Rural Housing Loans

[[Page 26980]]

DEPARTMENT OF AGRICULTURE

Rural Housing and Community Development Service

Rural Business and Cooperative Development Service

Rural Utilities Service

Consolidated Farm Service Agency

7 CFR Part 1980

RIN 0575-AB15

Rural Housing Loans

AGENCIES: Rural Housing and Community Development Service, Rural

Business and Cooperative Development Service, Rural Utilities Service,

and Consolidated Farm Service Agency; USDA.

ACTION: Final rule.

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

amends its Guaranteed Rural Housing Loans regulation. This action is

taken to address issues which arose during the implementation phase of

the program. The intended effect of this action is to make the program

more acceptable to lenders and the secondary market for mortgage loans,

to remove RHCDS internal administrative procedures from the Federal

Register, and to make minor adjustments and corrections as a result of

the Agency's experience in implementing the program.

EFFECTIVE DATE: June 21, 1995.

FOR FURTHER INFORMATION CONTACT: Michael S. Feinberg, Senior Loan

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

5334-S, 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/economically

significant and was reviewed by Office of Management and Budget under

Executive Order 12866.

Paperwork Reduction Act

The information collection and recordkeeping requirements contained

in this regulation have been previously approved by the Office of

Management and Budget (OMB), except for Sec. 1980.351, which will not

become effective until approved by OMB, in accordance with the

Paperwork Reduction Act of 1980 (44 U.S.C. Chapter 35). The assigned

OMB control number is 0575-0078. Please send written comments to the

Office of Information and Regulatory Affairs, OMB, Attention: Desk

Officer of USDA, Washington, D.C. 20503. Please send a copy of your

comments to Jack Holston, Agency Clearance Officer, USDA, RECD, Ag Box

0743, Washington, DC 20250. (OMB# 0575-0078)

Environmental Impact Statement

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

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

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment, and in

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

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

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/activity

is excluded from the scope of Executive Order (EO) 12372 which requires

intergovernmental consultation with State and local officials.

Civil Justice Reform

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. In accordance with this rule: (1) all state and

local laws and regulations that are in conflict with this rule will be

preempted; (2) no retroactive effect will be given to this rule; and

(3) administrative proceedings in accordance with the regulations of

the agency at 7 CFR part 1900 subpart B or those regulations published

by the Department of Agriculture to implement the provisions of the

National Appeals Division as mandated by the Department of Agriculture

Reorganization Act of 1994, whichever is applicable, must be exhausted

before bringing suit in court challenging action taken under this rule

unless those regulations specifically allow bringing suit at an earlier

time.

Programs Affected

This program is listed in the Catalog of Federal Domestic

Assistance under 10.410, Very Low to Moderate Income Housing Loans.

Discussion

On September 3, 1993, Farmers Home Administration (FmHA) published

a proposed rule with request for comments for the Guaranteed Rural

Housing (GRH) program. We received forty-two comments. Comments were

from Agency employees or employee groups, lenders, secondary market

sources, and various interest groups.

The Federal Crop Insurance Reform and Department of Agriculture Act

of 1994, Public Law No. 103-354, signed into law on October 13, 1994,

resulted in the restructuring of the Department of Agriculture's Rural

Housing programs, formerly carried out by FmHA, which are now assigned

to RHCDS. This change is reflected in this regulation.

The Agency discussed the need to make the program more compatible

with existing mortgage lending programs. Many of the comments addressed

this issue. Some of the respondents felt that the Agency should make

the program more like conventional loans. Others advocated the use of

other Federal mortgage programs as a guide. We tried to keep the better

features of both conventional and Government programs to make the

Guaranteed Rural Housing Program as easy for lenders to use as

possible. RHCDS believes the easier it is for lenders to participate,

the more borrowers can be served with the program.

This regulation omits the detailed internal agency administrative

instruction used by the field offices to administer the program. In the

past, RHCDS program regulations and FmHA Instructions have been the

same. Agency policy is to publish any regulation which confers a

benefit or imposes an obligation on the public. It is also agency

policy to publish any regulation which contains information necessary

for members of the public to understand their responsibilities. The

Agency does not intend to publish a regulation that omits or evades

issues which are subject to public comment or would be of interest to

the public. Any substantive changes in the regulation will continue to

be published in the Federal Register. Each RHCDS field office has a

copy of the FmHA Instruction and a copy is available upon written

request to RHCDS.

