Single Family Rural Housing Loans

DEPARTMENT OF AGRICULTURE

Rural Housing and Community Development Service

Rural Business and Cooperative Development Service

Rural Utilities Service

Consolidated Farm Service Agency

7 CFR Parts 1910, 1944, 1951, and 1965

RIN 0575-AA35

Single Family Rural Housing Loans

AGENCIES: Rural Housing and Community Development Service, Rural

Business and Cooperative Development Service, Rural Utilities Service

and Consolidated Farm Service Agency; USDA.

ACTION: Proposed rule.

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SUMMARY: The Rural Housing and Community Development Service (RHCDS)

proposes to revise its regulations for Single Family Rural Housing

(``RH'') Loans. Under the reorganization of the Department of

Agriculture, RHCDS is the successor to the former Farmers Home

Administration for the administration of rural housing programs under

the Housing Act of 1949. References to RHCDS will also include actions

of FmHA prior to the reorganization. Regulations regarding Receiving

and Processing Applications, Planning and Performing Site Development

Work, Borrower Supervision, Servicing and Collection of Single Family

Housing Loan Accounts, and Security Servicing for Single Family Rural

Housing Loans are also impacted by the proposed revisions. This action

is taken to implement the provisions of section 315 of the Housing and

Community Development Act of 1987, Pub. L. 100-242, to improve the

delivery of the program to the public, provide for the orderly

processing of loan applications, reduce workload of RHCDS field staffs,

to conform the section 502 RH program with the Guaranteed Rural Housing

Loan program and industry standards, and to notify the public of the

Agency's policy.

Note: The Department of Agriculture Reorganization Act of 1994,

Pub. L. 103-354, was signed on October 13, 1994. This established a

National Appeals Division (NAD) which replaced the FmHA National

Appeals Staff. The National Appeals Division is currently in the

process of writing new regulations. The Final Rule will be made

consistent with any new regulations promulgated by the National

Appeals Division.

DATES: Comments must be received on or before July 11, 1995.

ADDRESSES: Submit written comments, in duplicate, to the Office of the

Chief, Rural Economic and Community Development, U.S. Department of

Agriculture, Ag Box 0743, Room 6348, South Agriculture Building, 14th

and Independence SW., Washington, DC 20250. All written comments will

be available for public inspection at the above address during normal

working hours.

FOR FURTHER INFORMATION CONTACT: Betsy McDaniel, Senior Loan

Specialist, Rural Housing and Community Development Service, USDA, Ag

Box 0783, Room 5334, South Agriculture Building, 14th and Independence

SW., Washington, DC 20250, Telephone (202) 720-1474.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be significant and was reviewed by

the Office of Management and Budget under Executive Order 12866.

Regulatory Flexibility Act

The Administrator of Rural Housing and Community Development

Service has determined that this action will not have a significant

economic impact on a substantial number of small entities because the

regulatory changes affect RHCDS processing of section 502 loans and

individual applicant eligibility for the program.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' It is the determination of RHCDS

that this proposed action does not constitute a major Federal Action

significantly affecting the quality of the human environment, and in

accordance with the National Environmental Policy Act of 1969, Pub. L.

91-190, an Environmental Impact Statement is not required.

Programs Affected

This program is listed in the Catalog of Federal Domestic

Assistance under No. 10.410, Low Income Housing Loans.

Intergovernmental Consultation

For the reason set forth in the final rule related Notice to 7 CFR

part 3015, subpart V, 48 FR 29115, June 24, 1983, this program is

excluded from the scope of Executive Order (E.O.) 12372 which requires

intergovernmental consultation with State and local officials.

Civil Justice Reform

This proposed regulation has been reviewed in light of E.O. 12778

and meets the applicable standards provided in sections 2(a) and 2(b)

of that Order. Provisions within this part which are inconsistent with

State law are controlling. All administrative remedies pursuant to 7

CFR part 1900, subpart B must be exhausted prior to filing suit.

Paperwork Reduction Act

The information collection requirements contained in these

regulations have been approved by the Office of Management and Budget

(OMB) under the provisions of 44 U.S.C. Chapter 35 and have been

assigned OMB control numbers 0575-0134, 0575-0099, and 0575-0062, in

accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3507).

[[Page 25630]] This proposed rule does not revise or impose any new

information collection or recordkeeping requirement from those approved

by OMB, for those mentioned above. The revised information collection

contained in 0575-0059 and 0575-0060 will be submitted for approval to

OMB. Public reporting for this collection of information is estimated

to vary from 5 minutes to 1.5 hours per response, with an average of

.41 hours per response, including time for reviewing instructions,

searching existing data sources, gathering and maintaining the data

needed, and completing and reviewing the collection of information.

Please send written comments on the information collection aspect of

the rule to the Office of Information Regulatory Affairs, OMB,

Attention: Desk Officer for USDA, Washington, DC 20503. Please send a

copy of your comments to Jack Holston, Agency Clearance Officer, USDA,

RECD, Ag Box 0743, Washington, DC 20250.

Discussion

Background

Many of Rural Housing and Community Development Service's (RHCDS's)

single family housing size and amenity restrictions have been

criticized as being too rigid and restrictive to best serve the housing

needs of low income families as well as providing adequate security for

the Agency. In the past, these restrictions served to limit the size

and cost of properties financed, and to control the associated home

ownership costs of RHCDS applicants/borrowers. RHCDS feels that a

different approach can provide the control necessary to allow

applicants the freedom to select the home of their choice which best

suits their individual needs and still ensure that RHCDS meets its

mission and that its financial interest is adequately secured.

During Fiscal Year (FY) 1991, FmHA published regulations in

connection with the Cranston-Gonzales National Affordable Housing Act

for its Guaranteed RH program. Those regulations provided that the

amount of the RHCDS guaranteed loan may not exceed the maximum dollar

limitation of section 203(b) of the National Housing Act (12 U.S.C.

1702). RHCDS now proposes to use 85 percent of the same maximum dollar

limitations applicable to the guaranteed program for the direct single

family RH program. The Agency has determined that an 85 percent

limitation for the direct single family housing program should curtail

luxury type amenities, size, and cost, and will generally result in

modest housing similar to that presently financed by the Agency under

this program. This will greatly simplify and standardize the properties

acceptable under the section 502 single family housing program and

achieve the balance previously discussed. This change will result in

the elimination of specific characteristics, amenities, and

restrictions relative to ``modest housing,'' and substitute reliance by

the Agency on the percentile of maximum dollar limitation established

by the Housing and Urban Development (HUD), hereafter called ``CAPs,''

for determining the type and dollar amount of housing to be financed.

In conjunction with this change, the Agency recognizes the need to

change the manner in which subsidy is provided on these loans.

In order to provide sufficient subsidy to enable low-income

applicants/borrowers to show repayment ability but at the same time

make the applicant/borrower the true decision-maker concerning all

aspects of the property that meets his or her housing needs, RHCDS

proposes to provide subsidy which will result in a reduced payment

based on the adjusted family income percentile of the area median

income or the minimum percentage of adjusted family income, whichever

is greater. The minimum percentage of adjusted family income will be

based on the income category the applicant/borrower falls into and will

include principal, interest, taxes, and insurance. These percentages

are reasonable amounts to pay for housing expenses. This would provide

for a maximum rate of subsidy and encourage the family to purchase a

modestly priced property within its repayment ability.

At the same time, the Agency desires to move away from the use of a

``budget'' when determining the applicant/borrower's repayment ability

and proposes to use payment ratios in the general manner as set forth

in its guaranteed housing instructions. This is more in line with

industry standards and it is anticipated that this change will remove

much of the subjectivity and controversy related to its current method

of determining repayment ability. The Agency proposes to use a

principal, interest, taxes, and insurance (PITI) ratio of 29 percent

and a monthly obligation to income (MOTI) ratio of 41 percent in the

direct single family housing program.

In addition to the above changes, RHCDS proposes to revise its

application loan processing procedures to provide that State Directors

will hold a separate reserve of loan funds for priority loan

applications which will be processed immediately upon receipt. Priority

applications include hardships, as determined by the State Director on

a case-by-case basis, including applications from persons living in

deficient housing for more than 6 months; applications for refinancing

of non-RHCDS loans, servicing type loan applications including

financing for the purchase of Government-owned inventory properties and

subsequent loans for essential improvements or repairs, and

applications for mutual Self-Help Housing loans. It is anticipated that

this will direct loan funds to those applicants with the greatest need,

reduce backlogs of applications on hand, and better meet Agency

objectives.

The Agency has conducted an in-depth study involving 25 counties in

California, Delaware, Florida, Georgia, Iowa, Maine, Maryland,

Mississippi, and Nevada. These states were selected because of the

volume of loans closed in these states and their geographic diversity,

and to provide a diversified range of income ranges and housing costs

in order to determine appropriate income ratios, loan limits, and

payment assistance to utilize in this proposal. Ninety-four percent of

this sample control group would continue to qualify for payment

assistance under the proposed terms. The Agency has provided for

increased payment assistance in high cost areas, exceptions to

published ratios in special situations, increased loan limits for

larger or disabled families, and in areas where the applicant is unable

to obtain lower cost housing. These provisions will result in assisting

applicants who do not qualify within the new parameters, so they can be

handled on an individual basis. RHCDS feels confident that the single

family housing loan program will continue to serve the same clientele

as it has historically served. The data generated as a result of this

study supports the proposed revisions, which will result in stimulation

economic growth, providing objectivity in the administration of the

single family housing program, making the program more equitable to

RHCDS applicants and borrowers, and expanding housing choices for RHCDS

applicants, based on their repayment ability, so that they can maximize

their housing benefits to their individual needs.

The Agency is considering the possibility of implementing a 20 year

balloon payment using a 33 or 38 year amortization in the final

regulation. This proposal is consistent with the position that the

Section 502 program is temporary financing to enable a very

[[Page 25631]] low- or low-income family to obtain affordable housing.

The objective of the program is to eventually graduate the borrower to

other conventional sources of credit. The majority of RHCDS existing

borrowers pay their loans in full within 12 years of loan closing. In

additions to this, the provision related to this topic in the text is

Section 1944.25 Rates and terms, paragraph (b) Amortization.

Prior Requests for Comments ---------

In order to allow the public an opportunity to voice their concerns

regarding the proposed revisions, FmHA published an Advance Notice of

Proposed Rule Making in the Federal Register on Tuesday, April 28,

1992, (57 FR 17858), which outlined the major issues proposed for

revision and provided for a 30-day comment period which ended on May

28, 1992.

Note: At the time of the Advance Notice of Proposed Rule Making,

the Agency referred to its ``Interest Credit Assistance'' program

for single family housing loans. This rule proposes to rename this

program to ``Payment Assistance'' and all future references in this

proposal are under that title.

Twenty-five comments were received in response to the Advance

Notice of Proposed Rule Making. Fourteen comments were from RHCDS or

other Federal Agency personnel. Two comments were received from groups

representing public utilities (electric and gas companies). In

addition, nine comments were received from individuals and various

public interest groups. All of the comments received were considered in

the development of this proposed rule. Comments were on the following

issues which were addressed in the Advance Notice of Proposed Rule

Making:

I. Use of the HUD ``CAPs'' in Defining ``Modest'' Housing

As stated previously, existing RHCDS single family housing

regulations have restricted the type of housing financed by limiting

the size, design, and amenities of the dwelling. The Advance Notice

proposed eliminating all such restrictions relative to ``modest''

housing and proposed that financing be limited to the dollar ``CAP''

established by HUD. Twenty-four respondents commented on this proposal.

Fifteen of the respondents submitted comments in support of this

revision; five respondents were against the proposal; and four had

mixed feelings. Most respondents had both pro and con comments. Those

respondents who supported the concept of the proposal, felt that the

revision would improve RHCDS's image, remove the stigma of

``subsidized'' housing, provide for flexibility of architectural

design, provide freedom of choice for RHCDS applicants, reduce the

number of appeals, simplify procedures, provide greater time savings,

and provide uniformity in the definition of modest housing nationwide.

In addition, these respondents felt that the proposal would provide for

appreciation in the market value of RHCDS properties and increased

equity for homeowners, and would alleviate problems with local

governments and help to promote low-income housing.

Several of the respondents had problems with the use of the HUD

``CAPs'' stating they were not equitable, being too high in some areas

and too low in others and that they were inflexible and hard to change,

providing bias to existing homeowners and Real Estate Brokers. Based on

these comments, the Agency proposes to use 85 percent of the HUD

mortgage limits but has incorporated procedures for increasing the CAPs

in certain situations. Other respondents felt that the CAPs would

result in higher priced housing which, together with market inflation,

would result in a need for higher subsidies. One respondent felt that

it would force lower income families into older, cheaper units.

Based on the study done by the Agency to measure the effects of the

use of HUD CAPs, proposed changes to the payment assistance program,

and the use of income ratios for determining repayment ability, the

Agency feels that the price of housing financed would be limited not

only by the HUD CAP, but by the market value of the property as

reflected on a current real estate appraisal, and the applicant's

repayment ability based on the proposed income ratios and the revised

method of granting payment assistance. The study does not indicate that

this change will result in lower-income families being forced into

older, cheaper units.

Several respondents expressed concern that RHCDS programs were

becoming more like HUD programs and that the use of the CAPs would

result in less control for RHCDS. Many of the respondents felt that the

use of the HUD CAPs discriminates against ``one person'' and ``large''

households and felt that the use of CAPs would eliminate RHCDS

financing in some areas where the CAPs are not in line with the cost of

housing in the area. The Agency has revised the proposal to address

these concerns in Sec. 1944.17. There was also concern expressed

regarding potential size and additional cost items if the definition of

modest housing is changed. The Agency feels that increased housing

costs will be limited due to the new method of calculating payment

assistance.

In accordance with the Energy Policy Act of 1992, Public Law 102-

486, the Agency has adopted the Council of American Building Officials

(CABO) Model Energy Code, 1992 (MEC-92) for new construction of single

family homes other than manufactured homes. The Agency has deleted

specific loan approval authorities in the field, relying instead on the

established HUD CAP limits adopted. In addition, the Agency has agreed

to grant a waiver to allow the loan to exceed market value for

handicapped-accessible homes by no more than the cost of the amenities.

RHCDS has decided not to adopt recommendations to restrict

financing on housing constructed prior to 1953 in order to avoid

problems with lead based paint, provide safeguards describing minimum

standards allowed under RHCDS financing, establish RHCDS CAPs based on

the State Directors' knowledge of their individual areas, and require

40 percent of very low-income housing on all conditional commitments.

However, the Agency has provided for waivers on CAP limits under

certain circumstances and has included a requirement that repairs

required as a condition of loan approval will be performed, after loan

closing, in accordance with HUD Handbook 4905-1, ``1-4 Family Living

Units,'' (available in any RHCDS field office). The Agency will

continue to adhere to its present requirements contained in subpart A

of part 1924 of this chapter regarding new construction and will

require all dwellings repaired with RH loan funds to be structurally

sound, functionally adequate, and placed in good repair. All dwellings

financed must still provide decent, safe, and sanitary housing.

II. The Use of Income Ratios Instead of a Family Budget for Determining

Repayment Ability

In the past, RHCDS has utilized a family budget to determine debt

repayment. Twenty-one respondents commented on the proposal to

eliminate the family budget as a determinant of repayment ability and

instead rely on the use of income ratios similar to those used in the

single family guaranteed housing program. Ten respondents were in favor

of this proposal and ten opposed. The remaining respondent indicated a

need for additional information before making a decision.

Those respondents who supported this revision felt that adoption of

this proposal would result in considerable [[Page 25632]] savings in

time and effort, would provide for simplification of the eligibility

process, would result in fewer appeals, and would eliminate

subjectivity. In addition, there were several comments that the family

budget is subjective in nature, difficult to defend, and useless

without clear guidelines for individual cost items. It was generally

felt by these respondents that adopting the use of income ratios as a

determinate of an applicant's repayment ability would be consistent

with industry standards and a benefit to RHCDS and loan applicants.

