercised any right under the Consumer Credit Protection Act (15 U.S.C. 1601
et seq.
). All activities under this part shall be accomplished in accordance with the Fair Housing Act (42 U.S.C. 3601-3620), the Equal Credit Opportunity Act (15 U.S.C. 1691), and Executive Order 11063 as amended by Executive Order 12259, as applicable. Rural Development's civil rights compliance requirements are provided in 7 CFR part 1901, subpart E.

§ 3555.4
Mediation and appeals.
Whenever Rural Development makes a decision that will adversely affect a participant, the participant may proceed with alternative dispute resolution including mediation and a USDA National Appeals Division hearing in accordance with 7 CFR parts 1 and 11. The participant also may request an informal review of the adverse decision made by Rural Development. Except when the adverse decision applies to a loss claim, the applicant or borrower and the lender may participate in the appeal process. Adverse decisions made by the lender cannot be appealed unless concurrence by Rural Development was required by this subpart and obtained by the lender.

§ 3555.5
Environmental requirements.

(a)
Policy.
Rural Development will consider environmental quality, economic, social, and other relevant factors in program development and decision-making processes. Rural Development will take into account potential environmental impacts of proposed projects by working with applicants, other Federal agencies, American Indian tribes, State and local governments, and interested citizens and organizations in order to formulate actions that advance the program's goals in a manner that will protect environmental quality.

(b)
Regulatory references.
Loan processing and servicing actions under this part will be completed in accordance with the requirements of part 1940, subpart G of this title and part 1924, subpart A of this title, which addresses lead-based paint requirements; and any other Agency regulations addressing environmental requirements for the SFHGLP.

(c)
Agency responsibilities.
Rural Development is responsible for compliance with all applicable environmental regulations and statutes.

(d)
Lender and loan applicant responsibilities.
(1) Lenders must use due diligence in regard to potential environmental hazards to ensure the property is decent, safe and sanitary and of sufficient value to adequately secure the loan. The level of due diligence review to determine potential environmental hazards must be equivalent to the standards established by Fannie Mae, Freddie Mac, FHA, or the VA.

(2) Mortgage loan transactions will be subject to the requirements of the 1994 National Flood Insurance Reform Act to determine if the dwelling is located in a Special Flood Hazard Area (SFHA).

(3) On an as needed basis, lenders and loan applicants will assist Rural Development in obtaining such information as Rural Development needs to complete its environmental review and to cooperate in the resolution of environmental problems.

(4) Lenders will become familiar with Agency environmental requirements, so they can advise applicants and reduce the probability of unacceptable applications being submitted to Rural Development.

(5) The lender must comply with Federally mandated flood insurance purchase requirements. Existing dwellings in a SFHA are not eligible under the SFHGLP unless flood insurance through the FEMA National Flood Insurance Program (NFIP) is available. The lender will require the borrower to obtain, and maintain for the term of the mortgage, flood insurance for any property located in a SFHA, listing the lender as a loss payee.

(6) The borrower must obtain, and continuously maintain for the life of the mortgage, flood insurance on the security property in an amount sufficient to protect the property securing the guaranteed loan. Flood insurance policies must be issued under the NFIP, or by a licensed property and casualty insurance company authorized to participate in NFIP's “Write Your Own” program.

(7) Rural Development, will not guarantee loans for new or proposed homes in an SFHA unless the lender obtains a Letter of Map Amendment (LOMA) that removes the property form the SFHA or Letter of Map Revision (LOMR) that removes the property from the SFHA or obtains a FEMA elevation certificate that shows that the lowest habitable floor (including basement) of the dwelling and all related building improvements is built at or above the 100 year flood plain elevation in compliance with the NFIP.

§ 3555.6
State and local law.
Lenders will comply with applicable State and local laws and regulations, including the laws of American Indian tribes. Supplemental guidance will be issued in the case of any conflict with or significant differences from provisions of this part.