Some respondents, mostly RHCDS employees, focused on the lack of

detailed administrative instructions. The Agency continues to publish

its FmHA Instruction, discussed above, which contains information on

carrying out administrative details.

In previous publications of this regulation, RHCDS incorporated the

forms used in the program into the Federal Register. RHCDS no longer

publishes the forms. We incorporated the substantive materials from the

forms into the regulation.

We discuss other significant changes below in general order of

appearance in [[Page 26981]] the regulation, not based on order of

importance.

RHCDS added several new definitions based on the comments. New

definitions include: Agency, Co-applicant, Net proceeds, and Qualifying

income.

One respondent suggested a section for abbreviations and acronyms

which we added. The preamble for the Proposed Rule erroneously stated

that the definition for ``Existing Dwelling'' was deleted. The

definition for ``Existing Dwelling'' provides that an existing dwelling

is one ``which has been occupied for one year as a primary residence.''

Several respondents suggested that RHCDS revise the standard. They

proposed that an existing dwelling is one that has been completed for

more than 12 months as evidenced by a certificate of occupancy. RHCDS

agrees and adopts this change.

Several respondents pointed out that the program does not provide

for dwellings under construction before the lender receives an

application for a guaranteed housing loan. This includes speculative

dwellings as well as dwellings built by builders not familiar with the

RHCDS program. This results in a burden on builders and home-buyers who

would have to wait until the dwelling is more than 12 months old before

receiving a loan. RHCDS addresses this in its direct program by

limiting the amount of the loan to 90 percent of the appraised value.

Based on the comments, we incorporated this same provision into the

Guaranteed Rural Housing program.

One respondent indicated a need for clarification of ``first time

homebuyer.'' The authorizing legislation provides for granting

preference to first time homebuyers. If there are two requests for

commitments ready for approval but there is a shortage of funds, RHCDS

gives preference to the first time homebuyer over another applicant.

One respondent noted that the Proposed Rule omitted a provision

that allowed sale of the loan directly to Fannie Mae and Freddie Mac.

This has been corrected.

One respondent encouraged RHCDS to improve the accessibility of

housing counseling in rural areas. RHCDS has solicited interested

parties for implementation of a demonstration counseling program (see

Federal Register Vol. 59, No. 31, page 7240 dated February 15, 1994).

Loan applicants will be required to attend and complete the housing

counseling if it is available in the area.

Several respondents indicated that the various provisions for

lender reviews were confusing. RHCDS removed the review requirements

that were duplicative.

RHCDS had revised the section on loan purposes in the Proposed

Rule. Several respondents requested restoration of certain specific

items such as storm cellars, energy saving measures, etc. RHCDS did not

intend to exclude storm cellars, energy saving measures, etc. as long

as they are part of the dwelling acquisition. This has been clarified.

Several respondents complained about the prohibition on refinancing

in section 1980.311(a). They argued refinancing could assist some

homeowners in retaining their dwellings. Some respondents suggested

guaranteed loans could help in the graduation of direct loans. The

authorizing legislation limits the program to assistance for housing

acquisition only. There is no authority for refinancing. In addition,

the demand for guaranteed housing dollars exceeds available funds.

RHCDS proposed a prohibition on dwellings with in-ground swimming

pools. Several respondents argued that some areas of the country have

existing housing stock that is modest in cost even though there is a

pool. The respondents commented that the value of the dwelling is often

not significantly affected by the pool. They argued exclusion of pools

would preclude financing many otherwise eligible dwellings. RHCDS

continues to believe that it is not appropriate to finance dwellings

with in-ground pools. No change is made.

RHCDS has had a long standing policy of financing in areas only

where the streets and roads are maintained by a public entity. We

proposed to permit financing where the streets and roads are maintained

by a Homeowner Association in projects which have been approved or

accepted by HUD, VA, Fannie Mae, or Freddie Mac. One respondent

observed that the issue of project acceptance is better placed in a

different paragraph. RHCDS agrees and we revised and restructured this

portion of the regulation.