Several of the respondents opposed to this measure stated that

income ratios were not appropriate for RHCDS clientele. It was felt

that the low- and very low-income groups that RHCDS assists live within

their TOTAL income and not a percent of their income, and that these

were high risk loans requiring a high degree of accuracy when

determining repayment ability. Several respondents felt that income

ratios would result in loans to people without repayment ability due to

their high percentage of living expenses. Another area of concern was

the difficulty of developing ratios which would work for households, in

all situations, nationwide. They felt that ratios were inflexible and

would rule out those who do not fit the mold but who have repayment

ability, and it was feared that the use of ratios would eliminate many

very low- and low-income families. There were recommendations that

flexibility be built into the income ratios for adjustments where

projected costs are equal to or less than current rent, that ``non-

income'' benefits be incorporated into the calculation, that

compensating factors such as used by Fannie Mae be included, and that

an allowance be provided for the lower end of the income structure.

Two respondents suggested an in-depth study be made to analyze

where the PITI and MOTI ratios should be set, and one respondent

suggested combining ratios with the family budget for borderline cases

with justification for expenses which are deemed by RHCDS to be

abnormally low. In addition, there were several recommendations

relative to actual ratios which should be used.

All of these comments were taken under consideration when arriving

at the ratios established. The study undertaken by the Agency supports

the use of a 29 percent PITI ratio; 94 percent of existing RHCDS

borrowers would still qualify using this ratio. The decision to use a

29 percent ratio is supported by the fact that it is the same ratio

used in the Agency's guaranteed housing loan program. The Agency

proposes to establish the MOTI ratio at 41 percent. Both ratios will be

based on the applicant's gross income.

The Agency's experience with income ratios in the guaranteed

housing program and the study recently conducted indicates the proposed

system should provide consistency in determining repayment ability in a

better, less subjective manner that will improve our underwriting

criteria and loan portfolio and be consistent with industry standards.

Based on the comments received and the results of the study conducted,

the Agency has incorporated exceptions to the use of income ratios when

repayment ratios do not support adequate repayment ability for the

proposed loan, if the applicant can demonstrate a history of meeting

equal or greater housing related costs in the past 6 months in similar

financial circumstances than projected housing costs, or where the

applicant demonstrates that the use of a budget is a better determinant

of repayment ability than ratios for their particular circumstances.

Income ratios proposed are contained in Sec. 1944.8(a)(3).

Other objections to this proposal included concerns that the Agency

would no longer be a source of supervised credit, would lose valuable

skills in money management that are still needed for loan servicing,

and would require additional training to adapt to the new system. The

Agency feels that a supervisory counseling role is fundamental to its

mission and does not foresee a change in this regard. RHCDS will

continue to be a ``hands on'' Agency and will provide credit and

financial counseling to suit each applicant's individual needs to

assure the applicant's success as a homeowner. Where the applicant does

not demonstrate adequate repayment ability, or otherwise meet loan

making criteria, RHCDS is prepared to discuss and advise the applicant

regarding other alternatives such as reducing amenities, increasing

sources of income, reduction of debt load, obtaining a cosigner, or

constructing the home by the self-help method.

III. Revision of the Payment Assistance Calculation

RHCDS proposes to revise their method of providing ``payment

assistance'' on new loans. As noted previously, this program was

formerly known as ``interest credit assistance.'' Under this proposal,

only procedures for payment assistance that will be processed in

connection with loan processing will be included in subpart A of part

1944. All other payment assistance and deferred mortgage payment

actions, including renewals and other servicing actions are transferred

to subpart G of part 1951.

(a) Existing Payment Assistance System

Currently, RHCDS calculates the amount of payment assistance needed

based on a formula which takes into consideration the annual real

estate taxes and property insurance premiums to be paid by the

applicant/borrower and their adjusted family income. Under the current

program, a borrower pays 20 percent of the borrower's adjusted family

income for PITI (but never less than the loan amortized at a 1 percent

interest rate). This procedure has given the applicant little incentive

to look for an inexpensive home since the payment by the borrower

generally did not increase drastically as a result of a higher loan

amount. Under this program, an applicant/borrower must have a very low-

or low-adjusted income to initially receive payment assistance.

However, many applicants/borrowers with acceptable income levels who

obtain small loans, will often not qualify for payment assistance under

the present procedure since their PITI is less than 20 percent. This

has resulted in inequities in the system.

(b) Proposed Payment Assistance System

As explained above, under the current method of providing payment

assistance, many families attempting to purchase inexpensive homes are

denied assistance if the formula does not indicate that PITI will

exceed 20 percent of adjusted family income. Conversely, many other

applicants, purchasing homes in the higher cost ranges, receive maximum

payment assistance even though their incomes are often in the higher

ranges allowable under the program. To eliminate these inequities, the

proposed method will provide a range of equivalent rates of interest

for all new loans (including assumptions), and subsequent loans of

existing borrowers based on area median income, regardless of the

amount of the loan. The chart for determining the appropriate interest

rate paid by RHCDS applicants/borrowers on loans closed after this rule

becomes effective, is defined in Sec. 1944.34(c). Exceptions have been

incorporated which will provide for additional assistance where needed

to allow very low- and low-income applicants to obtain or retain

housing or to allow very low-, low-, or moderate-income RHCDS borrowers

to retain housing.

The proposed payment assistance system includes floors which are

[[Page 25633]] minimum percentages of adjusted gross income. The floor

for very low-income is 22 percent and for low-income is 26 percent of

adjusted family income. A new borrower will pay PITI at the minimum

percentage floor of adjusted gross income or at the equivalent interest

rate, whichever is greater. For loans closed under the proposed system,

the borrower will never pay more than the note interest rate for the

monthly installment.

It is intended that this proposal will encourage applicants to shop

for a home within their repayment ability instead of relying on the

higher cost of a home to drive the equivalent interest rate down to 1

percent which often results under the current system of payment

assistance.

The interest rates established for each income level were based on

the results of a study conducted by the Agency. The Agency ran a

comparison between the proposed system and the old system on a control

group in nine states. The new system will result in slightly higher

payments for new borrowers in the higher range of income. Existing

RHCDS borrowers who are currently receiving payment assistance, will

continue under the system in effect prior to the effective date of this

rule.

Under the current system, the payment assistance agreement is

effective for a 12-month period based on the applicant/borrower's

projected, verified income. The Agency proposes to revise the renewal

period for self-employed borrowers to coincide with the borrower's

business fiscal year. The Agency also proposes to eliminate the limit

on the amount of net family assets an applicant/borrower may have when

qualifying for payment assistance.

(c) Responses to the Advance Notice of Proposed Rule Making

Nineteen respondents commented on this proposal. Five of these

comments supported the proposal, eight were opposed, and six

respondents indicated they needed more information before deciding.

Those respondents who supported this concept stated they felt the

proposal would save considerable effort and time, would simplify the

process, would be more fair, would be easier to define and defend,

would provide an incentive to seek less costly housing, would stimulate

the rural economy and save on subsidy, and would provide the applicant/

borrower a means to see the range of payments up front so they could

budget future costs accordingly.

Of those respondents who were not in support of this proposal,

several felt that the lowest-income families would be penalized since

they pay the largest portion of income toward housing costs and this

method could result in families paying more than 30 percent for their

housing costs. One respondent felt that the system would be ineffective

in their area since median income is skewed due to a large population

of low-income college students. Several respondents felt that the

proposed system would be nonresponsive to individual applicant/

borrower's needs, would exclude more families than it includes, did not

provide for an applicant/borrower's future loss of income, and could

result in more loan failures. There were also comments that there would

be high costs involved in retraining RHCDS employees in the new system.

The original proposal provided that applicants/borrowers whose

homes were located in a high cost area as established by HUD would

automatically qualify for a reduction in their equivalent interest rate

of 1 percent. One respondent felt that the Agency was experiencing

problems in high cost and high real estate tax areas in the single

family housing guaranteed program which would be intensified in the

section 502 loan program. Several respondents were not clear how the

additional 1 percentage point subsidy in a high cost area would help.

The Agency has re-examined this issue and has decided to revise this

provision by providing exception authority for a reduction in the

equivalent rate of interest by 1 percentage point, when applicants in

high cost areas lack repayment ability without additional payment

assistance.

In addition to the above, there were two recommendations for

specific subsidy rates to be utilized. There was also a suggestion to

calculate annual income on the basis of past earnings rather than on

projected income. The Agency is mandated to utilize the same

calculations for annual income as are used by HUD, therefore, this

suggestions was not adopted. There appeared to be an opinion that once

the equivalent interest rate was set based on the family's income at

the time of loan approval it could never be changed downward, and that

only applicants/borrowers living in high cost areas would be eligible

for an equivalent interest rate of 1 percent. Neither of these

assumptions are correct.

There was a recommendation that RHCDS allow a change in payment

assistance when a borrower's income increases; this will be handled

under the sliding scale, the same as a loss of income. One respondent

suggested a change in the recapture calculation and this regulation is

in the process of being revised. There was a recommendation that the

payment assistance agreement, deferral, and recapture forms be

consolidated. The Agency has partially accepted this recommendation by

use of a separate payment assistance/deferral/repayment form for

applicants/borrowers receiving deferral assistance.

We urge all readers to thoroughly review this proposal and provide

us with their detailed recommendations for any changes suggested.

IV. Revision of the Method Used for Selection and Processing of

Applications

The Agency intends to streamline its method of selecting and

processing loan applications. When this section was revised, ``Fund

Allocation'' was included under Sec. 1944.26 and ``Application

Processing'' was completely revised and transferred to Sec. 1944.27.

Those instructions for application processing located in subpart A of

part 1910 which were exclusive to Single Family Housing applications

have been moved to subpart A of part 1944, which already contained some

application processing instructions. This section now contains a clear

definition of a complete RH application and guidance for dealing with

an incomplete RH application.

In the past, RHCDS has often required that an application package

include a credit report fee as well as information on the house to be

financed at the time of application, despite the fact that there were

often large backlogs of applications on hand or a lack of loan funds.

This resulted in delays to prospective sellers of property and the need

for reverification of information, sometimes at additional cost. Under

the proposed rule, RHCDS will access HUD's Credit Alert Interactive

Voice Response System (CAIVRS) to determine if the applicant is

delinquent on a Federal debt. If a delinquent Federal debt is

identified through CAIVRS, processing on the application will be

suspended and the applicant notified to contact the appropriate Federal

agency to resolve the delinquency. An outstanding judgment obtained by

the United States in a Federal Court (other than the United States Tax

Court), which has been recorded, shall cause the applicant to be

ineligible for loan assistance until the judgment is paid in full or

otherwise resolved. When the delinquency has been paid in full or

otherwise resolved, processing of the application will be continued;

RHCDS loan funds may not be used to satisfy an outstanding judgment. If

a judgment remains outstanding or the applicant is unable to resolve a

Federal debt delinquency, the [[Page 25634]] application will be

rejected and the applicant notified of the rights of appeal. In

addition, RHCDS will order an on-line profile credit report, where

available, on each application received. Derogative credit reported

will be discussed with the applicant and information on the address and

telephone number of the credit repository provided so that the

applicant may resolve potential credit problems. Applicants will not be

rejected on the basis of the on-line credit report; this service is

provided for the primary purpose of allowing the applicant to identify

potential credit problems prior to paying a fee for a credit report and

to clarify the difference between eligibility for program assistance

and loan approval. RHCDS will make a preliminary determination of

eligibility upon receipt of an application based on the information

provided on the application form and the information received as a

result of the CAIVRS inquiry and on-line credit report. A final

determination of eligibility will be made after the application is

selected for processing and all information necessary to determine

eligibility for the RH program has been verified.

Under current regulations, the Agency assigns a processing priority

to each application. The County Supervisor selects a number of

applications to be processed each quarter based on assigned priority

and availability of loan funds. The Agency has determined that this

system does not adequately serve the neediest applicants and facilitate

efficient loan processing.

The Agency proposes to provide for a separate reserve of loan funds

to be held by the State Director for priority applications. This

reserve will include hardship cases as determined by the State

Director, including applicants living in deficient housing,

applications for refinancing of debts, servicing type loans to existing

RHCDS borrowers for essential improvements or repairs, loans for the

purchase of Government-owned inventory properties, subsequent loans in

connection with assumptions of existing RHCDS loans, and mutual self-

help housing loans. These priority applications as well as applications

for the purchase of Government-owned inventory property or assumption

of existing RHCDS loans, will be processed immediately, and will not

compete for the same pool of funds as other applications. All other

applications will be considered for processing in date order.

If an applicant is clearly not eligible, an applicant may be

rejected upon receipt of the application. Applications received from

persons who appear to meet basic eligibility requirements for the

program will be held until funding is available. Each quarter the

County Supervisor, with guidance from the District Office, will select

enough applicants/borrowers to potentially fund 175 percent of the

anticipated quarterly allotment. This figure is an administrative

determination based on information available for applications on hand,

percent of applications rejected and withdrawn, and number of loans

closed per quarter. It is anticipated that almost half of the

applications selected for processing will not be processed to the point

of loan closing due to ineligibility, marital changes, lack of

interest, and other reasons.

Applicants/borrowers selected will be advised in writing that they

have 30 days to supply information needed for verifying data submitted

on their applications, including any fees for credit reports, so a

final determination of eligibility can be made. Detailed guidance is

provided regarding the means of verifying data. The proposed regulation

continues RHCDS's general policy that written income verification is

the preferred method of income verification. When an applicant/

borrower's eligibility for an RH loan is determined, the income

verification must not be more than 90-days old. In addition, RHCDS will

continue to require a copy of the applicant/borrower's most recently

filed income tax return and will randomly spot-check reported wages

through wage matching sources, where available, for 5 percent of all

applications where all adult members of the household are employed

full-time. Income for all other applicants/borrowers, including those

with non-taxable income, will be confirmed through this source where it

is available. Applicants/borrowers who are supposed to receive court

ordered alimony or child support but who actually do not receive it,

may certify that they have exhausted all efforts to collect same, and

in such cases, the alimony/child support will not be included in the

applicant/borrower's annual income. The applicant interview section has

been expanded to include discussion of all new requirements such as

income ratios, HUD CAPs, and penalties connected with providing false

information.

Once a final determination of eligibility has been made, the Agency

will issue a ``Certificate of Eligibility,'' valid for 90 days, to

eligible RH applicants who have been selected for processing. The

applicant may take the certificate to real estate agents, builders, and

sellers to verify eligibility for an RHCDS loan. The certificate will

not guarantee that adequate funds are available, but is intended to

assist applicants in locating an adequate home within their repayment

ability and reduce application processing time. The applicant will be

required to submit information on the dwelling to be financed within 90

days or the application will be withdrawn unless an extension is

granted. There will be a maximum of two 60-day extensions allowed if

the applicant is actively working on supplying the requested

information.

Time guidelines for RHCDS actions have been added. Appraisals will

generally be completed within 30 days of submission of information

requested by RHCDS. After the appraisal is completed and required loan

approval information has been received, a loan will usually be approved

within 30 days. If no funding is available, it will be held as an

approved loan until the next quarter's funding becomes available.

Sixteen comments were received as a result of the summary of

proposed revisions published as a Notice of Proposed Rule Making; eight

supported the proposal, three opposed it, and five indicated they did

not have enough information to make an evaluation. Those who supported

the proposal felt it was a positive approach, would reduce and help

manage backlogs of applications, would address the most urgent cases

according to need, would result in considerable time savings and be

less difficult to explain, and would result in greater assurance of

fund availability for Self-Help Housing applications.