§ 3555.7
Exception authority.
The Administrator of the Agency, or a designee, may make an exception to any requirement or provision of this part or to address any omissions in this part, when the Administrator, or designee, determines that application of the requirement or failure to take action would adversely affect the Government's interest. Any exception must be consistent with the authorizing statute and other applicable laws.

§ 3555.8
Conflict of interest.

(a)
Applicant or borrower responsibility.
The applicant or borrower must disclose to the lender any prohibited relationship or association with any Rural Development employee, and the lender must disclose that information to Rural Development.

(b)
Lender responsibility.
The lender must disclose to Rural Development any prohibited relationship or association it, or any of its employees, has with any Rural Development employee.

(c)
Prohibited relationships and associations.
Prohibited relationships and associations include the following:

(1) Immediate family members, including parents and children, whether related by blood or marriage;

(2) Close relatives, including grandmother, grandfather, aunt, uncle, sister, brother, niece, nephew, granddaughter, grandson, or first cousin, whether related by blood or marriage;

(3) Any household residents;

(4) Immediate working relationships, including coworkers in the same office, subordinates, and immediate supervisors; and

(5) Close business associations, including business partnerships, joint ventures, or closely held corporations.

(d)
Result of disclosure.
Disclosure of prohibited relationships and associations under this section will not necessarily result in applicant, borrower or lender ineligibility. Disclosures may result in reassignment with regard to the loan guarantee in question so that no prohibited relationships or associations exist between the Rural Development employees responsible for loan guarantee transactions and lenders, borrowers, or applicants.

§ 3555.9
Enforcement.
Rural Development will take such actions as are appropriate and necessary to enforce the provisions of these regulations. Such actions will include, but not be limited to, reduction of the loss claim payment; termination of a lender's or servicer's participation in the SFHGLP; suspension and debarment of participation in this or other Federal programs; and, any other appropriate administrative, civil, or criminal actions as allowed by law. Rural Development may assess civil monetary penalties pursuant to Section 543 of the Housing Act of 1949, 42 U.S.C. 1409s(b).

§ 3555.10
Definitions and abbreviations.
The definitions and abbreviations in this section apply to this part.

Acceleration.
Demand for immediate repayment of the entire balance of a debt if the covenants in the promissory note, assumption agreement, or security instruments are breached.

Adjusted annual income.
Income from all household members who live or propose to live in the dwelling as their primary residence for all or part of the ensuing 12 months. Adjusted annual income is used to determine whether an applicant is income-eligible for a guaranteed loan, or interest assistance, if applicable. Adjusted annual income provides for deductions to account for varying household circumstances and expenses. See § 3555.152(c) for a complete description of adjusted annual income.

Agency.
The Rural Housing Service of the U.S. Department of Agriculture, Rural Development.

Agency employee.
Any employee of the Rural Housing Service, or any employee of the Rural Development mission area who carries out SFHGLP functions.

Alien.
See “Qualified alien.”

Amortization.
A gradual reduction of the mortgage debt through equal monthly principal and interest payments sufficient to fully repay the unpaid principal balance over the mortgage term.

Amortized payment.
Equal monthly payments under a fully amortized mortgage loan that provides for the scheduled payment of interest and principal over the term of the loan.

Annual fee.
A periodic amount that is based on the average annual scheduled unpaid principal balance of the loan and is paid by the servicing lender to Rural Development on an annual basis for issuance of a Loan Note Guarantee. The fee may be passed on to the borrower and included in the monthly mortgage payment of a borrower and is used when calculating payment ratios.

Annual income.
The income of all household members calculated according to § 3555.152(b). Annual income is used to determine adjusted annual income in § 3555.152(c) for program eligibility purposes.

Applicant.
An individual applying to a lender for a guaranteed loan.

Area median income.
The median income in a specific locality, typically a county or Metropolitan Statistical Area (MSA), as determined by the Department of Housing and Urban Development.

Assumption.
A method of selling real estate wherein the property purchaser accepts the liability for payment of an existing mortgage.