We received several comments on the proposal to replace the

provision that limits the site to one acre. RHCDS proposed that the

value of the site cannot exceed 30 percent of the total value of the

property. One respondent felt the proposed change was not as clear as

the 1 acre rule. Some respondents believed the 30 percent rule may

cause problems in high cost areas. One respondent indicated that the

one acre rule is easier to explain and understand. Another respondent

suggested the 30 percent rule is an unnecessary regulatory burden. Most

of the comments, however, favored the proposal. Many people felt that

the one acre rule was overly restrictive in many areas of the country.

RHCDS believes the issue of high cost areas is adequately addressed by

the provision that the 30% limitation does not apply when the site

cannot be subdivided into two or more sites. The intent of the rule is

to assure financing is limited to rural residences and to avoid

financing income producing properties. Other lenders use a similar

provision.

RHCDS required completion of all development work before issuance

of the guarantee. Several respondents observed that RHCDS has no

provision for issuance of the guarantee when there is a delay in

completion of required development work due to inclement weather. This

requires lenders to delay closing until completion of the development

work and places undue burden on both the purchaser and the seller. The

respondents suggested RHCDS adopt a provision allowing the use of

escrow accounts in situations where necessary repair work is delayed

due to weather. RHCDS agrees that this would reduce the regulatory

burden for its customers.

Many respondents expressed interest in section 1980.317 which

implements Executive Order 11246. Respondents took particular interest

in the equal opportunity and nondiscrimination inspection and reporting

requirements. A number of the respondents argued that these

requirements should not apply to guaranteed loans in as much as there

is no direct federal financing involved. Some respondents argued that

since construction draws are not allowed, RHCDS is not a party in the

construction process. While RHCDS is not directly involved in the

construction financing, there likely would be no construction contract

without the RHCDS guarantee. Executive Order 11246 applies when there

is a construction contract of more than $10,000 between the borrower

and the builder.

Several comments addressed flood zones. RHCDS has long had a policy

of not financing dwellings located within a flood plain unless it could

be demonstrated that there was no alternative. This policy is derived

from Executive Order 11988, Flood Plain Management. Practical

alternatives are addressed through the environmental review process. In

addition, the Agency requires that the first floor elevation to be

above the 100 year flood line. These are not changes to RHCDS policy or

to the GRH program. This revision simply incorporates the language from

other [[Page 26982]] Agency regulations into this regulation for

consistency.

RHCDS had proposed to amend section 1980.324(b) on late charges to

make the maximum fee a lender could charge for late payments an

unpublished administrative provision. One respondent indicated that the

maximum late charge should be available for public comment. This

section is revised to provide that the late charge cannot exceed the

late charge as prescribed by either HUD or by Fannie Mae. This will

allow both HUD and conventional lenders to participate in the program

making it available to as many borrowers as possible.

RHCDS proposed to limit the age of the appraisal to not more than 3

months from the date of submission to RHCDS. Several respondents felt

this did not allow enough time in some circumstances and proposed a 6

month time frame. RHCDS agrees and the change is adopted.

RHCDS had proposed to implement an environmental checklist intended

to help the Agency determine the need for a site visit for

environmental reasons. The checklist was to be similar to HUD Form

54891, ``Appraiser/Review Appraiser Checklist.'' Of the seven comments

on this subject, only two were favorable. Two respondents advised that

HUD no longer uses the form in most circumstances (See 58 Fed. Reg.

41328-41339, August 3, 1993). One respondent reported that they had

difficulty locating appraisers who were familiar with the form. Another

respondent had little problem locating several appraisers familiar with

it. One of the respondents represented an organization of professional

real estate appraisers. This respondent indicated the proposed form

would require appraisers to respond to questions which they were not

trained or qualified to identify. RHCDS has determined it will not

adopt the use of the HUD form at this time. The Agency plans to review

this issue further for possible future implementation.

RHCDS proposed discontinuing the use of replacement cost in

appraisals of dwellings which are more than a year old. One respondent

felt that the appraisers should provide the depreciated value of the

dwelling and the value of the site for determining insurance and site

values. RHCDS believes that these are loan underwriting issues which

should be left to the lender. The revisions are adopted as originally

proposed.

Several comments were received regarding RHCDS appraisal reviews.

Since the performance of the appraisal review is an internal matter,

RHCDS is removing the language from the Federal Register regarding

appraisal reviews.