Of those respondents who did not support this proposal, several

felt the proposed system had potential for discrimination, that it

would extend the selection/approval period by an additional 30 days and

there was no provision for people living in substandard housing to be

handled as a priority. It should be noted that the hardship reserve

established by the State Director does include applicants living in

substandard housing and there has been no extension of the application

selection/approval time. The Agency finds no basis for the comment

regarding the potential for discrimination.

There were also comments that the Certificate of Eligibility would

create a lot of extra work for RHCDS with little or no benefit and was

valueless since RHCDS was the lender. The certificate will provide

information on the maximum loan limit, the repayment

[[Page 25635]] ratios, and the effective interest rate based on the

applicant's projected income. It will be the responsibility of the Real

Estate Broker, contractor, or packager to work with the applicant to

find a suitable home that fits within the repayment parameters of the

certificate. RHCDS feels there is little extra work created by this

form, that it will encourage Real Estate Brokers and contractors to

work with an applicant in finding suitable housing, and would provide

for the orderly processing of loan applications.

One respondent felt that 175 percent of the allocation for loan

processing was too restrictive, and another felt that the number of

applications processed should be left to the discretion of the State

Director based on local conditions. The Agency states that 175 percent

is the minimum required and is, therefore, not restrictive. It was also

decided to make this a nationwide requirement in order to provide

consistency in the program.

A recommendation was made to retain the National Office's annual

``pooling'' of loan funds; there is no plan to eliminate this

provision. Another recommendation was made to provide for sufficient

funds in the priority reserve pool; the proposal allows the State

Director to determine the amount retained in this pool based on

historical or other data available. Other suggestions included

restricting the Certificate of Eligibility to applicants who have

submitted all information necessary for loan processing, requiring a

sales agreement for a completed application, and limiting the

Certificate of Eligibility renewal to one 90-day period.

Restricting the certificate as requested, would negate the purpose

for the form. The information on the Certificate will assist the

applicant to find suitable housing at a price the applicant can afford.

Once the house is found, data necessary for an appraisal and loan

processing is submitted to the RHCDS field office. Extensions to this

90-day period will only be granted when the applicant presents evidence

that the applicant is actively working on supplying the information

requested. There will be a maximum of two 60-day extensions allowed.

One respondent requested a definition of hardship so as to

eliminate politics, and to include persons living in substandard

housing as a hardship. The definition of hardship is left to the

discretion of the State Director on a case-by-case basis but will

include persons living in deficient housing as defined in Sec. 1944.2

for more than 6 months. The Agency feels that it would be too

restrictive to place a definition on what constitutes a hardship since

it is impossible to address every situation, but a new definition for

deficient housing has been included.

The last comment was a suggestion to separate low- and very low-

income application processing. The Agency feels this would be too

cumbersome and has not included this suggestion in the proposed rule.

Other Changes Proposed

In addition to the four issues addressed in the Advance Notice of

Proposed Rule, the Agency proposes to make the following changes in

subpart A of part 1944 regarding single family housing loans:

General

The section dealing with denial of loans and services on a

discriminatory basis has been revised to include the term ``familial

status'' as required under the Fair Housing Amendments Act of 1988.

This section has also been revised to provide that applicants for

assistance are required to identify any known relationship or

association with an RHCDS employee and provides for reasonable

accommodations for applicants with developmental disabilities as

required under the 1988 amendments to the Fair Housing Act and the

Americans with Disabilities Act of 1990. This revision also provides

for the collection of fees for real estate appraisals.

Definitions

Several new definitions have been added and some existing

definitions have been revised to more clearly describe annual payment

borrowers, certificate of eligibility, conditional commitment,

cosigners, deficient housing, elderly family, existing dwellings,

household or family, income, insurance, live-in aides, median income,

minors, monthly payment borrowers, net family assets, payment

assistance, and real estate taxes.

Loan Purposes

The proposed change incorporates the provisions of Sec. 315 of the

Housing and Community Development Act of 1987, Pub.L. 100-242, which

added Sec. 501(i) of the Housing Act of 1949; loan funds may be used to

pay loan packaging fees when the application is packaged by qualified

public or private nonprofit organizations exempt under the Internal

Revenue Code of 1986. Packaging fees are not authorized for inventory

property sales. In addition, the cost of personal liability insurance

for Self-Help Housing applicants/borrowers has been added as an

authorized loan purpose. A section has also been included to allow the

purchase of single family housing units located in Planned Unit

Developments (PUDs) under certain conditions.

Loan Restrictions

The restriction against income-producing property has been revised

to more clearly define those types of home-based operations that will

be allowed under certain conditions, such as the production of crafts,

child care facilities, etc. Small businesses which are run from the

home which do not require specifically designed features to accommodate

the enterprise will not be restricted; however, housing related

expenses which are claimed as business expense deductions for income

tax purposes, such as real estate taxes, mortgage interest, etc., will

not be allowed when determining income eligibility for RHCDS

assistance.

The restriction against packaging fees has been lifted as it

pertains to public and private non-profit organizations. Restrictions

regarding loans to former RHCDS borrowers who sold their homes within

the last 2 years have been deleted. Restrictions regarding applicants/

borrowers who have demonstrated an inability to carry out the required

obligations of the loan have been removed and transferred to the

section dealing with other eligibility requirements.

The Agency has further clarified that funds may not be used to

refinance debts on a manufactured home and that loan funds may not be

used to pay off existing RHCDS debts in lieu of an assumption.

Income

RHCDS is required by the Housing Act of 1949, as amended, to use

income definitions established by HUD; however, several definitions

have been revised or added for clarification purposes. Income

definitions have been revised to include cost of living allowances

(COLAs) or other proposed increases in income expected to take place on

or before loan approval, loan closing, or the effective date of the

payment assistance agreement. Clarification has been added regarding

allowance of deductions for verified business related expenses which

are not reimbursed for salaried employees. Revisions have been made to

allow the applicant/borrower to certify that court awarded alimony and/

or child support is not being received after all reasonable efforts for

enforcing same have been exhausted. Amounts received for educational

scholarships and allowable [[Page 25636]] deductions have been more

clearly defined. Income which a Federal statute exempts has been

removed from this section and transferred to exhibit J (available in

any RHCDS field office). Income of live-in aides is defined.

The 6-month waiting period is being removed where the spouse is

living apart from the household and separation or divorce proceedings

have not been initiated. The proposal clarifies that medical expenses

anticipated for an elderly family may be for any household member.

Income Eligibility Requirements

As noted previously, the Agency has moved from determining

repayment ability on the basis of a budget and is relying on income

ratios. As a result of the study conducted by the Agency, where ratios

do not support adequate repayment for the proposed loan, exceptions to

the use of ratios have been added where the applicant can present

evidence of meeting similar costs in similar circumstances over the

past 6 months or where the use of a budget is a better method of

determining repayment ability for a particular applicant/borrower's

circumstances. Income ratios have been defined in Sec. 1944.8(a)(3).

The proposal also clarifies the responsibilities of a cosigner on an

RHCDS loan.

Other Eligibility Requirements

The Agency has included a provision that applicants will be

expected to utilize nonessential liquid assets to reduce the amount of

loan needed. Information on verification of alien status has been

transferred to exhibit B (available in any RHCDS field office).

Credit history standards have been slightly liberalized to allow up

to two debt payments more than 30 days late within the last 12 months

and to allow one rent payment paid 30 days or more past due within the

last 2 years. In addition, the section dealing with outstanding

collection accounts has been rewritten to clarify that collection

accounts paid off within 3 months of filing an application for RHCDS

assistance will be considered as an indicator of an unacceptable credit

history unless there is a record of regular payments maintained prior

to the final payment. This clarification was necessary to prohibit

persons with unsatisfactory credit from paying off this indebtedness

for the sole purpose of obtaining an RHCDS loan.

Pursuant to the Federal Debt Collection Act of 1990, Pub. L. 101-

647 (Nov. 29, 1990), prohibits making a loan to an applicant/borrower

who has a judgment which is or could become a lien against the debtor's

property for a debt owed to the United States Government until the

judgment is paid in full or otherwise satisfied. The RHCDS

Administrator may waive this requirement upon making a determination

that it is in the best interest of the Government to do so.

In addition to referral for criminal prosecution, RHCDS plans to

debar applicants/borrowers who have falsified applications and/or

income information submitted to RHCDS for program eligibility purposes.

Applicants/borrowers who have a documented history of inability to

carry out the required obligations of a RHCDS RH loan will be denied

assistance.

Rural Areas

This section has been revised to require a ``buffer'' zone of open

space incorporated as an ineligible area when new boundaries are drawn.

Rapid growth areas and eligible areas within an Metropolitan

Statistical Area (MSA) will be reviewed for eligibility every 3 years

or more often as needed, instead of the 5-year review required for

other areas. In addition, RHCDS is now required to consult with local

planning boards, where available, at the time of each review to assure

that open spaces identified are not scheduled for development in the

near future. These changes are a direct result of recommendations made

by the Office of Inspector General (OIG) during past audits.

Site Requirements

Currently, RHCDS generally restricts financing to sites of 1 acre

or less. Due to the large number of exceptions which have been

requested, the Agency proposes to broaden its definition of an adequate

site to include those sites which cannot be subdivided into two or more

sites under current zoning ordinance requirements for the area. In

addition, the proposal clarifies the requirements for other than

central waste and water disposal systems, and requires a legally

binding agreement which allows interested third parties to enforce the

obligation of the owner/operator of privately owned water and waste/

water disposal systems to provide satisfactory service at reasonable

rates.

Ownership Requirements

Buyers and sellers under a recorded land purchase contract must

convert the purchaser's interest to a deed/mortgage or trust deed

situation prior to loan closing.

Conditions for allowable leases are simplified and changed to

require that unless the loan is guaranteed by a public agency or Indian

housing authority, the remaining term of the lease must be at least 150

percent greater than the term of the RHCDS loan. If the loan is

guaranteed by a public agency or Indian housing authority, the

remaining term must be at least 2 years longer than the repayment

period of the RHCDS loan. In no case may the remaining term of the

lease be less than 15 years.

Dwelling Requirements

All references to modest housing, characteristics of new dwellings,

dwelling designs and materials, prohibited features and amenities, and

permitted features have been removed. Homes financed must still provide

decent, safe, and sanitary housing but loan amounts will be limited to

85 percent of the HUD established mortgage limits unless an exception

is granted. In-ground swimming pools and income producing properties

are still prohibited except as discussed under loan restrictions. The

section on existing dwellings has been revised to provide for

inspections by RHCDS or disinterested third parties. Repairs to

existing dwellings will be done after loan closing and performed in

accordance with HUD Handbook 4905.1, ``1-4 Family Living Units.''

Maximum Loan Amounts

RHCDS recognizes that the revision allowing fees for appraisals as

an authorized loan purpose will likely result in the need for loan

funds in excess of the purchase price of the dwelling. Most applicants/

borrowers would not be expected to have the resources to pay this

additional cost. RHCDS believes it is necessary to allow the financing

of this fee. The Agency proposes a revision to permit loans in excess

of the appraised value or the purchase price of the dwelling (whichever

is less) for most program type loans.

The loan amount may not exceed 85 percent of the maximum dollar

limitation of section 203(b) of the National Housing Act (12 U.S.C.

1702), unless authorized by the State Director or RHCDS Administrator.

These amounts are the HUD established CAPs and are available from any

HUD office. Exceptions to these loan limits are provided for where the

existing HUD mortgage limit is insufficient to provide adequate housing

for RHCDS applicants/borrowers or where different mortgage limits exist

in adjoining areas of the same community. Exceptions have also been

provided for the needs of larger families or to accommodate a disabled

or disabled household member. [[Page 25637]]

Security Requirements

The section on mortgage insurance has been revised to clarify what

is needed in State supplements when financing is provided to a holder

of possessory rights on an American Indian reservation or State-owned

land.

The section on best mortgage obtainable has been revised to provide

that title clearance and legal services required under subpart B of

part 1927 are waived when taking a real estate mortgage to secure a

subsequent loan to an existing RHCDS borrower for minimal essential

repairs which are necessary to preserve the Government's security.

The proposed regulation contains a new provision regarding the

amount of attorney fees permitted for foreclosures on prior mortgages

when RHCDS is requested to take a subordinate lien position. The

current regulation prohibits the charge of a flat fee of more than 5

percent; the proposal will limit these costs to that customary for the

area.

The section on life estates has been revised to provide for a

guardian or conservator for the remainder interests of a person who is

not legally competent. Land purchase contracts must be converted to a

deed/mortgage situation to be considered for financing.

Refinancing Non-RHCDS Debts

This section has been renamed and the section dealing with

refinancing of RHCDS debts has been moved to the section dealing with

loan restrictions. This section has been revised to clarify that

refinancing of non-RHCDS debts is not permitted on manufactured homes.

In addition, this section has been broadened to permit refinancing of a

debt that is not currently delinquent when it is clear that the

applicant will be unable to continue to maintain payments for reasons

beyond the applicant's control, and this will likely result in the

applicant's loss of the dwelling at an early date if the debt is not

refinanced. The Agency has removed its restriction on the use of loan

funds to refinance non-RHCDS debts on building sites without a dwelling

under certain conditions.

Loans to Farm Ownership (FO), Individual Soil and Water (SW) and

Recreation (RL) Borrowers

This section has been removed from subpart A of part 1944 as being

unnecessary. There are no restrictions on such loans.

Technical Services

As noted previously, there will be an appraisal fee charged for

each application involving an appraisal. Sales of a Government-owned

inventory property do not require an appraisal, and, therefore, no

appraisal fee will be charged in these cases. This fee will be the

applicant/borrower's responsibility and may be included as a loan cost

if the applicant/borrower chooses. Appraisals will generally be

completed within 30 days of receipt of the information requested when

the Certificate of Eligibility is issued to the applicant.

The collection of appraisal fees has been waived for appraisals

done for subsequent loans being made to existing RHCDS borrowers for

minimal essential repairs necessary to protect the Government's

security.

The limit on total indebtedness necessitating a real estate

appraisal has been raised from $7,500 to $15,000. There has also been a

change to indicate that a real estate appraisal is not required when

making a loan to an existing RHCDS borrower where the existing real

estate appraisal indicates the property value is sufficient to secure

the total real estate indebtedness when the total debt, including the

planned loan, does not exceed the amount of the original loan.

Rates and Terms

This section has been revised to remove the paragraph regarding the

source of funds, reword the section on eligibility for 38-year terms,

and remove the section dealing with Repair and Rehabilitation loans.

Under the revised payment assistance method, there is no benefit in

making these loans and the authority for same is removed.

Preparation of Loan Docket

This section has been removed from the body of the instruction and

transferred to exhibit E (available in any RHCDS field office).

Loan Approval

Time guidelines have been included to provide that loans will

generally be approved within 30 days of receipt of information needed

to complete the loan docket.

Loan Closing

This section has been revised to require that all new loans will be

closed on a monthly basis with the exception of existing RHCDS

borrowers who have annual payment promissory notes.

Deferred Mortgage Payments

This section has been revised to clarify the provisions of the

program. The Agency has increased the percentage of PITI used in the

calculation to determine eligibility for deferred mortgage payments

from 20 percent of adjusted family income to 29 percent of gross annual

income. Applicants whose PITI ratio exceeds 29 percent of gross annual

income will be considered for a longer term loan; if the PITI ratio,

calculated at a 1 percent equivalent rate of interest for the maximum

loan term still exceeds 29 percent of gross annual income, the

applicant will qualify for additional subsidy in the amount of .25

percent of the payment at the 1 percent equivalent rate of interest.

Subsequent Loans

A requirement that a new credit report will be obtained for all

applicants for subsequent loans has been included. Reference has been

made to the waiver of title clearance and appraisal fees for subsequent

loans made for essential repairs as provided in Sec. Sec. 1944.18 and

1944.24.