Borrower.
An individual obligated to repay the loan guaranteed under the Guaranteed Rural Housing loan program.

Combination construction and permanent loan.
A guaranteed loan on which the Rural Development guarantee becomes effective at the time construction of an eligible single family housing project begins.

Community land trust.
A private nonprofit community housing development organization that is established to acquire parcels of land, held in perpetuity, primarily for conveyance under long-term ground leases. See section 502(a)(3)(B) of the Housing Act of 1949, 42 U.S.C. 1472(a)(3)(B), as amended.

Conditional commitment.
Rural Development's agreement that a proposed loan will be guaranteed if all conditions and requirements established by Rural Development are met.

Condominium project.
A real estate project in which each owner has title to a unit in a building, an undivided interest in the common areas of the project and sometimes the exclusive use of certain limited common areas. See § 526(d) of the Housing Act of 1949, as amended.

Debarment.
An action taken under 2 CFR part 180 or 417 to exclude a person or entity from participating in Federal programs.

Disability.
See “Person with a disability.”

Dwelling.
A house, manufactured home, or condominium unit, and related facilities, such as a garage or storage shed, used or to be used as the borrower's principal residence.

Elderly family.
An elderly family consists of one of the following:

(1) A person who is the head, spouse, or sole member of a household and who is 62 years of age or older, or who is disabled, and is an applicant or borrower;

(2) Two or more persons who are living together, at least one of whom is age 62 or older, or disabled, and who is an applicant or borrower; or

(3) Where the deceased borrower or spouse in a household was at least 62 years old or disabled, the surviving household member shall continue to be classified as an elderly household for the purpose of determining adjusted income, even though the surviving members may not meet the definition of an elderly family on their own, provided:

(i) They occupied the dwelling with the deceased household member at the time of the death;

(ii) If one of the surviving household members is the spouse of the deceased household member, the surviving household shall be classified as an elderly family only until the remarriage or death of the surviving spouse; and

(iii) At the time of the death of the deceased household member the dwelling was financed with a Guaranteed Rural Housing loan.

Escrow account.
A trust account that is established by the lender or its servicing agent to hold funds collected from the borrower and allocated for the payment of real estate taxes, special assessments, hazard or flood insurance premiums, and other similar expenses.

Existing dwelling.
A dwelling that does not meet the definition of “new dwelling”.

Extended-term loan modification.
A loan modification authorized under § 3555.304 of this part, in which the lender reduces the interest rate to a level at or below the maximum allowable interest rate and then extends the repayment term up to a maximum of 40 years from the date of loan modification, but only as long as is necessary to achieve the targeted mortgage payment to income ratio.

Fannie Mae.
A private, shareholder-owned company with a charter from Congress to support the housing finance system, formerly officially known as the Federal National Mortgage Association.

FEMA.
The United States Department of Homeland Security, Federal Emergency Management Agency.

FHA.
The Federal Housing Administration of the United States Department of Housing and Urban Development.

FHLB.
Federal Home Loan Bank.

First-time homebuyer.
Individuals who meet any one of the following three criteria are considered first-time homebuyers:

(1) An individual who has had no ownership interest in a principal residence during the three-year period ending on the date of loan closing.

(2) An individual who is a displaced homemaker and who, except for owning a home with a spouse, has had no ownership interest in a principal residence during the three-year period ending on the date of loan closing. Displaced homemakers include any individual who is:

(i) An adult;

(ii) Unemployed or underemployed;

(iii) Experiencing difficulty in obtaining or upgrading employment; and

(iv) In recent years has worked primarily without remuneration to care for the home and family, but has not worked full-time, full-year in the labor force.

(3) An individual who is a single parent and who, except for owning a home with a spouse, has had no ownership interest in a principal residence during the three-year period ending on the date of loan closing. Single parents include any individual who is:

(i) Unmarried or legally separated; and

(ii) Has custody or joint custody of one or more children, or is pregnant.