Section 1980.340(c) provides that the ``Lender and borrower are

responsible for seeing that loan purposes are accomplished and loan

funds are properly utilized.'' One respondent felt that the Agency is

holding the borrower responsible for matters that require a high degree

of technical expertise. RHCDS disagrees. The Government does not

perform these functions on behalf of the borrower or the lender.

Lenders and borrowers must take the necessary actions to protect their

interest.

One respondent took exception with RHCDS's inspection requirements

for new and existing dwellings. The respondent indicated that it was

not typical to obtain inspections beyond that done by or recommended by

the appraiser. The respondent also complained that RHCDS did not

provide guidance on minimum qualifications a qualified inspector must

meet. Some respondents suggested that only a final inspection need be

obtained for new dwellings along with a certification that the dwelling

was built according to the plans and specifications and that the

appraiser address the inspection issue for existing dwellings. RHCDS

continues to believe it is important to have the dwelling inspected. In

many instances, the inspection can be performed by the appraiser. The

Agency expects that lenders will use the same standards that any

reasonable person would use to obtain an inspection of their own

dwelling. The regulation is clarified on this point.

Several respondents expressed interest in the requirements for

existing dwellings. Section 1980.341(b) made reference to the general

requirements of the Agency's Guide 2 to subpart A of part 1924. The

respondents indicated a need for clearer guidance. RHCDS agrees and we

have revised this section to incorporate the HUD guidelines for

existing properties. Many residential appraisers and inspectors are

familiar with the HUD guidelines and this will make it easier for

lenders to use the program.

Section 1980.345 provides the eligibility requirements an applicant

must meet at the time of ``loan approval.'' Program eligibility is

limited to moderate income households. One respondent questioned

whether loan approval referred to approval by the lender or RHCDS. This

is pertinent because an applicant that exceeds the moderate income

limits is not eligible for the program. The point in time at which

income is determined could result in different decisions. Another

respondent suggested using loan closing as a point of reference instead

of loan approval. RHCDS believes this would cause undue burden to

borrowers, sellers, and lenders by rendering ineligible loans in which

considerable processing time and expense has been incurred. It is

important to note the distinction between RHCDS approval and lender

approval. The lender approves the loan. RHCDS approves issuance of a

loan guarantee. The regulation is revised to bring out this distinction

and approval will clearly reference issuance of the commitment for a

loan guarantee.

One respondent suggested that RHCDS adopt the income limits used in

the Fannie Mae Community Home Buyers Program. The respondent complained

that it is burdensome to work with income limits that vary by family

size. Fannie Mae limits are simpler to work with, however, many

families otherwise eligible would be excluded since the current method

provides higher limits for larger family sizes. This provision remains

unchanged.

One respondent recommended that RHCDS change the ratio term

``Monthly Obligation to Income (MOTI)'' to ``Total Debt Ratio.''

``Total Debt'' is the terminology used in the industry. RHCDS agrees.

The proposal to consider the cost of job related expenses in the

total debt ratio generated nine comments. Three respondents opposed the

addition of this provision. One clearly favored including child care as

an expense. There were two suggestions for clarification and one

recommendation for further study of the issue. RHCDS had proposed this

revision in order to make its program more consistent with other

Federal program. It has been learned that other agencies are reviewing

this requirement. Based on its experience with this program to date,

RHCDS has not had cause to believe its current handling of job related

expenses has led to losses that otherwise would not have occurred. The

Agency has opted for further study of the issue.

Several respondents suggested adding two percent to the qualifying

ratios for dwellings that meet the 1992 Model Energy Code (CABO 92

MEC). After careful consideration, the Agency is not adopting this

change. The reason is that the Agency's thermal standards which were

already in place meet or exceed the Model Energy Code. Adoption of the

Model Code standards will not enhance the repayment ability of an RHCDS

borrower.

Three respondents suggested the Agency provide guidance on the

consideration of contingent liabilities. [[Page 26983]] Contingent

liabilities include debts from a previous marriage and debts assigned

to the former spouse in a divorce decree. The lack of guidance is

burdensome and inefficient for borrowers and lenders. RHCDS added this

guidance.