Mutual Self-Help Housing

This section has been rewritten for clarification.

Housing Demonstration Programs

Section 1944.41 has been added to this subpart to authorize

demonstration housing programs. In the past, demonstration programs

have been utilized to study the effects of various ways to provide

housing to meet the objectives of the RHCDS RH program in ways that

could not have been accomplished otherwise based on existing

regulations. Demonstration programs will be announced prior to

implementation.

Conditional Commitments

A conditional commitment is assurance by the Agency to an owner,

qualified builder, or dealer-contractor that a dwelling offered for

sale will be acceptable for purchase by a qualified RH loan applicant

under specified limited conditions. In the past, commitments has been

limited to the construction of new housing or the rehabilitation of

existing housing. The Agency has revised this section to allow a

conditional commitment on an existing house, with or without repairs.

This will allow a seller of a home to obtain a conditional commitment

prior to finding a buyer for the property.

The loan limit for a conditional commitment is currently the

appraised value of the property, less closing costs. Based on the

revision of the maximum loan amount discussed previously, the Agency

proposes to remove the requirement that the commitment amount be

reduced by the amount of [[Page 25638]] loan closing costs. In

addition, the Agency proposes to increase the charge for a conditional

commitment fee to cover the cost of a real estate appraisal and

required inspections. The holder of the conditional commitment will be

reimbursed for the appraisal portion of the fee at the time of loan

closing in an amount equal to the appraisal fee charged to the RHCDS

loan applicant.

Existing houses will be eligible for conditional commitments to

address the needs in those areas with an abundance of existing,

eligible housing. The restriction on 15 outstanding conditional

commitments in any one County has been removed.

An exception has been incorporated under certain conditions to

allow construction to begin prior to obligation of loan funds for a

qualified loan applicant. These exceptions will generally be limited to

situations where it is necessary to begin construction because of

impending weather conditions, and it is likely that funding will be

forthcoming shortly. Under this type of exception, sales agreements

must be modified to outline the circumstances under which the loan has

been approved, and provide an option for the contractor to terminate

the sales agreement if the loan is not funded and closed within 90

days. In these situations, the conditional commitment issued on the

property to be constructed will be honored by RHCDS for the remaining

commitment period to allow the commitment holder the opportunity of

finding another eligible loan applicant. The prior RHCDS loan applicant

will be issued a Certificate of Eligibility so that the applicant may

locate another suitable dwelling.

Rural Housing Disaster Loans and Construction Financing for Builders by

Private Credit Sources

These sections have been deleted from this subpart.

Exhibits to Subpart A of Part 1944.

The exhibits to this regulation are not required to be published.

They contain administrative requirements and will be available at any

RHCDS field office upon publication of the regulation.

Other Affected Regulations

Conforming changes which are necessary to other regulations as a

result of revisions proposed to subpart A of part 1944 will be done at

publication of the Final Rule. Revisions were necessary to the

following regulations as noted, due to the revisions proposed to

subpart A of part 1944:

Subpart A of Part 1910--Receiving and Processing Applications

Section 1910.4 has been revised to remove information on what

constitutes a completed RH application and verification of information

supplied with the application and to make minor editorial changes. This

information is now contained in subpart A of part 1944 of this chapter.

Other revisions made to conform with revisions to subpart A of part

1944 of this chapter.

Subpart J of Part 1944--Section 504 Rural Housing Loans and Grants

This section has been revised to provide a definition of ``owner-

occupant,'' allow payment of environmental and tax monitoring expenses

as an authorized loan purpose, limit packaging fees to $300, and

provide for the use of a guardian or conservator for incompetent

applicants. When evaluating an applicant's personal resources to meet

their housing needs, the Agency proposes to increase the limit for

liquid assets from $5,000 to $7,500; however, excess real estate must

be included in this evaluation. In addition, subsequent loans in areas

where the designation has recently changed from rural to nonrural, will

be limited to essential repairs.

Due to the increased cost of materials and labor, the Agency has

found it difficult to remove all major health and safety hazards under

existing loan and grant limits. For this reason, the maximum amount of

section 504 loan and grant assistance has been raised; the maximum loan

outstanding to any owner/occupant may not exceed $20,000 and the

maximum lifetime grant assistance to any owner/occupant may not exceed

$7,500. In addition, the Agency has increased the amount of total

indebtedness where a real estate appraisal is required to $20,000.

Subpart G of Part 1951--Borrower Supervision, Servicing, and Collection

of Single Family Housing Loan Accounts

A new section has been added for payment assistance. Corrections,

renewals, and cancellations of payment assistance agreements and

payment assistance granted as a servicing action on existing loans will

be handled under this section.

Clarification has been added regarding the preparation of payment

assistance agreements for applicants/borrowers who claim to have no

income and situations where the coapplicant/coborrower has left the

dwelling due to domestic discord.

While loans may be made only to low- or very low-income applicants

who will receive payment assistance, this assistance will also be

available to existing RHCDS borrowers with incomes that do not exceed

the moderate income limit. Corrections on existing agreements will be

processed when information is available to indicate a change in family

income that would change the amount of authorized payment assistance in

accordance with Sec. 1944.34(c). Applicants/borrowers will be required

to present a copy of their most recently filed federal income tax

return unless exempted from filing a return.

Subpart C of Part 1965--Security Servicing for Single Family Rural

Housing Loans

Minor changes have been made to bring this instruction into line

with proposed changes to subpart A of part 1944 relative to minimum

adequate sites and modest housing.

List of Subjects in 7 CFR Parts 1910, 1944, 1951, and 1965

Accounting servicing, Administrative practice and procedure, Aged,

Applications, Credit, Grant programs--Housing and community

development, Home improvement, Loan programs--Housing and community

development, Housing standards, Low- and moderate-income housing, Low-

and moderate-income housing--rental, Low- and moderate-income housing--

Servicing, Marital status discrimination, Mobile homes, Mortgages,

Nonprofit organizations, Rural areas, Rural housing, Sex

discrimination, Subsidies.

Therefore, as proposed, Chapter XVIII, Title 7, Code of Federal

Regulations is amended as follows:

PART 1910--GENERAL

1. The authority citation for part 1910 continues to read as

follows:-

Authority: 7 U.S.C. 1989, 42 U.S.C. 1480, 5 U.S.C. 301.

Subpart A--Receiving and Processing Applications

2. Section 1910.4 (a) is revised to read as follows:

Sec. 1910.4 Processing applications.

* * * * *

(a) Completed RH applications. Completed applications are those as

described in Sec. 1944.27 of subpart A of part 1944 (copies available

in any RHCDS field office), and all applications for Rural Housing

loans will be processed as outlined in that instruction.

* * * * * [[Page 25639]]

3. Section 1910.5 is amended by revising the reference

``1944.4(c)'' to read ``1944.9.'' in the last sentence of paragraph

(c)(6) and by adding a new paragraph (e) to read as follows:

Sec. 1910.5 Evaluating applications.

* * * * *

(e) Delinquency on a Federal debt. The Department of Housing and

Urban Development's Credit Alert Interactive Voice Response System

(CAIVRS) will be used to help determine if an applicant is delinquent

on any Federal debt.

Sec. 1910.6 [Amended]

4. Section 1910.6(g) is amended in the first sentence by revising

the words ``Rural Housing'' to read ``RH'' and by revising the

reference ``Sec. 1944.26'' to read ``Sec. 1944.27.''

PART 1944--HOUSING

7. The authority citation for part 1944 continues to read as

follows:

Authority: 7 U.S.C. 1989, 42 U.S.C. 1480, 5 U.S.C. 301.

8. Subpart A of part 1944 is revised to read as follows:

Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and

Authorizations

Sec.

1944.1 General.-

1944.2 Definitions.

1944.3 Loan purposes.-

1944.4 Loan restrictions.

1944.5 Annual income.

1944.6 Adjusted annual income.-

1944.7 [Reserved]-

1944.8 Income eligibility requirements.-

1944.9 Other eligibility requirements.-

1944.10 Rural area designation.-

1944.11 Site requirements.-

1944.12-1944.14 [Reserved]-

1944.15 Ownership requirements.-

1944.16 Dwelling requirements.-

1944.17 Maximum loan amounts.-

1944.18 Security requirements.-

1944.19-1944.21 [Reserved]-

1944.22 Refinancing non-RHCDS debts.-

1944.23 [Reserved]

1944.24 Technical services.-

1944.25 Rates and terms.

1944.26 Fund allocation.

1944.27 Application processing.-

1944.28-1944.30 [Reserved]

1944.31 Loan approval.

1944.32 [Reserved]

1944.33 Loan closing.-

1944.34 Payment assistance.

1944.35 Deferred mortgage payments.-

1944.36 [Reserved]

1944.37 Subsequent section 502 RH loans.-

1944.38 Mutual Self-Help Housing.-

1944.39 RH loans to RHCDS employees and loan closing officials.-

1944.40 [Reserved]-

1944.41 Housing demonstration programs.

1944.42-1944.44 [Reserved]

1944.45 Conditional commitments.-

1944.46 Appeals.

1944.47-1944.48 [Reserved]

1944.49 FmHA Instructions.

1944.50 [Reserved]

Subpart A--Section 502 Rural Housing Loan Policies, Procedures, and

Authorizations

Sec. 1944.1 General.

This Subpart sets forth the policies and procedures and delegates

authority for making section 502 Rural Housing (``RH'') loans to

individuals under title V of the Housing Act of 1949, as amended. The

objective of section 502 RH loans is to provide eligible persons who

will live in rural areas with an opportunity to own adequate but

modest, decent, safe, and sanitary dwellings and related facilities.

The requirements of subpart E of part 1901 will be applied as

appropriate. Loans and services provided under this subpart shall not

be denied to any person or applicant based on race, sex, national

origin, color, religion, marital status, familial status, age, physical

or mental disabled (applicant must possess the capacity to enter into a

legal contract for services or have a court appointed guardian/

conservator empowered to obligate the applicant in real estate

matters), receipt of income from public assistance, or because the

applicant/borrower has, in good faith, exercised any right under the

Consumer Protection Act.

(a) In compliance with the 1988 amendments to the Fair Housing Act

and the Americans with Disabilities Act of 1990, reasonable

accommodations must be given to individuals who are developmentally

disabled so that they have the opportunity to become successful

homeowners. When an applicant or an applicant's representative

indicates the existence of a disability during the loan process, e.g.

by requesting the Rural Housing and Community Development Service

(RHCDS) disability deduction to income due to mental or physical

disability or through verification of income from a Federal or state

government source because of mental or physical disability, RHCDS must

ask the applicant or the applicant's representative what reasonable

accommodations should be made in order for the loan to be processed.

The reasonable accommodation request must be provided to RHCDS by the

applicant or the applicant's representative. Reasonable accommodations

can include allowing a court appointed guardian or conservator to

execute appropriate loan making and loan closing documents on behalf of

the applicant; the court order must show that the guardian/conservator

has the power and responsibility to obligate the applicant in real

estate matters and a copy of the court order must be made a part of the

loan docket.

(b) Any processing or servicing activity conducted pursuant to this

subpart involving authorized assistance to RHCDS employees, members of

their families, known close relatives, or business or close personal

associates, is subject to the provisions of subpart D of part 1900.

Applicants for this assistance are required to identify any known

relationship or association with an RHCDS employee.

(c) RHCDS will collect fees for credit reports, real estate

appraisals, and conditional commitment applications when appropriate.

RHCDS may use its own employees or other agents or institutions in

carrying out its responsibilities under this subpart.

Sec. 1944.2 Definitions.

The following definitions apply to this subpart:

Annual payment borrowers. Borrowers who signed promissory notes

providing for annual payments, including borrowers converted to monthly

payments through the use of Form FmHA 1951-34, ``Direct Payment Plan

Change.''

Certificate of Eligibility. Certificate issued by RHCDS to

applicants who have received a final determination of eligibility after

verification of all income. Applicants can present this to real estate

agents, builders and sellers to provide their eligibility

documentation.

Conditional Commitment. Assurance from RHCDS, in exchange for a

specific fee, to an owner, qualified builder, or dealer-contractor that

a dwelling offered for sale will be acceptable for purchase by a

qualified RH loan applicant under specified limited conditions.

Cosigner. A party who joins in the execution of a promissory note

to compensate for any deficiency in the borrower's repayment. The

cosigner becomes jointly liable to comply with the terms of the note in

the event of the borrower's default, but is not entitled to any

interest in the security or borrower rights. If the security is

transferred to the cosigner, the cosigner may assume the RHCDS

indebtedness on program or nonprogram terms, as applicable.

Deficient housing. A dwelling which meets one or more of the

following conditions:

(1) Lacks complete plumbing; i.e. no bathtub or shower, wash basin,

flush toilet, or hot running water for the exclusive use of the

occupant; [[Page 25640]]

(2) Lacks adequate heating;

(3) Is physically deteriorated or structurally unsound; i.e. roof

leaks, falling plaster or sheetrock, extensive termite or wood rot

damage, dangerous electrical service; or

(4) Overcrowding situations which will be corrected after loan

closing; i.e. more than 2 persons per bedroom.

Disabled person. A person who is unable to engage in any

substantially gainful activity by reason of any medically determinable

physical or mental impairment expected to result in death or which has

lasted or is expected to last for a continuous period of not less than

12 months. The disability is expected to be of long or indefinite

duration; substantially impede his/her ability to live independently;

and is of such a nature that the person's ability to live independently

could be improved by more suitable housing conditions. In the case of

an individual who has attained the age of 55 and is blind, disability

is defined as inability by reason of such blindness to engage in any

substantially gainful activity requiring skills or abilities comparable

to those of any gainful activity in which the individual has previously

engaged with some regularity over a substantial period of time. Receipt

of veteran's benefits for disability, whether service-oriented or

otherwise, does not automatically establish disability. A disabled

person also includes a person with a developmental disability. A

developmental disability means a severe, chronic disability of a person

which:

(1) Is attributable to a mental or physical impairment or

combination of mental and physical impairments;

(2) Is manifested before the person attains age 22;

(3) Is likely to continue indefinitely;

(4) Results in substantial functional limitations in three or more

of the following areas of major life activity:

(i) Self-care,

(ii) Receptive and expressive language,

(iii) Learning,

(iv) Mobility,

(v) Self-direction,

(vi) Capacity for independent living,

(vii) Economic self-sufficiency; and

(5) Reflects the person's need for a combination and sequence of

special care, treatment, or other services which are of lifelong or

extended duration, and are individually planned and coordinated.

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

(1) A person who is the head, spouse or sole member of a family and

who is 62 years of age or older, or who is disabled and is the

applicant/borrower or the coapplicant/coborrower; or

(2) Two or more persons who are living together, at least one of

whom is age 62 or older, disabled and who is the applicant/borrower or

coapplicant/coborrower; or

(3) In the case of a family where the deceased borrower,

coborrower, or spouse, was at least 62 years old, disabled, the

surviving household member shall continue to be classified as an

``elderly family'' for the purpose of determining adjusted income even

though the surviving member or members may not meet the definition of

elderly family on their own, provided:

(i) They occupied the dwelling with the deceased family member at

the time of the death; and,

(ii) If one of the surviving family members is the spouse of the

deceased family member, the surviving family shall be classified as an

elderly family only until the remarriage of the surviving spouse; and,

(iii) At the time of the death of the deceased family member, the

dwelling was financed under title V of the Housing Act of 1949.

Equivalent interest rate. The interest rate charged under payment

assistance. It is determined by a comparison of the borrower's adjusted

annual income to the median income for the area where the security

property is located, based on income figures published by the

Department of Housing and Urban Development (``HUD'') as reflected in

exhibit C (available in any RHCDS field office).

