# Single Family Rural Housing Loans

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URL: https://www.frixlaw.com/law-library/documents/fr%3A95-11308

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** May 12, 1995
- **Citation:** 60 FR 25629

## Text

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.

-----------------------------------------------------------------------

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 wh

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-11308. Public record. Not legal advice.