Another respondent expressed concern about the difference between

eligible income and qualifying income. Authorizing legislation limits

program eligibility to those borrowers with a moderate income. In

making this determination, RHCDS looks at income that many lenders

typically would not rely on for repayment ability. We clarified the

difference between ``eligible'' and ``qualifying'' income. RHCDS uses

``eligible'' income to determine the borrower's eligibility for the

program. Eligibility is based on current income. The lender uses

``qualifying'' income in loan underwriting. ``Qualifying'' income

provides the basis for repayment ability. For example, income from a

part time job the applicant has held for less than 6 months is eligible

income. Unless the applicant has a history of similar income, it may

not be dependable enough to consider for repayment ability.

RHCDS had proposed allowing the lender to waive the qualifying

ratios when there are compensating factors. One respondent suggested

that this approach could be workable but would require considerable

RHCDS training and oversight. Another respondent suggested the Agency

have the lender request an Agency determination for the waiver. Another

respondent suggested that ``waiver'' of the ratios implies that lenders

may not have to consider income adequacy. RHCDS agrees with all of

these comments. We made revisions so the lender may request RHCDS

concurrence in allowing a higher ratio.

Several respondents discussed loan underwriting standards for

credit history. Two respondents disagreed with the RHCDS standard which

provides that any debt written off by the creditor within the last 36

months is adverse credit. They argued that sometimes a debt is written

off by the creditor but the borrower continues to pay. The respondents

stated this is not adverse credit. RHCDS considers any credit history

blemish to be adverse credit. There are, however, circumstances in

which the borrower can reasonably explain adverse credit. When adverse

credit is beyond the applicant's control, the lender may consider this

in making a final determination.

Several respondents alluded to a 36-month ``waiting period'' in the

case of a bankruptcy. There is no ``waiting period'' in the

regulations. In fact, RHCDS regulations do not directly address

bankruptcy as being adverse credit. There is a provision that

bankruptcy older than 36 months should not be considered in evaluating

credit history.

One respondent commented on the eligibility issue of home

ownership. An applicant that already owns an adequate dwelling is not

eligible. Sometimes a family moves from one area to another and they

are unable to sell their former residence. The respondent suggested a

provision that the applicant could meet the ownership requirement as

long as he or she does not own a dwelling in the local commuting area.

We have revised the regulation to incorporate the clarification

requested.

Another respondent suggested a revision on the provision for other

credit. The issue is whether the qualification for another Federal or

state program would preclude eligibility for the program or not. We

have revised the regulation to incorporate the clarification requested.

Several respondents suggested changing the determination of annual

income to include a 24 month history instead of a 12 month history and

including straight line depreciation in determining income. Annual and

adjusted income, by law, have the same meanings given by section

3(b)(4) and 3(b)(5) of the United States Housing Act of 1937. The

regulation already provides for the consideration of depreciation as

allowed by the Internal Revenue Service.

One respondent pointed out that income from the employment of

minors is not included in annual income but the regulation calls for

its use in determining repayment ability. The respondent suggested

elimination of the provision for counting a minor's income. Although

the minor cannot be a party to the note, the lender may consider this

additional household income as a possible compensating factor.

RHCDS had proposed to reserve the authority to issue commitments

subject to the availability of funds. RHCDS recognizes the loan making

process can range from several weeks to several months. RHCDS receives

no notification of a pending application until the Lender submits a

request for a loan guarantee. Since RHCDS's funding authority is based

on annual appropriations, there could be loans in process which the

Agency cannot fund. RHCDS received eight comments on the proposal to

issue commitments subject to funding. Seven of these opposed the

proposal. Several respondents argued that the proposal would represent

an unacceptable risk to the secondary market and to lenders. One

respondent stated that commitments without funding would weaken the

validity of the conditional commitment. Most of the respondents

suggested an alternative method such as the creation of a register for

loan applications. This would enable the Agency to track the

application pipeline and assure lenders of the availability of funds.

Section 1980.351 implements a funding reservation system.

Section 1980.353(c) clarifies that the loan must be underwritten by

the lender before it is submitted to RHCDS. Previous language called

for lender submission of a feasibility analysis. This change in

terminology was made based on comments received both from RHCDS

employees and lenders.

One respondent suggested that the request for a conditional

commitment should include copies of the income verifications and the

purchase agreement or construction contract. We added these to the list

of required documentation.

Several respondents made suggestions regarding requirements for

verification of the borrower's income. One suggestion was to clarify

that the verification must be valid at that time of issuance of the

Conditional Commitment. Several respondents suggested that RHCDS permit

the use of an authorization for release of information instead of the

borrower signing the verification form directly. This would allow the

lender to increase their efficiency. Another suggestion encourages the

use of secondary means of income verification. For example, many

lenders obtain a copy of the 3 most recent paycheck stubs for employed

borrowers to compare with the information in the employer verification.