Existing dwelling. A dwelling which is:

(1) More than 1 year old; or

(2) Less than 1 year old but the dwelling is covered by an approved

10-year warranty plan as described in subpart A of part 1924 and the

contractor provides complete plans and specifications, together with a

certification that construction was completed in compliance with said

plans and specifications, applicable building codes, and thermal

performance standards (``TPS'') for new construction. In addition, the

contractor must provide evidence that the contractor meets any

licensing requirements in the state and is an approved builder in good

standing under the approved 10-year warranty plan.

Extended family. A family unit comprised of adult relatives who

live together with the other members of the household, for reasons of

physical dependency, economics, and/or social custom, who, under other

circumstances, could maintain separate households. A typical example

would be parents living with their adult children.

Farm. Includes the total acreage of one or more tracts of land

which:

(1) Is owned by the applicant/borrower;

(2) Is operated as a single unit;

(3) Is in agricultural production; and

(4) Annually will produce agricultural commodities for sale and

home use with a gross annual value equivalent to $400 in 1944.

Full-time student. A person who is carrying a subject load that is

considered full-time for day students (excluding correspondence

courses) under the standards and practices of the educational

institution attended. An educational institution includes a vocational

school with a diploma or certificate program, as well as an institution

offering a college degree.

Household or family. The applicant/borrower, coapplicant/

coborrower, and all other persons who will make the applicant/

borrower's dwelling their primary residence for all or part of the next

12 months (excluding foster children placed in the home and live-in

aides). Children who are members of the family, but have been removed

and placed in foster care, will be counted as residents of the

household. Children who are subject to a joint custody agreement and

live in the unit at least 50 percent of the time are considered to be

household members.

Income. Income limits (the definitions of which are included below

in order from the lowest to the highest) are contained in exhibit C

(available in any RHCDS field office).

(1) Very-low income. An adjusted annual income that does not exceed

the very low-income limit according to size of household as established

by HUD for the county or Metropolitan Statistical Area (``MSA'') where

the property is or will be located.

(2) Low-income. An adjusted annual income greater than the very

low-income limit but that does not exceed the low income limit

according to size of household as established by HUD for the county or

MSA where the property is or will be located.

(3) Moderate-income. An adjusted annual income greater than the

low-income limit but that does not exceed the maximum limit for

moderate-income households.

(4) Above moderate-income. An adjusted annual income that exceeds

the maximum limit for moderate-income households.

Insurance. The insurance required by RHCDS as a condition of loan

approval, including fire and extended coverage [[Page 25641]] insurance

and flood insurance when applicable.

Live-in aides. Persons living in the household for the sole purpose

of providing essential care and well being for an elderly, or disabled

household member. Live-in aides cannot be related to a household member

and would not be living in the unit except to provide essential

supportive services.

Median income. An adjusted median annual income for the size of

household as established by HUD for the county or MSA where the

property is or will be located.

Metropolitan Statistical Area (MSA). MSAs are defined according to

a set of detailed standards prepared by the Federal Committee on MSAs.

An area qualifies as an MSA if it contains a city of at least 50,000

population or an urbanized area of at least 50,000 with a total

metropolitan population of at least 100,000. MSAs are defined in terms

of entire counties, except in the six New England states where they are

defined in terms of cities and towns. An MSA may also include

additional counties having strong economic and social ties to the

central county. The term Standard Metropolitan Statistical Area (SMSA)

was in use prior to the June 30, 1983, effective date of the MSA

terminology.

Minor. For the purposes of determining adjusted annual income, this

definition is restricted to persons under 18 years of age. Neither the

head of household nor spouse may be counted as a minor. Foster children

are not counted as minors for determining annual or adjusted annual

income.

Monthly payment borrowers. Borrowers who signed promissory notes

providing for payment of monthly installments.

Net family assets. Include:

(1) The value of equity in real property (other than the dwelling

or site); cash on hand; savings; checking accounts; demand deposits;

and the market value of stocks, bonds, and other forms of capital

investments, including voluntary retirement plans that are accessible

to the applicant/borrower such as individual retirement accounts

(IRAs), 401(k) plans, and Keogh accounts, as well as amounts that can

be withdrawn from other retirement and pension funds without retiring

or terminating employment, but exclude:

(i) Interests in American Indian trust land,

(ii) Cash on hand which will be used to reduce the amount of the

loan,

(iii) The value of necessary items of personal property such as

furniture and automobile,

(iv) The assets that are a part of the business, trade, or farming

operation in the case of any member of the household who is actively

engaged in such operation, and

(v) The value of a trust fund that has been established where the

trust is not revocable by, or under the control of, any member of the

household, so long as the fund continues to be held in trust.

(2) The value of any business or household assets disposed of by a

member of the household for less than fair market value (including

disposition in trust, but not in a foreclosure or bankruptcy sale)

during the 2 years preceding the date of application, in excess of the

consideration received therefor. In the case of a disposition as part

of a separation or divorce settlement, the disposition shall not be

considered to be for less than fair market value if the household

member receives important consideration not measurable in dollar terms.

Nonfarm tract. A parcel of land that is not a farm and is located

in a rural area, or a building site that is part of a farm, and which

secures an RH loan in accordance with Sec. 1944.18(b)(10).

Place. An area containing a concentration of inhabitants within a

determinable unincorporated area.

Real estate taxes. Real estate taxes mean the amount of real estate

taxes and assessments estimated to be due and payable on the dwelling

and the dwelling site, reduced by the amount of any tax exemption

available to the borrower, regardless of whether such an exemption is

actually claimed. Tax exemptions may include such things as homestead

exemptions, special exemptions for low-income families, senior

citizens, veterans, and others.

Rehabilitation. Major repairs and improvements to existing

dwellings such as the installation or completion of bathroom

facilities, installation of major items of equipment, additions, or

structural changes.

Senior citizen. Is a person who is 62 years of age or older.

Town. Is a municipality similar to a city but does not include a

New England-type town which resembles a township or county in most

States.

Urban area. Either a town, village, city, place, or any associated

combination thereof which, with the immediately adjacent densely

settled areas, has a population in excess of the limits prescribed in

1944.10 (a)(2)(i) and (ii).

Sec. 1944.3 Loan purposes.

(a) A loan may be made to an eligible applicant/borrower for the

following purposes:

(1) To buy, build, rehabilitate, improve, or relocate a dwelling

and provide related facilities for use by the applicant/borrower as a

permanent residence.

(2) To buy, build, rehabilitate, improve, or relocate a dwelling,

and provide related facilities for a farm owner to provide housing to

be occupied by the farm manager, tenants, sharecroppers, or farm

laborers.

(3) To refinance secured debts or unsecured debts as provided in

Sec. 1944.22, except for manufactured homes.

(b) A loan made under paragraph (a) (1) or (2) of this section may

be used to:

(1) Purchase, in fee title, a minimum adequate site, as outlined in

Sec. 1944.11 on which the improvements are or will be located, if the

applicant/borrower does not own an adequate site.

(2) Pay reasonable acquisition costs for a leasehold interest in a

minimum adequate site at the time of making the initial RH loan.

(3) Provide an adequate and safe water supply or an adequate waste/

water disposal facility.

(4) Provide site preparation, including grading, foundation

plantings, seeding or sodding of lawns, trees, walks, yard fences, and

driveways to building sites.

(5) Purchase and install essential equipment in the dwelling

including items such as a range, refrigerator, clothes washer or

clothes dryer, if these items are normally sold with dwellings in the

area, and if purchase of these items is not the primary purpose of the

loan.

(6) Provide special design features or equipment when necessary

because of physical disability of the applicant/borrower or of a member

of the household.

(7) Purchase and install approved energy saving measures and

approved furnaces and space heaters which use a type of fuel that is

commonly used, and is economical and dependably available.

(8) Provide storm cellars and similar protective structures.

(9) Pay incidental expenses such as legal fees, costs of title

clearance, and loan closing services; appraisal, surveying,

environmental, tax monitoring, and other technical services; personal

liability insurance fees for self-help housing borrowers; and

incidental expenses authorized in exhibit G (available in any RHCDS

field office).

(10) Pay lender fees and points in connection with participation

loans, (except as provided in Sec. 1944.4), which are customary,

reasonable, and do not exceed the amount typical for the area.

(11) Pay reasonable connection fees for utilities such as water,

sewer, electricity and gas, which are required [[Page 25642]] to be

paid by the borrower and which cannot be paid from other funds.

(12) Pay the borrower's share of Social Security taxes for labor

hired by the borrower in connection with making the planned

improvements.

(13) Pay real estate taxes which are due and payable on the

building and site owned by the applicant at the time of closing an

initial loan, if this amount is not a part of the loan.

(14) Establish escrow accounts for the payment of real estate taxes

or property insurance premiums in those States where the use of escrow

accounts is authorized by the National Office.

(15) Provide living area for all members of the applicant/

borrower's household, including ``extended family.''

(16) Finance the purchase of single family housing units located in

a Planned Unit Development with a Homeowners' Association that has

employed professional management, with prior National Office approval.

(17) Pay fees for the development and packaging of loan

applications and related actions to public and private nonprofit

organizations which are tax exempt under the Internal Revenue Code of

1986 (except when restricted under Sec. 1944.4) when:

(i) The loan has been packaged in accordance with exhibit A to FmHA

instruction 1944-A (available in any RHCDS field office) and the

limitations of Sec. 1944.17, and

(ii) The charges are reasonable considering:

(A) The amount and purpose of the assistance,

(B) The repayment ability of the recipient, and

(C) The cost of similar services in the same or a similar rural

area.--

(iii) The State Director may issue a State Supplement outlining

what is considered a reasonable amount for his/her jurisdiction.

Sec. 19 44.4 Loan restrictions.

Loan funds may not be used to:

(a) Make a new loan to pay off existing RHCDS debts in lieu of a

transfer with assumption.

(b) Refinance:

(1) RHCDS debts, except as authorized under Sec. 1951.318.

(2) Debts on a manufactured home.

(c) Purchase or improve income-producing land, or buildings to be

used principally for income-producing purposes, or buildings not

essential for RH purposes, or buy or build buildings which are either

largely, or in part, specifically designed to accommodate a business or

income-producing enterprise. (Home based operations such as child care,

home/beauty product sales, the production of crafts, etc., that do not

require specifically designed features to accommodate the enterprise,

are not restricted under this subpart; however, housing related

expenses such as mortgage interest, real estate taxes, and insurance,

which may be claimed as business expense deductions for income tax

purposes, will not be allowed when determining annual income for RHCDS

assistance.)

(d) Pay fees, charges, or commissions, such as finders' fees, fees

for packaging the application (except as provided in Sec. 1944.3), or

placement fees for the referral of a prospective applicant to RHCDS.

(e) Pay packaging fees (as provided under Sec. 1944.3) for the

purchase of an RHCDS inventory property or where the packager is

receiving a grant under subpart B of part 1944.

(f) Improve the entry of a homestead entryman or desert entryman

prior to receipt of patent.

(g) Finance manufactured homes which are not constructed and

installed in accordance with exhibit F to FmHA instruction 1944-A and

exhibit J of subpart A of part 1924. (Both exhibits are available in

any RHCDS field office.)

Sec. 1944.5 Annual income.

Annual income determinations will be thoroughly documented in the

case file. Historical data based on the past 12 months or last fiscal

year may be used if a determination of expected income cannot logically

be made. Annual income will be calculated as follows: -

(a) Current verified income, either part-time or full-time,

received by the applicant/borrower and all adult members of the

household including the spouse is derived by multiplying:

(1) An hourly wage by 2080 hours (for part-time employment use

anticipated annual hours); or

(2) A weekly wage by 52 weeks; or

(3) A biweekly wage by 26 weeks; or

(4) A monthly wage by 12 months.

(b) If the spouse or any other adult member of the household is not

presently employed but there is a recent history of such employment,

that person's income will be projected unless the applicant/borrower or

the person involved signs a statement that the person is not presently

employed and does not intend to resume employment in the foreseeable

future, or, if payment assistance is involved, during the term of the

payment assistance agreement.

(c) Income from such sources as seasonal work of less than 12

months duration, commissions, overtime, bonuses, and unemployment

compensation will be computed as the estimated annual amount of such

income for the ensuing 12 months. Temporary income such as unemployment

benefits, worker's compensation, etc., will be projected over 12 months

when computing payment assistance on an annual basis. Historical data

based on the past 12 months may be used if a determination of expected

income cannot logically be made.

(d) The following are included in annual income:

(1) The gross amount, before any payroll deductions, of wages and

salaries, overtime pay, commissions, fees, tips, bonuses, and other

compensations for personal services of all adult members of the

household. If a cost of living allowance or a proposed increase in

income has been estimated to take place on or before loan approval,

loan closing, or the effective date of the payment assistance

agreement, it will be included as income.

(2) The net income from the operation of a farm, business, or

profession. The following provisions apply:

(i) Expenditures for business or farm expansion, capital

improvements, or payments of principal on capital indebtedness shall

not be used as deductions in determining income. A deduction is allowed

in the manner prescribed by Internal Revenue Service (IRS) regulations

only for interest paid in amortizing capital indebtedness.

(ii) Farm and nonfarm business losses are considered ``0'' in

determining annual income.

(iii) A deduction, based on straight line depreciation, is allowed

in the manner prescribed by IRS regulations for the exhaustion, wear

and tear, and obsolescence of depreciable property used in the

operation of a trade, farm, or business by a member of the household.

The deduction must be based on an itemized schedule showing the amount

of straight line depreciation actually claimed for Federal income tax

purposes.

(iv) Any withdrawal of cash or assets from the operation of a farm,

business, or profession will be included in income, except to the

extent the withdrawal is reimbursement of cash or assets invested in

the operation by a member of the household.

(v) A deduction is allowed for verified business expenses, such as

lodging, meals, and fuel, for overnight business trips made by salaried

employees, such as long-distance truck drivers, who must meet these

expenses without reimbursement.

(vi) Housing related expenses for the property being financed such

as [[Page 25643]] mortgage interest, real estate taxes, and insurance,

which may be claimed as business expense deductions for income tax

purposes, will not be deducted from annual income.

(3) Interest, dividends, and other net income of any kind from real

or personal property, including:

(i) The share received by adult members of the household from

income distributed from a trust fund.

(ii) Any withdrawal of cash or assets from an investment except to

the extent the withdrawal is reimbursement of cash or assets invested

by a member of the household.

(iii) Where the household has net family assets, as defined in

Sec. 1944.2, in excess of $5,000, the greater of the actual income

derived from all net family assets or a percentage of the value of such

assets based on the current passbook savings rate, as determined by

RHCDS.

(4) The full amount of periodic payments received from Social

Security (including Social Security received by adults on behalf of

minors or by minors intended for their own support), annuities,

insurance policies, retirement funds, pensions, disability or death

benefits, and other similar types of periodic receipts. Amounts

received from the United States Government which are attributable to

underpayment of benefits for one or more prior months shall be excluded

in the calculation of annual income as provided in 42 U.S.C. 1382b.

(5) Payments in lieu of earnings, such as unemployment and

disability compensation, worker's compensation, and severance pay.

(6) Public assistance except as indicated in exhibit J to FmHA

instruction 1994-A (available in any RHCDS field office).

(7) Periodic allowances, such as:

(i) Alimony and child support awarded in a divorce decree or

separation agreement, unless the applicant/borrower certifies the

payments are not received, and the applicant/borrower provides

documentation to RHCDS that a reasonable effort has been made to

collect the payments through the official entity responsible for

enforcing such payments; or

(ii) Recurring monetary gifts or contributions from someone who is

not a member of the household.

(8) Any amount of educational grants or scholarships or Veterans

Administration (VA) benefits available for subsistence after deducting

expenses for tuition, fees, books, and equipment.