Forbearance agreement.
An agreement between the lender and the borrower providing for temporary suspension of payments or a repayment plan that calls for periodic payments of less than the normal monthly payment, periodic payments at different intervals, etc. to bring the account current.

Freddie Mac.
A private, shareholder owned company with a charter from Congress to support the housing finance system, formerly officially known as the Federal Home Loan Mortgage Corporation.

Funded buydown account.
An escrow account funded by the lender, seller, or through a third party gift, from which monthly payments are released directly to the lender to reduce the amount of interest on a loan, thereby improving an applicant's repayment ability.

Ginnie Mae.
Government National Mortgage Association, a Government-owned corporation within HUD.

Household.
All persons routinely living in the dwelling as principal residence, except for live-in aides, foster children, and foster adults.

Housing Act of 1949.
The Act which, in part, provides the authority for single family housing programs, codified at 42 U.S.C. 1471
et seq.

HUD.
The United States Department of Housing and Urban Development.

Interest assistance.
Agency assistance available to eligible borrowers that reduces the effective interest rate on the guaranteed loan. Interest assistance applied to borrowers whose loans were approved as a subsidized guaranteed loan between April 17, 1991, and September 30, 1991, and who entered into interest assistance and shared equity agreements at loan closing.

IRS.
The Internal Revenue Service of the United States Department of the Treasury.

Leasehold estate.
The right to use and occupy real estate for a stated term and under conditions which have been conveyed by a lease.

Lender.
The entity making, holding, or servicing a loan that is guaranteed under the provisions of this part.

Live-in aide.
A person who:

(1) Lives with an elderly person or a person with a disability and

(2) Is essential to that person's care and well-being, and

(3) Is not obligated for the person's support, and

(4) Would not be living in the unit except to provide the support services.

Loan modification.
A written agreement that permanently changes an original note term, such as the interest rate, monthly payment, and/or the principal balance due to capitalization of interest or advances.

Low-income.
An adjusted income that is greater than the HUD established very low-income limit, but that does not exceed the HUD established low-income limit (generally 80 percent of median income adjusted for household size) for the county or Metropolitan Statistical Area where the property is or will be located.

Manufactured home.
A structure that is built on a permanent foundation according to Federally Manufactured Home Construction and Safety Standards established by HUD and found at 24 CFR part 3280.

Market value.
The value of the property as determined by a current appraisal made in accordance with the Uniform Standards of Professional Appraisal Practices.

Maximum allowable interest rate.
For purposes of § 3555.304, the rate established by the Agency in a
Federal Register
notice describing how to calculate the maximum allowable interest rate. If the maximum allowable interest rate has not been established by notice in the
Federal Register
, the maximum allowable interest rate shall be 50 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) rate for 30-year fixed-rate mortgages (U.S. average), rounded to the nearest one-eighth of one percent (0.125%), as of the date the loan modification is executed. Weekly PMMS rates are published on the Freddie Mac Web site, and the Federal Reserve Board includes the average 30-year PMMS rate in the list of Selected Interest Rates that it publishes weekly in its Statistical Release H.15.

Median income.
The area median income, adjusted for family size, as established by HUD.

Moderate income.
The greater of:

(1) 115 percent of the U.S. median family income,

(2) The average of the state-wide and state non-metro median family income,

(3) 115/80ths of the area low-income limit adjusted for household size for the county or MSA where the property is, or will be, located.

Modest housing.
For purposes of this part, “modest housing” is the housing that a low- or moderate-income borrower can afford based on their repayment ability.

Mortgage.
A form of security instrument or consensual lien on real property including a real estate mortgage and a deed of trust.

Mortgage credit certificate.
A certificate issued by an authorized State or local housing finance agency that documents a Federal income tax credit awarded to a first-time homebuyer and/or low- or moderate-income homebuyer. The Federal income tax credit reduces the applicant's Federal income tax liability, which improves his or he

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-29084. Public record. Not legal advice.