These suggestions have been adopted.

There were four comments on lender submission of a copy of the loan

docket. Each of the respondents asked for an explanation of what a

``loan docket'' consists of. Two of the respondents suggested that

RHCDS should already have copies of the information it needs and that

the requirement may be redundant. One respondent suggested that RHCDS

should ask only for items which are necessary to determine that the

closing conditions were met. RHCDS agrees and so revised the

regulation.

Two respondents asked that the provision regarding additional loans

be removed or revised. One respondent stated the prohibition prevents

the lender from making a home [[Page 26984]] improvement loan but

leaves other lenders free to make the same loan. RHCDS agrees with the

respondents and deleted this provision.

Two comments addressed assumptions and transfers. One respondent

was concerned that since transfers were permitted but not required, a

lender might unfairly place a borrower in jeopardy by refusing to

permit a transfer. The other respondent felt transfers should be

allowed at market value or for the outstanding debt, whichever is less.

The same respondent proposed release of liability for the transferor.

The Housing Act of 1949, as amended, prohibits the release of

liability. For this reason, RHCDS determined that the loan transfers

cannot be for less than outstanding debt. Sale of the dwelling without

assumption of the loan is not prohibited. RHCDS wanted to permit the

lender the flexibility to use the transfer as a servicing tool if the

lender determined that was the best course of action. No change is made

to this section.

One respondent noted there is nothing in the regulation addressing

an unapproved transfer. A provision has been added to clarify this.

One respondent challenged RHCDS because moratoria are not included.

The respondent referenced section 505 of the Housing Act of 1949, as

amended. RHCDS notes that the Act authorizes the use of this servicing

tool but does not require it. RHCDS encourages lenders to ``make every

effort to assist borrowers who are cooperative and willing to make a

good faith effort * * *.'' The lender is authorized to make temporary

revisions to the repayment schedule.

There were two comments on protective advances. One respondent

suggested that the $500 threshold was too low. The other respondent

argued that prior approval may not be appropriate since protective

advances are by definition of an emergency nature. The respondent

suggested that RHCDS encourage lenders to obtain prior approval to

assure the expense is included in the loss claim. This protects RHCDS

while providing flexibility to the lender.

One respondent suggested that RHCDS approval of a plan to continue

with a delinquent borrower may result in delays. These delays could

forestall successful implementation of the plan. RHCDS agrees with the

comment and section 1980.374(d)(1) is so revised. However, the Agency

may reject any plan that does not protect the Government's interest.

One respondent indicated that it was almost always cost effective

to accept a Deed-in-lieu rather than foreclose. The respondent

suggested that RHCDS permit the lender discretion to accept a Deed-in-

Lieu of foreclosure without prior approval. RHCDS agrees and this

change is adopted.

Several comments were received on the revised loss payment

provisions. Three respondents indicated that the time frame for filing

the loss claim was not long enough. Two respondents suggested 45

working days is more consistent with industry practice. RHCDS finds a

45-working day time frame is awkward to work with and allows 9 weeks or

longer for the lender to process the claim. The other respondent

indicated that Fannie Mae allows its servicers 30 calendar days to file

claims for private mortgage insurance. RHCDS believes that 30 calendar

days is reasonable time to file a claim and this revision is adopted.

There were two favorable comments on the proposal to allow a 6

month period for the lender to liquidate acquired property. One

respondent indicated that the 6 month period was not long enough and

might encourage a ``fire'' sale to liquidate the property. The

respondent suggested a 12 month period with a minimum established upset

sale price. Another respondent questioned the need for a plan for

disposition of the property. The respondent indicated that the

preparation of the plan is a burden for both the lender and RHCDS

without financial benefit. The purpose of the plan is to protect the

Agency against the possibility of a ``fire'' sale. The respondent

stated that the regulation is very general as to the content of the

plan and contains no financial guidance with respect to how much RHCDS

will allow for various cost items. The respondent also complained that

there is no indication whether RHCDS will accept aggregate costs in

excess of the percentage formula allowance currently used. The same

respondent felt it is not clear when the plan is to be filed. The

intent of the Agency is to protect itself from unreasonable losses.