(9) All regular pay, special pay (except for persons exposed to

hostile fire), and allowances of a member of the armed forces who is

the applicant/borrower or spouse, whether or not that family member

lives in the home.

(e) The following are not included in annual income but will be

considered in determining repayment ability:

(1) Income over $1,000 from employment of minors (including foster

children) under 18 years of age. The applicant/borrower, coapplicant/

coborrower, or spouse may never be considered minors.

(2) Payments received for the care of foster children.

(3) The income of an applicant/borrower's spouse, when the spouse

has been living apart from the applicant/borrower (for reasons other

than military or work assignment), or court proceedings for divorce or

legal separation have been commenced.

(4) Casual, sporadic, or irregular cash gifts.

(5) Lump-sum additions to family assets such as inheritances,

capital gains, insurance payments included under health, accident,

hazard, or worker's compensation policies, and settlements for personal

or property losses (except as provided in paragraph (d)(5) of this

section).

(6) Amounts which are granted specifically for, or in reimbursement

of, the cost of medical expenses.

(7) The full amount of student financial assistance paid directly

to the student or to the educational institution;

(8) Reparation payments paid by a foreign government arising out of

the Holocaust. If an applicant for an RHCDS loan was deemed ineligible

because the applicant's income exceeded the low income (moderate income

for guaranteed loans) because of the applicant's Nazi persecution

benefits, the RHCDS approval official should notify the applicant to

reapply for a loan.

(9) Any earned income tax credit will not be counted as part of

annual income, but will remain part of the applicant's income for

purposes of repayment ability.

(10) Any other revenue which a Federal statute exempts shall not be

considered income or used as a basis for determining eligibility for an

RHCDS loan, payment assistance, or denying or reducing Federal

financial assistance or benefits to which the recipient would otherwise

be entitled. For information on additional financial assistance which

is considered exempt income under Federal statutes, refer to exhibit J

(available in any RHCDS field office).

(f) Income of live-in aides as described in Sec. 1944.2, will not

be counted when calculating annual income and will not be considered in

determination of repayment ability.

Sec. 1944.6 Adjusted annual income.

Adjusted annual income is annual income as determined in

Sec. 1944.5 less the following:

(a) A deduction of $480 for each member of the family residing in

the household, as defined by Sec. 1944.2, other than the applicant/

borrower, coapplicant/coborrower, or spouse who is:

(1) Under 18 years of age; or

(2) Eighteen years of age or older and is disabled as defined in

Sec. 1944.2; or

(3) A full-time student aged 18 or older.

(b) A deduction of $400 for any elderly family as defined in

Sec. 1944.2.

(c) A deduction for the care of minors 12 years of age or under, to

the extent necessary to enable a member of the applicant/borrower's

family to be gainfully employed or to further his/her education. The

deduction will be based only on monies reasonably anticipated to be

paid for care services and, if caused by employment, must not exceed

the amount of income received from such employment. Payments for these

services may not be made to persons whom the applicant/borrower is

entitled to claim as dependents for income tax purposes.

(d) A deduction of the amount by which the aggregate of the

following expenses of the household exceeds 3 percent of gross annual

income:

(1) Medical expenses for any elderly family as defined in

Sec. 1944.2. This includes medical expenses, for any household member,

the applicant/borrower anticipates incurring over the ensuing 12 months

which are not covered by insurance. Examples of medical expenses are

dental expenses, prescription medicines, medical insurance premiums,

eyeglasses, hearing aids and batteries, the cost of home nursing care,

the costs of transportation to and from medical treatment, monthly

payments on accumulated major medical bills, and cost of full-time

nursing or institutional care which cannot be provided in the home for

a member of the household; and

(2) Reasonable attendant care and auxiliary apparatus expenses for

each disabled member of any household to the extent necessary to enable

any member of such household (including such disabled member) to be

employed.

Sec. 1944.7 [Reserved]

Sec. 1944.8 Income eligibility requirements.

(a) Repayment Ability. An applicant/borrower is eligible for a

section 502 RH [[Page 25644]] loan only if the following requirements

are met:

(1) Income limit. The adjusted annual income as defined in

Sec. 1944.6 at the time of loan approval does not exceed the applicable

income limit in exhibit C to FMHA instruction 1944-A (available in any

RHCDS field office).

(2) Adequate and dependable income. The applicant/borrower (and

coapplicant/coborrower, if applicable), has adequate and dependably

available income. The determination of income dependability will

include consideration of the applicant/borrower's past history of

annual income and/or the history of the typical annual income of others

in the area with similar types of employment. Such income must be

sufficient to meet the income ratios described in Sec. 1944.8(a)(3), as

modified by Sec. Sec. 1944.34 and 1944.35.

(3) Determining repayment ability. In considering whether the

applicant/borrower has adequate repayment ability, RHCDS must calculate

the principal, interest, taxes, and insurance (PITI) and monthly

obligation to income (MOTI) ratios. The PITI ratio is calculated by

dividing the monthly PITI for the proposed loan (less any payment

assistance for which the applicant/borrower may qualify) by the gross

monthly family income. The MOTI ratio is calculated by dividing the

applicant/borrower's monthly obligations by total gross monthly family

income.

(i) Monthly obligation consists of the PITI for the proposed loan

(less any payment assistance for which the applicant/borrower may

qualify), homeowner and other assessments, and long term obligations.

Long term obligations include those obligations such as alimony, child

support, child care, and other obligations with a remaining repayment

period of more than 6 months, other shorter term obligations that are

considered to have a significant impact on repayment ability, plus 5

percent of the current balance on all revolving credit cards.

(ii) Income, for the purpose of determining these ratios, includes

the total gross monthly income of the applicant/borrower, coapplicant/

coborrower, and any other member of the household who will be a party

to the note, including any income that may be excepted under

Sec. 1944.5.

(iii) The applicant/borrower is considered to have repayment

ability when the proposed PITI and MOTI ratios are less than or equal

to a PITI ratio of 29 percent and a MOTI ratio of 41 percent as defined

in Sec. 1944.8(a)(3). Applicants whose PITI ratio exceeds the ratio

shall be considered for deferred mortgage assistance as provided in

Sec. 1944.35.

(iv) When the ratios do not support repayment of the proposed loan,

at the applicant/borrower's request, RHCDS may make an exception to the

above income ratio calculations under the following circumstances or

compensating factors:

(A) When the applicant presents documented evidence of having met

housing related costs in the past 6 months that are equal to or greater

than the projected housing costs after approval of the proposed loan.

These housing costs must have been maintained when the applicant's

household income was equal to or less than the current annual income,

and the applicant's household debt load was equal to or greater than

the current debt load. Projected housing costs will include the RHCDS

monthly payment after application of any payment assistance for which

the applicant may qualify, projected real estate taxes and assessments,

premiums for required property and/or flood insurance, estimated

utility and maintenance costs, and any other costs expected to be

incurred with home ownership.

(B) When the applicant/borrower presents evidence that, due to

unusual circumstances a budget form should be utilized to determine

repayment ability in lieu of repayment ratios. In these circumstances,

a budget will be prepared jointly between RHCDS and the applicant/

borrower to determine the applicant/borrower's repayment ability.

(b) Additional coapplicant. Applicants/borrowers applying who do

not meet the requirements of paragraph (a)(2) of this section will be

considered ineligible unless other adults in the household have

adequate income and wish to join in the application as a coapplicant.

The combined incomes and obligations shall then be considered in

determining repayment ability.

(c) Cosigner. RHCDS will also consider the use of a cosigner when

the applicant/borrower applying for assistance does not meet the

requirements of paragraph (a)(2) of this section. Cosigners must have

adequate and dependably available income sufficient to repay any

deficit in the applicant/borrower's repayment ability. Cosigners are

subject to the same determination of repayment ability outlined in

paragraph (a)(3) of this section as the applicant/borrower, with the

amount of the applicant/borrower's repayment deficiency considered as

part of the cosigner's PITI ratio. The cosigner may be an individual or

an entity but may not be a member of the applicant/borrower's

household.

Sec. 1944.9 Other eligibility requirements.

In addition to the income eligibility requirements of Sec. 1944.8

the applicant/borrower must:

(a) Qualify as one of the following:

(1) A person who does not own a dwelling (except for refinancing

purposes), or owns a dwelling which is not structurally sound,

functionally adequate, or large enough to accommodate the needs of the

applicant/borrower, or,

(2) A farmowner without decent, safe, and sanitary housing for the

farmowner's own use or for the use of farm tenants, sharecroppers, farm

laborers, or farm manager.

(b) Be without sufficient resources to provide the necessary

housing or related facilities, and be unable to secure the necessary

credit from other sources upon terms and conditions which the

applicant/borrower could reasonably be expected to fulfill. If the

applicant/borrower has only an undivided interest in the land to be

improved, those co-owners whose execution of the mortgage is required

under Sec. 1944.18(b)(8) must also be unable to provide the improvement

with their own resources or obtain the necessary credit elsewhere,

either individually or jointly with the applicant/borrower. Applicants/

borrowers are expected to reduce the need for loan funds by utilizing

available nonessential assets and/or cash on hand; however, IRAs, SEPs,

401(k) plans, and similar personal retirement accounts do not have to

be liquidated when considering other resources. Reasonable reserves may

be retained for unforeseen events.

(c) Be a natural person (individual) who resides as a citizen in

any of the 50 states, the Commonwealth of Puerto Rico, the U.S. Virgin

Islands, Guam, American Samoa, the Commonwealth of the Northern

Marianas, the Federated States of Micronesia, the Republic of Palau, or

the Republic of the Marshall Islands, or a noncitizen who resides in

one of the foregoing areas after being legally admitted for permanent

residence or on parole. An applicant who indicates that the applicant

is not a United States citizen on the application is required to submit

evidence that the applicant has been lawfully admitted to the country

as a permanent resident. Exhibit B (available in any RHCDS field

office) provides additional information for evaluating alien status for

these applicants. Verification is only required when the applicant

indicates the applicant is not a U.S. citizen.

(d) Possess legal capacity to incur the loan obligation (or have a

court appointed guardian/conservator who is [[Page 25645]] empowered to

obligate the applicant in real estate matters), and have reached the

legal age of majority in the state, or have had the disability of

minority removed.

(e) Have the potential ability to personally occupy the home on a

permanent basis. Due to the probability of moving after graduation,

full-time students will not be granted loans unless:

(1) The applicant intends to make the home a permanent residence

and there are reasonable prospects that employment will be available in

the area after graduation and

(2) An adult member of the household will be available to make

inspections if the home is being constructed and to sign checks for

work performed.

(f) Have a credit history which indicates a reasonable ability and

willingness to meet obligations as they become due.

(1) Any or all of the following are indicators of an unacceptable

credit history unless RHCDS determines that the cause was beyond the

applicant/borrower's control (except for Federal judgments described in

paragraph (f)(1)(i) of this section), and satisfies the criteria in

paragraph (f)(3) of this section:

(i) An outstanding judgment obtained by the United States in a

Federal Court (other than the United States Tax Court), which has been

recorded, shall cause the applicant to be ineligible for any loan or

grant until the judgment is paid in full or otherwise satisfied. RHCDS

loan or grant funds may not be used to satisfy the judgment. Questions

regarding whether or not a judgment is still outstanding should be

directed to the Office of the General Counsel. The Administrator may

waive the rejection of an application based on verification of an

outstanding Federal judgment upon specific determination that it is in

the best interest of the Government to do so. Verification of

delinquent Federal debt and processing of applications with such debt

must comply with Sec. 1944.27(b)(4).

(ii) Incidents of more than two secured or unsecured debt payments

being more than 30 days late if the incidents have occurred within the

last 12 months. This includes more than two late payments on a single

account. Instances of more than two late payments may be waived in the

event that the RHCDS loan will result in a significant reduction in

shelter costs, which will contribute to improved debt payment ability.

(iii) Loss of security due to a foreclosure if the foreclosure has

been completed within the last 36 months.

(iv) An outstanding IRS tax lien.

(v) Other outstanding tax liens with no satisfactory arrangements

for payments.

(vi) A court-created or affirmed obligation (judgment), caused by

non-payment, that is currently outstanding or has been outstanding

within the last 12 months, not including hospital or state motor

vehicle liens described under Sec. 1944.17.

(vii) Two or more rent payments paid 30 days or more past due, that

have occurred within the last 2 years. Notwithstanding the previous

sentence, if there have been no other credit problems in the

applicant's last two year's general credit history, only the past

rental year will be considered. Instances of more than two late

payments may be waived in the event that the RHCDS loan will result in

a significant reduction in shelter costs, which will contribute to

improved debt payment capability.

(viii) Accounts which have been converted to collections within the

last 12 months (utility bills, medical debts, etc.).

(ix) Collection accounts outstanding with no satisfactory,

reasonable arrangements for repayment, or collection accounts which

have been outstanding within the last 12 months which were paid in full

within 3 months of filing an application for RHCDS assistance, where

there is no record of regular payment being maintained on the account

prior to receipt of the final payment.

(x) Non-RHCDS debts written off within the last 36 months.

(xi) RHCDS debts which were debt settled pursuant to subpart B of

part 1956, or by release from personal liability under subpart A of

part 1955 or subpart C of part 1965, or debt settlement is being

considered except where the conditions of Sec. 1944.9(g) can be met.

(2) The following will not indicate an unacceptable credit history:

(i) ``No history'' of credit transactions by the applicant/

borrower.

(ii) A bankruptcy in which the applicant received a discharge more

than 36 months before the date of application.

(iii) A satisfied judgment, or foreclosure with no monetary loss

which was completed more than 12 months before the date of application.

(3) When an applicant/borrower has an unacceptable credit history,

an exception may be considered by the loan approval official (except

for Federal judgments described in paragraph (f)(1)(i) of this section)

when the applicant/borrower provides documentation that:

(i) The circumstances were of a temporary nature, were beyond the

applicant/borrower's control, and have been removed. Examples: loss of

job; delay or reduction in benefits, or other loss of income; increased

expenses due to illness, death, etc.

(ii) The adverse action or delinquency was the result of a refusal

to make full payment because of defective goods or services or as a

result of some other justifiable dispute relating to the goods or

services purchased or contracted for.

(4) Applicants will be advised of adverse credit which is

discovered as a result of an on-line profile credit report at the time

of application and will be provided the telephone number and address of

the credit repository so that the applicant may contact the repository

directly to correct the negative or incorrect information or discuss

the circumstances of the credit problem with the RHCDS staff.

Applicants will not be rejected on the basis of information contained

in an on-line credit report; however, once a full written credit report

is received by RHCDS, it will be the responsibility of the applicant/

borrower to work directly with the credit repository to correct any

erroneous credit bureau records. The credit history cannot be

determined satisfactory until:

(i) The credit repository issues a corrected report, showing that

the error has been removed, or

(ii) The credit repository has not issued a corrected report within

30 days of the applicant's submission of disputed credit information

but the applicant/borrower submits conclusive proof, acceptable to

RHCDS, that the report is in error, such as creditor correspondence,

court documents, etc.

(g) Meet the following conditions if the applicant had any previous

RHCDS debt settled pursuant to subpart B of part 1956, or by release

from personal liability under subpart A of part 1955 or subpart C of

part 1965, or debt settlement is being considered:

(1) RHCDS must determine that failure to pay the debt was the

result of circumstances beyond the applicant's control, or the

conditions which necessitated the debt settlement or release, other

than weather hazards, disasters, or price fluctuations, have been or

will be removed by making the loan, and

(2) Before causing the applicant to incur any expense in connection

with the loan, with the exception of the cost of a credit report, RHCDS

must determine the applicant's eligibility and notify the applicant of

same. [[Page 25646]]

(h) Have the ability to carry out the required obligations of the

loan. If the applicant has demonstrated inability to do so by recent

failure to maintain a former residence in a habitable and responsible

manner, or by unauthorized conversion or alteration of the structure,

or by creating a public nuisance in or around a former residence, RHCDS

must determine that the reasons contributing to such inability have

been removed and are not likely to recur.