RHCDS does not impose specific cost allowances for various liquidation

expenses. The Agency looks to see whether the costs claimed by the

lender are legitimate, necessary, and reasonable for the area. There

are no allowances for aggregate costs over the percentage formula.

Examples and details will be available through the lender handbook.

Two comments related to the date of the RHCDS interest assistance

payment. The language was adjusted to clarify when the interest

assistance payment would be made. A proposal to provide for the payment

on the first of the month instead of the fifteenth was not adopted.

One respondent suggested that interest assistance should be made

available as a loss mitigation strategy. We believe the commenter

intended this as a loan servicing tool to grant interest assistance to

borrowers who experience decreases in income. Interest assistance funds

are subject to appropriations. This means that interest assistance can

be made available only for loans guaranteed from funds with an interest

assistance appropriation. This comment is not implemented.

Four comments dealt with Mortgage Credit Certificates and funded

buy-down accounts. Two respondents suggested the value of a Mortgage

Credit Certificate should be subtracted from the borrowers obligations

rather than added to income. The respondents mentioned this is

consistent with the method used by ``the general lending community.''

They argued this would remove a source of confusion for borrowers and

lenders. RHCDS acknowledges that some conventional lenders have adopted

this approach. However, the method proposed by RHCDS is consistent with

other Federal mortgage lending agencies. The income tax credit

increases disposable income. The tax credit does not reduce the

borrower's liabilities. No change is made on Mortgage Credit

Certificates. However, after consideration, RHCDS determined that

funded buy-down accounts would be implemented; however, RHCDS

concurrence would be required similar to that concurrence required for

higher ratios.

We received two comments on appeals. Both respondents suggested a

revision to the language so borrowers and lenders could appeal

separately. One respondent expressed concern that the lender is not

likely to join the borrower in an appeal. RHCDS's position is that the

loans are the lender's loans. There is no point in the borrower

appealing a decision without the lender's willingness to make the loan

after the appeal. It is not necessary that the lender and borrower each

fully participate in the appeal process. Only that both parties join in

requesting the appeal. One respondent implied that the appeal process

should allow the applicant/borrower to appeal lender decisions. This is

not consistent with the Agency's position.

List of Subjects in 7 CFR Part 1980

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

Mortgage insurance, Mortgages, Rural areas.

Therefore, Chapter XVIII, Title 7, Code of Federal Regulations is

amended as follows: [[Page 26985]]

PART 1980--GENERAL

1. The authority citation for part 1980 continues to read as

follows:

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

2.23, 7 CFR 2.70.

2. Subpart D of part 1980 is revised to read as follows:

Subpart D--Rural Housing Loans

Sec.

1980.301 Introduction.

1980.302 Definitions and abbreviations.

1980.303-1980.307 [Reserved]

1980.308 Full faith and credit.

1980.309 Lender participation in guaranteed RH loans.

1980.310 Loan purposes.

1980.311 Loan limitations and special provisions.

1980.312 Rural area designation.

1980.313 Site and building requirements.

1980.314 Loans on leasehold interests.

1980.315 Escrow accounts for exterior development

1980.316 Environmental requirements.

1980.317 Equal opportunity and nondiscrimination requirements in

use, occupancy, rental, or sale of housing.

1980.318 Flood and mudslide hazard area precautions.

1980.319 Other Federal, State, and local requirements.

1980.320 Interest rate.

1980.321 Terms of loan repayment.

1980.322 Loan guarantee limits.

1980.323 Guarantee fee.

1980.324 Charges and fees by Lender.

1980.325 Transactions which will not be guaranteed.

1980.326-1980.329 [Reserved]

1980.330 Applicant equity requirements.

1980.331 Collateral.

1980.332 [Reserved]

1980.333 Promissory notes and security instruments.

1980.334 Appraisal of property serving as collateral.

1980.335-1980.339 [Reserved]

1980.340 Acquisition, construction, and development.

1980.341 Inspections of construction and compliance reviews.

1980.342-1980.344 [Reserved]

1980.345 Applicant eligibility requirements for a guaranteed loan.

1980.346 Other eligibility criteria.

1980.347 Annual income.

1980.348 Adjusted annual income.

1980.349-1980.350 [Reserved]

1980.351 Requests for reservation of funds.

1980.352 [Reserved]

1980.353 Filing and processing applications.

1980.354 [Reserved]

1980.355 Review of requirements.

1980.356-1980.359 [Reserved]

1980.360 Conditions precedent to issuance of the loan note

guarantee.