(i) Provide accurate and truthful application and financial

information to RHCDS at the time of application. Applicants who have

failed to fully disclose financial and application information will be

denied program assistance.

Sec. 1944.10 Rural area designation.

(a) For the purposes of this subpart, a rural area is:

(1) Open country which is not part of or associated with an urban

area.

(2) Any town, village, city, or place, including the immediately

adjacent densely settled area, which is not part of or associated with

an urban area and which:

(i) Has a population not in excess of 10,000 if it is rural in

character, or

(ii) Has a population in excess of 10,000 but not in excess of

20,000, and

(A) Is not contained within an MSA, and

(B) Has a serious lack of mortgage credit for low- and moderate-

income households as determined by the Secretary of Agriculture and the

Secretary of HUD.

(3) An area classified as a rural area prior to October 1, 1990,

(even if within an MSA), with a population exceeding 10,000, but not in

excess of 25,000, which is rural in character, and has a serious lack

of mortgage credit for low- and moderate-income families. This is

effective through receipt of census data for the year 2000.

(b) A determination that open country, or any town, village, city,

or place is not part of or associated with an urban area must include a

finding that any densely populated section of the area in question is

separated from the densely populated section of any adjacent urban area

by open spaces. Open spaces include undeveloped, agricultural, or

sparsely settled areas. Other spaces such as physical barriers (e.g.,

rivers, canals), public parks, commercial and industrial developments,

small areas reserved for recreational purposes, recognized open spaces

for which development is planned, and similar nonresidential areas, are

not considered open spaces for the purpose of this program. RHCDS files

must contain documentation that local planning boards, where available,

were contacted at the time of each review to verify that areas

considered as open spaces are not scheduled for development in the next

5 years.

(c) Two or more towns, villages, cities, and places may have

contiguous boundaries, and each be considered separately if they are

not otherwise associated with each other, and their densely populated

areas are not contiguous, as determined after consideration of

paragraphs (a) and (b) of this section.

(d) Population count in any area will be taken from the decennial

U.S. Census of Population, national population updates published by the

Bureau of the Census, any special population census conducted by the

Bureau of the Census, and the following:

(1) Significant new development on the periphery of ineligible

areas which requires a change in boundaries.

(2) Redesignation of corporate limits by local authorities which

affects the eligibility status of an area.

(e) In determining population count for area eligibility,

consideration must be given to developed areas in counties or states

which are contiguous to, and, therefore, a part of developed areas in

other counties or states. This determination must be made in agreement

between the State Directors concerned.

(f) In order to ensure that the RH program is limited to eligible

areas, RHCDS will periodically review areas under their jurisdiction.

If the review shows that an area is not rural, RHCDS will limit the RH

program in that area after the date of the decision, to the loan

purposes prescribed in paragraph

(i) of this section.

(g) [Reserved]

(h) [Reserved]

(i) If an area designation is changed from rural to nonrural, loans

may be made only in the following instances:

(1) Applications received by RHCDS prior to the change of

designation may be processed.

(2) New conditional commitments may be issued and existing

conditional commitments will be honored only in conjunction with the

approval of RH loan applications which were received prior to the date

the area was designated nonrural.

(3) Inventory property sales and transfers by assumption may be

processed in such areas as authorized by Sec. 1955.103(q) or

Sec. 1965.126, respectively.

(4) Subsequent loans may be made on property in an area where the

designation was changed from rural to nonrural after the initial loan

was made:

(i) To make necessary repairs.

(ii) To pay equity in connection with an assumption and transfer of

an RH loan.

Sec. 1944.11 Site requirements.

(a) Location. The property on which the loan is made must be

located on a farm, or in a designated rural area as defined in

Sec. 1944.10, or in an area where the designation has been changed as

provided in Sec. 1944.10(i) and must also meet the requirements of

subpart G of part 1940. A nonfarm tract to be purchased or improved

with loan funds must not include farm service buildings.

(b) Access. The property must be contiguous to and have direct

access from a street, road, or driveway that meets the applicable

requirements of Sec. 1924.115(b) (Site access).

(c) Minimum adequate site. A nonfarm tract on which a loan is to be

made must have an adequate water and/or wastewater disposal system,

other related facilities, and a yard, or those items must be provided

with loan funds. The site must be of a size that it cannot be

subdivided into two or more adequate sites under existing zoning

ordinance requirements for the area.

(1) When the site is served by a centrally owned and operated water

and/or wastewater disposal system, the system must meet the applicable

water and wastewater disposal system requirements of subpart C of part

1924 as well as the design requirements of the state Department of

Health or comparable reviewing and regulatory agency.

(2) Written verification must be obtained from the regulatory

agency that the wastewater disposal systems comply with the Safe Water

Drinking Act and the Clean Water Act, respectively. There must be

assurance of continuous service at reasonable rates for central water

and wastewater disposal systems. A system owned or operated by a

private party must have a legally irrevocable agreement which allows

interested third parties to enforce the obligation of the operator to

provide satisfactory service at reasonable rates.

Secs. 1944.12-1944.14 [Reserved]

Sec. 1944.15 Ownership requirements.

(a) After the loan is closed, the borrower must have an interest in

the property to be purchased, improved, or refinanced, which qualifies

as one of the following:

(1) Full marketable title.

(2) The buyer and the seller will convert the purchaser's interest

under a [[Page 25647]] recorded land purchase contract to a deed/

mortgage situation with full marketable title prior to loan closing.

(3) An undivided fee interest if the co-owners meet the security

requirements imposed by Sec. 1944.18(b)(8).

(4) A life estate interest with rights of present possession,

control, and beneficial use of the property if the remaindermen meet

the security requirements imposed by Sec. 1944.18(b)(9).

(5) Leasehold interest if all of the following conditions are met:

(i) The applicant/borrower is unable to obtain fee title to the

property and the rent charged for the lease does not exceed the rate

being paid for similar leases.

(ii) The lessor owns the fee simple title. This paragraph does not

apply to American Indians with leasehold interests on tribal allotted

or trust land.

(iii) Neither the leasehold nor the fee simple title is subject to

a prior lien, unless RHCDS authorizes acceptance of the prior lien

prior to approval of the loan. The amount of the RH loan plus any prior

liens shall not exceed the market value of the leasehold.

(iv) The written lease contains the following provisions:

(A) The lessor's consent to the RH mortgage.

(B) Reasonable security of tenure. The borrower's interest must not

be subject to summary forfeiture or cancellation.

(C) The right of RHCDS to foreclose the RH mortgage and sell

without restrictions that would adversely affect the market value of

the security.

(D) The right of RHCDS to bid at foreclosure sale or to accept

voluntary conveyance of the security in lieu of foreclosure.

(E) The right of RHCDS, after acquiring the leasehold through

foreclosure or voluntary conveyance in lieu of foreclosure, or in event

of abandonment by the borrower, to occupy the property or sublet it,

and to sell for cash or credit. In case of an inventory property sale

of the leasehold, the right of RHCDS to take a mortgage with rights

similar to those under the original RH mortgage.

(F) The right of the borrower, in the event of default or inability

to continue with the lease and the RH loan, to transfer the leasehold,

subject to the RH mortgage, to an eligible transferee with assumption

of the RH debt.

(G) Advance written notice of at least 90 days to RHCDS of lessor's

intention to cancel or terminate the lease.

(H) Negotiated provisions as to the liability of RHCDS for unpaid

rentals or other charges accrued at the time RHCDS acquires possession

of the property or title to the leasehold, and those which become due

during RHCDS's possession or ownership, pending further servicing or

liquidation.

(I) [Reserved]

(v) An unexpired term which is at least 150 percent of the term of

the RHCDS loan, unless the RHCDS loan is guaranteed by a public

authority, Indian tribe, or Indian Housing Authority, in which case the

unexpired term of the lease must be at least 2 years longer than the

repayment period of the loan; provided that: in no case may the

unexpired term of the lease be less than 15 years.

(6) Possessory rights on an American Indian reservation or State-

owned land if the security requirements imposed by Sec. 1944.18 are

met.

(7) The interest of an American Indian in land held in severalty

under trust patents or deeds containing restrictions against alienation

if the security requirements imposed by Sec. 1944.18(b)(3) are met.

(b) If an applicant's title to any part of the property does not

qualify as an ownership interest under paragraph (a) of this section,

an RH loan may nevertheless be made, if:

(1) The defect cannot be cured at a reasonable cost, and

(2) No improvements to be constructed or repaired with loan funds

will be located on the parcel to which title is defective, and

(3) No security value will be accorded to the parcel to which title

is defective.

Sec. 1944.16 Dwelling Requirements.

Dwellings financed must provide decent, safe, and sanitary housing.

Costs of dwellings financed cannot exceed 85 percent of the maximum

dollar limitation established under section 203(b) of the National

Housing Act (12 U.S.C. Sec. 1702) (available from any HUD office)

unless authorized by RHCDS under Sec. 1944.17(g). Loans shall not be

approved for dwellings containing in-ground swimming pools or

structures designed for income-producing facilities or purposes.

(a) New dwellings. Construction must meet the requirements

contained in subpart A of part 1924 as well as the thermal performance

standards for new construction outlined in exhibit D of subpart A of

part 1924.

(b) Existing dwellings. Consideration should be given to financing

existing dwellings in areas with a good supply of competitively priced,

suitable housing. Homes financed should be affordable to the applicant/

borrower, including operating and maintenance costs.

(1) Loans will not be made on an existing manufactured home unless

it is already financed by RHCDS or is being sold from RHCDS inventory.

(2) Existing homes, including those already in the program, must be

inspected by RHCDS or by a disinterested third party inspector to

determine that the dwelling meets the criteria outlined in paragraphs

(b)(2)(i), (ii), and (iii) of this section. The sales agreement must

identify the party (i.e., purchaser or seller) who has accepted

responsibility for obtaining and paying for these inspections and

certifications. Inspections are not required on public water and

wastewater disposal systems. RHCDS inventory property will be inspected

and repaired in accordance with the subpart B of part 1955. The

inspector will:

(i) Determine that the dwelling is structurally sound, functionally

adequate, in good repair, or will be placed in good repair with loan

funds, and meets the ``General'' requirements in Guide 2 of subpart A

of part 1924 (available in any RHCDS field office).

(ii) Certify that the dwelling meets thermal performance standards

for existing dwellings required in exhibit D of subpart A of part 1924.

(iii) Certify that the dwelling has adequate electrical, heating,

plumbing, water, and wastewater disposal systems, and is free of

termites and other wood damaging pests and organisms.

(c) Repairs. Any dwelling repaired with RH funds must be

structurally sound, functionally adequate, and be placed in good repair

with loan funds. If the loan is not more than $7,500 and is scheduled

for repayment in not more than 15 years from the date of the note, the

dwelling may lack some equipment or features such as a complete bath,

kitchen cabinets, closets, or completed finished interior in some

rooms. Such dwellings must meet the housing needs of the applicant/

borrower and provide decent, safe, and sanitary living conditions when

the improvements financed with the loan are completed. Repairs required

as a condition of loan approval will be performed in accordance with

HUD Handbook 4905.1, ``1-4 Family Living Units'' (available in any

RHCDS field office), after loan closing. Repairs on manufactured homes

are limited to those financed by a subsequent loan for existing homes

currently financed with a section 502 RH loan, inventory property

sales, and transfers.

(d) Improvements. Improvements financed with loan funds must be on

land which, after loan closing, is part of a tract owned by the

borrower in [[Page 25648]] accordance with Sec. 1944.15(a), or on an

easement appurtenant to such a tract.

(e) Manufactured homes. Exhibit F to FMHA instruction 1944-A

(available in any RHCDS field office) contains supplemental information

concerning construction requirements for manufactured homes.

Sec. 1944.17 Maximum loan amounts.

The amount of the loan may not exceed 85 percent of the maximum

dollar limitation of section 203(b) of the National Housing Act (12

U.S.C. Sec. 1702) (available from any HUD office) unless authorized by

RHCDS as an exception. A loan may exceed the market value or the equity

value in the security property by the appraisal fee. Applicants/

borrowers are expected to reduce the need for loan funds by using

available non-essential assets including cash on hand as outlined under

Sec. 1944.9.

(a) The maximum loan amount will be the lesser of the cost of:

(1) The acquisition and any necessary development or

(2) The market value of the security, less the unpaid principal

balance and past-due interest of any other liens against the security

property, plus an appraisal fee, for the following types of dwellings:

(i) An existing dwelling, as described in Sec. 1944.2, including

one being financed by transfer or inventory property sale, except as

provided in exhibit F (available in any RHCDS field office).

(ii) A new dwelling when any one of the following conditions exist:

(A) A conditional commitment was issued in accordance with

Sec. 1944.45.

(B) The RH loan will be closed prior to the start of construction,

and construction conforms to the requirements contained in subpart A of

part 1924.

(C) The required construction inspections were made by the Federal

Housing Administration (FHA) or Veterans Administration (VA). If

qualified under this paragraph, a complete set of plans and

specifications must be submitted together with copies of construction

phase inspection reports or certification by FHA or VA indicating the

dwelling was built in accordance with approved plans and

specifications. The builder will also furnish a certification of

compliance with RHCDS thermal standards for new construction as

required by exhibit D of subpart A of part 1924 (available in any RHCDS

field office).

(D) The manufactured home and site meet the requirements in exhibit

F and exhibit J of subpart A of part 1924 of this chapter. (These

exhibits are available in any RHCDS field office.)

(b) A loan will be limited to 90 percent of the market value of the

security, plus an appraisal fee, for any dwelling that does not meet

the requirements of paragraph (a) of this section, with the exception

of manufactured housing units.

(c) Notwithstanding the provisions of paragraph (a) of this

section, a loan on a dwelling which causes the total secured

indebtedness to exceed the requirements of paragraph (a) of this

section, may be made when the excess indebtedness is all or part of a

lien held by a public body (except for a lien arising out of a judgment

against the applicant/borrower in favor of the United States in a

Federal Court other than the United States Tax Court), hospital, or

welfare institution for advances made for medical bills, welfare

payments, or state motor vehicle judgments provided:

(1) The applicant/borrower is unable to settle or compromise such

lien sufficiently to avoid exceeding the market value;

(2) The lien securing the excess amount will at all times be

inferior to the RHCDS mortgage securing the initial loan and any

subsequent loan or advances determined by the RHCDS to be reasonably

necessary to carry out the purpose of the initial loan or to protect

the Government's financial interest;

(3) The existence of the excess lien will not jeopardize the

security or servicing so as to preclude the making of a sound RH loan;

(4) The applicant/borrower has the ability to meet any payments on

the excess debt as they become due or are likely to become due.

(d) Notwithstanding the provisions of paragraph (a) of this

section, when a subsequent loan for closing costs only is made

simultaneously with an inventory property sale (as provided in

Sec. 1955.117(f) or a transfer, the total indebtedness may exceed the

sale price or market value of the security property, whichever is less,

by no more than 1 percent.

(e) Notwithstanding the provisions of paragraph (a) of this

section, when RHCDS is refinancing the loan of an existing RHCDS

borrower in accordance with Sec. 1951.318, the debt may exceed the

market value of the security property to the extent necessary to

refinance the borrower's outstanding indebtedness plus closing costs

required in connection with the refinancing.

(f) Notwithstanding the provisions of paragraph (a) of this

section, when a subsequent loan is needed for repairs essential to

protect the Government's security interest, the total RHCDS

indebtedness may exceed the market value of the security by no more

than the amount of the subsequent loan consisting of the cost of

essential repairs and reasonable closing costs.

(g) RHCDS may grant exceptions to allow the amount of the loan to

exceed 85 percent of the maximum dollar limitation of section 203(b) of

the National Housing Act (12 U.S.C. Sec. 1702) may be granted under the

following conditions:

(1) RHCDS may increase the loan amount in selected areas when the

existing mortgage limit is insufficient to provide adequate housing for

RHCDS applicants and modest housing costs in the area exceed maximum

loan limits or where different maximum loan limits exist in adjacent

areas of the same community, for example: One limit on one side of the

street compared to a higher limit on the other side.

(2) RHCDS may increase the loan amount where necessary to

accommodate the specific needs of the family such as a larger home to

correct overcrowding situations for exceptionally large households and

reasonable accommodations for a disabled household member. When the

request is to allow reasonable accommodations for a disabled household

member, the additional loan amount will not exceed the cost of the

special features provided and the amount of the appraisal fee.

Sec. 1944.18 Security requirements.

(a) Adequate security. Except as provided below, to protect the

interests of RHCDS, all loans must be adequately secured. Except as

provided in Sec. 1944.17(c) and paragraph (b) of this section, a loan

is adequately secured only when all of the following requirements are

met:

(1) RHCDS obtains at closing a mortgage on all ownership interests

in the entire tract.

(2) No liens prior to the RHCDS mortgage exist at the time of

closing, and no junior liens are likely to be taken immediately

subsequent to or at the time of closing.

(3) The provisions of subpart B of part 1927 regarding title

clearance and the use of legal services are complied with.

(4) The property improvements and proposed improvements are totally

on the site and do not encroach on adjoining property. RHCDS may

require a survey, at the buyer's or seller's expense.

(b) Exceptions. Exceptions to the usual security requirements will

be made only as follows: [[Page 25649]]

(1) Note only. A loan of $2,500 or less, scheduled for repayment in

not more than 10 years from the date of the note, that is not subject

to recapture of subsidy in accordance with subpart I of part 1951, may

be secured by the borrower's promissory note alone when RHCDS

determines that:

(i) The applicant/borrower has a credit history which indicates an

ability and willingness to pay debts when they are due;

(ii) The applicant/borrower will have sufficient income to readily

meet all obligations; and

(iii) The applicant/borrower's equity in the real estate as

improved, equals, or exceeds the amount of the proposed loan.

(2) Mortgage insurance. When the applicant/borrower is the holder

of possessory rights on an American Indian reservation or State-owned

land, adequate security is required. This may include mortgage

insurance guaranteeing payment from a state agency or American Indian

tribe. States will issue a state supplement covering special security

and title clearance requirements needed for loans of this type.

(3) American Indian land. American Indian land in trust or

restricted status acquired with an RH loan will remain in trust or

restricted status. These mortgages must be approved by the Secretary of

the Department of the Interior. A State Supplement will be issued to

prescribe the actions to be taken by RHCDS personnel to implement the

making of loans under such conditions.

(4) Best mortgage obtainable. Loans of $7,500 or less scheduled for

repayment in not more than 15 years from the date of the note and

subsequent loans made for minimal essential repairs necessary to

preserve the Government's security must be secured by a mortgage,

except as provided in paragraph (b)(1) of this section, but title

clearance and the use of legal services in accordance with subpart B of

part 1927 are not required unless the loan approval official determines

that the procedures in subpart B of part 1927 are necessary to assure

repayment or accomplish the objective of the loan. Evidence of

ownership must be in accordance with Sec. 1944.24(d)(2).

(5) Leasehold. When the applicant/borrower owns only a leasehold

interest will treat the lessee's interest like any other type of

ownership interest in determining whether a mortgage on the leasehold

is required. The lease must meet the requirements of Sec. 1944.15(a)(5)

(iv) and (v). In any state in which applicants/borrowers are likely to

own a leasehold interest, the State Director will issue a State

Supplement outlining the technical requirements for making such loans.

(6) Security by junior lien. RHCDS may take a junior mortgage as

security for an RH loan if the tract, which will secure the RHCDS

mortgage, provides adequate security for the entire prior lien debt and

the RH loan, and

(i) The prior mortgage does not contain provisions that may

jeopardize RHCDS's security position or the applicant/borrower's

ability to repay the loan, such as provisions for future advances,

forfeiture, cancellation, foreclosure without adequate notice to junior

lienholders, attorney's fees exceeding those customary for the area in

cases of foreclosure; or

(ii) Such provisions are satisfactorily limited, modified, or

waived; and

(iii) The conditions set forth in subpart B of part 1927 are met.

(7) Liens junior to RHCDS lien. Liens junior to the RHCDS lien will

be allowed at closing or immediately subsequent to closing only when:

(i) The junior lien will not interfere with the purpose or

repayment of the RH loan, and

(ii) The total amount of the RH loan, the junior lien, and any

prior liens will not exceed the market value of the security except as

provided in Sec. 1944.17(c), and

(iii) The conditions set forth in subpart B of part 1927 are met.

(8) Undivided interest. When the applicant/borrower owns an

undivided interest in the property, the co-owners' interests need not

be included in the mortgage in the following instances:

(i) When one or more of the co-owners are not legally competent

(and there is no representative who can legally consent to the

mortgage) or cannot be located, or the ownership rights are divided

among such a large number of co-owners that it is not practical for all

their interests to be mortgaged, the mortgaging of interests not

exceeding 50 percent may be excluded from the security requirements

upon prior approval by RHCDS. All legally competent co-owners using or

occupying the property will be required to sign the mortgage. Co-owners

will be required to sign the note when necessary for a sound loan or to

obtain the required security. The loan may not exceed the value of the

percentage of the market value of the property represented by the

interests of the owners who sign the mortgage. In determining such

value, consideration will be given to any adverse effect which might

result from sale of the mortgaged interests separately from the

nonmortgaged interests.

(ii) When the applicant/borrower owns only an undivided interest in

a building site which will be a part of the farm, the interest of the

applicant/borrower's co-owners may be excluded from the security

requirements upon approval by RHCDS if:

(A) The market value of the jointly owned tract is at least equal

to the debts against it (including the RHCDS loan), and

(B) The applicant/borrower's participation in the joint ownership

of part of the farm and its operations has been and is likely to

continue to be successful.

(9) Life estate. When the applicant/borrower owns a life estate

interest in the property, the remainder interests need not be included

in the mortgage if one or more of the persons holding remainder

interests are not legally competent (and there is no representative who

can legally consent to the mortgage) or cannot be located, or if the

remainder rights are divided among such a large number of people that

it is not practicable to obtain the signatures of all the remainder

interests. In the instance of numerous heirs, the mortgaging of

remainder interests, not exceeding 50 percent of the total remainder

interest may be excluded from the security requirements upon prior

approval by RHCDS. In such cases, the loan may not exceed the value of

the property owned by the persons executing the mortgage.

(10) Farm dwelling. When the applicant/borrower is the owner of a

farm, a mortgage may be taken only on the dwelling and dwelling site

provided the following conditions can be met:

(i) The tract to be mortgaged must not include farm service

buildings, must be in a good residential location, be otherwise

suitable as a residential type of nonfarm tract, provide adequate

security for the loan, be contiguous to and have direct access to a

public road, or

(ii) The tract to be mortgaged must contain at least enough land to

clearly provide adequate security for the loan and to make the tract

readily saleable in the area.

(11) Land purchase contract. When the ownership interest is by

virtue of a land purchase contract (as described in Sec. 1927.52), the

transaction must be converted to a deed/mortgage situation prior to

loan closing and meet the conditions of Sec. 1944.22(b)(6) prior to

loan closing.

(c) Additional security. When necessary to supplement the

applicant/borrower's equity in the farm or [[Page 25650]] nonfarm tract

on which the dwelling is located, or to facilitate servicing the loan,

RHCDS may also require a mortgage on other real estate owned by the

applicant/borrower.

(d) Assignment of income from real estate to be mortgaged. Income

to be received by the borrower from royalties, leases, or other

existing agreements under which the value of the real estate security

will be depreciated will be assigned and disposed of in accordance with

applicable portions of subpart C of part 1965, and the provisions for

written consent of any prior lienholder. In small nonfarm tract cases,

RHCDS may authorize withholding transmittal of assignments to lessees

for execution until production begins.

Sec. Sec. 1944.19-1944.21 [Reserved]

Sec. 1944.22 Refinancing non-RHCDS debts.

(a) Loan funds may be used for refinancing non-RHCDS debts on a

dwelling (except for manufactured homes) if the debt was incurred by

the applicant prior to the date the application was filed and the

following conditions can be met:

(1) The debt was incurred for purposes for which a section 502 RH

loan could be made or is a protective advance by the mortgagee for

items covered by the mortgage to be refinanced, including accrued

interest, insurance premiums, real estate tax advances, or preliminary

foreclosure costs.

(2) The debt must be a lien against the property which will be

security for the RH loan. The promissory note and security instrument

for the debt to be refinanced must represent rates and terms that were

typical and customary for long-term residential financing in the area

at the time the debt was incurred.

(3) A loan to refinance a qualified secured debt may also include

short-term or unsecured debts, if necessary to establish a sound

repayment ability, if such short-term or unsecured debts were incurred

for authorized section 502 RH loan purposes and are not a significant

portion of the loan.

(4) Payments on the debt are so seriously delinquent or, if not

delinquent, it must be evident that the applicant will be unable to

continue to maintain payments, for reasons beyond the control of the

applicant, and the applicant is likely to lose the dwelling at an early

date if the debt is not refinanced. Such delinquency must be due to

loss of employment or household income, illness, or other such similar

events or unforeseen circumstances.

(5) A statement must be obtained from the creditor for each debt to

be refinanced showing the purpose for which the debt was incurred, the

date on which it was incurred, the final due date, interest rate,

amount and frequency of installments, unpaid principal and accrued

interest, and amount of delinquency, if any.

(6) Refinancing such debts will not jeopardize the required

priority of the RHCDS security instrument.

(b) Loan funds may be used for refinancing non-RHCDS debts on a

building site without a dwelling when the applicant is unable to pay

the debt from personal resources and failure to authorize the use of RH

funds to pay such costs would prevent the applicant from acquiring

decent, safe, and sanitary housing and the following conditions can be

met:

(1) The site meets the conditions prescribed in Sec. 1944.11(c).

(2) The debt was incurred prior to the date of application for the

sole purpose of purchasing the site.

(3) The debt is a lien against the property which will be used as

security for the RH loan. The promissory note and security instrument

for the debt represent rates and terms that were typical and customary

for short-term residential financing in the area at the time the debt

was incurred.

(4) The refinancing loan will include adequate funds for

constructing a modest dwelling on the site for the use of the

applicant, which conforms with the requirements of Sec. 1944.16(a).

(5) A statement must be obtained from the creditor for each debt to

be refinanced showing the purpose for which the debt was incurred, the

date on which it was incurred, the final date due, interest rate,

amount and frequency of installments, unpaid principal and accrued

interest, and amount of delinquency, if any.

(6) Refinancing such debts will not jeopardize the required

priority of the RHCDS security instrument.

(c) If a loan of $5,000 or more is necessary for repairs to correct

major deficiencies and make the dwelling decent, safe, and sanitary, an

existing lien which meets the requirements of paragraphs (a)(1), (2),

(3), and (5) of this section may be refinanced regardless of

delinquency, if necessary for the applicant to have repayment ability

for the existing loan and the requested loan for repairs.

(d) Debts or costs incurred after the date of application may be

refinanced if the costs were incurred for:

(1) Fees for legal, architectural, and other technical services, or

(2) Materials, construction, or site acquisition.

(e) RHCDS may authorize the use of RH funds to pay costs provided

for in paragraphs (d)(1) and (2) of this section only when RHCDS

retains the same lien priority as the debt to be refinanced and all of

the following conditions exist:

(1) The costs were incurred after the applicant filed a written

application for a loan but before the loan was closed. In the event of

a subsequent loan to complete improvements previously planned, the

costs must have been incurred after the initial loan was closed.

(2) The applicant is unable to pay such costs from personal

resources or to obtain credit from other sources and failure to

authorize the use of RH funds to pay such costs would jeopardize the

applicant's capability of repaying the loan.

(3) The construction or repair work conforms to that shown on the

building plans and specifications or the RHCDS Development Plan, when

applicable, and the costs were incurred for authorized Section 502 RH

loan purposes.

Sec. 1944.23 [Reserved]

Sec. 1944.24 Technical services.

(a) Planning and performing construction work. Any construction

work will be planned and completed in accordance with subpart A of part

1924 or a lesser standard as may be prescribed by RHCDS for

demonstration type loans.

(b) Planning and performing site development work. Any site

development will be planned and completed in accordance with subpart C

of part 1924, except as provided for manufactured homes in exhibit J of

subpart A of part 1924. Subdivisions will be accepted by RHCDS without

further processing when the developer provides written evidence of

current subdivision acceptance by HUD or VA and the developer provides

proof of compliance with exception conditions established by HUD or VA.

(c) Appraisals. Appraisals will be required as follows:

(1) When a mortgage will be taken to secure a total indebtedness of

more than $15,000, an appraisal of the security property will be made.

The loan can exceed the market value of the security by the amount of

an appraisal fee. A fee will be charged for each application for a

section 502 RH loan when an appraisal is needed for initial and

subsequent loans and assumptions. Fees will be waived for appraisals

done for subsequent loans to existing RHCDS [[Page 25651]] borrowers

for minimal essential repairs that are necessary to protect Government

security property. The fee will be collected at loan closing by the

closing agent.

(2) When the total indebtedness will be $15,000 or less, an

appraisal of the real estate or leasehold interest is not required,

unless RHCDS is uncertain as to the adequacy of the security.

(3) Real estate mortgaged as additional security will be appraised

when it represents a substantial portion of the security for the loan

or when requested by the loan approving official.

(d) Title clearance and legal services. (1) When real estate will

be taken as security (including a mortgage on a leasehold), except on a

best mortgage obtainable basis, title clearance and legal services for

making and closing the loan will be provided in accordance with subpart

B of part 1927. Title clearance and legal services will not be

requested until the loan is approved.

(2) When real estate will not be mortgaged or when the best real

estate mortgage obtainable is taken as security without title clearance

or use of legal services, the applicant will be required to submit

evidence of ownership of the farm or nonfarm tract. When RHCDS is

uncertain as to whether or not the applicant is a qualified owner, such

action will be taken as RHCDS considers necessary, such as requiring

the applicant to furnish additional information. No loan will be made

if RHCDS has actual knowledge that the applicant does not have valid

title to the property.

Sec. 1944.25 Rates and terms.

(a) Interest rate. The interest rate charged by RHCDS will be the

lower of the rates in effect at the time of loan approval or loan

closing. Interest rates are specified in exhibit B of FmHA Instruction

440.1 (available in any RHCDS field office) for the type of assistance

involved.

(b) Amortization. Loans will be scheduled for repayment over a

period that will not exceed the expected useful life of the property as

a dwelling. Only one of the amortization periods listed in this

paragraph may be used for a borrower. Each loan will be scheduled for

repayment from the date of the promissory note, for a period not to

exceed one of the following as applicable:

(1) Thirty-three years for initial and subsequent loans.

(2) Thirty-eight years for initial loans (subsequent loans may be

made for a period not to exceed the remaining years of the initial

loan) when the following conditions are met:

(i) Adjusted annual income does not exceed 60 percent of the median

income for the area as reflected in exhibit C, (available in any RHCDS

field office), and

(ii) The longer term is necessary to show repayment ability, with

or without mortgage payment deferral.

(3) Thirty years for manufactured homes.

(4) Ten years for loans not exceeding $2,500 which are not secured

by a real estate mortgage.

(c) Payment Assistance. Borrowers may be eligible

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