1980.361 Issuance of loan note guarantee.

1980.362 [Reserved]

1980.363 Review of loan closing.

1980.364-1980.365 [Reserved]

1980.366 Transfer and assumption.

1980.367 Unauthorized sale or transfer of the property.

1980.368-1980.369 [Reserved]

1980.370 Loan servicing.

1980.371 Defaults by the borrower.

1980.372 Protective advances.

1980.373 [Reserved]

1980.374 Liquidation.

1980.375 Reinstatement of the borrower's account.

1980.376 Loss payments.

1980.377 Future recovery.

1980.378-1980.389 [Reserved]

1980.390 Interest assistance.

1980.391 Equity sharing.

1980.392 Mortgage Credit Certificates (MCCs) and Funded Buydown

Accounts.

1980.393-1980.396 [Reserved]

1980.397 Exception authority.

1980.398 Unauthorized assistance and other deficiencies.

1980.399 Appeals.

1980.400 [Reserved]

Subpart D--Rural Housing Loans

Sec. 1980.301 Introduction.

(a) Policy. This subpart contains regulations for single family

Rural Housing (RH) loan guarantees by the Rural Housing and Community

Development Service (RHCDS) and applies to lenders, borrowers, and

other parties involved in making, guaranteeing, servicing, holding or

liquidating such loans. 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.

(b) Program objective. The basic objective of the guaranteed RH

loan program is to assist eligible households in obtaining adequate but

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

their own use in rural areas by guaranteeing sound RH loans which

otherwise would not be made without a guarantee. Guarantees issued

under this subpart are limited to loans to applicants with incomes that

do not exceed income limits as provided in exhibit C of FmHA

Instruction 1980-D (available in any RHCDS office).

(c) [Reserved]

(d) Nondiscrimination. Loan guarantees and services provided under

this subpart are subject to various civil rights statutes. Assistance

shall not be denied to any person or applicant based on race, sex,

national origin, color, familial status, religion, age, or physical or

mental disability (the applicant must possess the capacity to enter

into a legal contract for services). The Consumer Protection Act

provides that the applicant may not be denied assistance based on

receipt of income from public assistance or because the applicant has,

in good faith, exercised any right provided under the Act.

Sec. 1980.302 Definitions and abbreviations.

(a) The following definitions are applicable to RH loans:

Agency: Rural Housing and Community Development Service (RHCDS).

Applicant. The party applying to a Lender for a loan.

Approval official. An RHCDS employee with delegated loan approval

authority under subpart A of part 1901 consistent with the amount and

type of loan considered.

Borrower. Collectively, all parties who applied for and received a

specific guaranteed loan from an eligible Lender.

Coapplicant. An adult member of the household who joins the

applicant in applying to a lender for a loan.

Conditional commitment. RHCDS's notice to the Lender that the

material it has submitted is approved subject to the completion of all

conditions and requirements set forth in the notice.

Development standard. The current edition of any of the model

building, plumbing, mechanical, and electrical codes listed in exhibit

E to subpart A of part 1924 applicable to single family residential

construction or other similar codes adopted by RHCDS for use in the

state.

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 the person's 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 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: [[Page 26986]]

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

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 one 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, and

(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.

Displaced homemaker. An individual who is an adult; has not worked

full-time full-year (2,080 hours) in the labor force for a number of

years but has during such years worked primarily without remuneration

to care for the home and family; and is unemployed or underemployed and

is experiencing difficulty in obtaining or upgrading employment.

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

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

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

applicant/borrower or the coapplicant/coborrower; or

(2) Two or more unrelated elderly (age 62 or older), disabled

persons who are living together, at least one of whom is the applicant/

borrower or coapplicant/coborrower; or

(3) In the case of a family where a deceased borrower/coborrower or

spouse was at least 62 years old or disabled, the surviving household

members shall continue to be classified as an ``elderly family'' for

the purpose of determining adjusted income even though the surviving

members may not meet the definition of elderly family on their own,

provided:

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

the time of his/her death; and

(ii) If one of the surviving 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 death, the dwelling of the deceased family

member was financed under title V of the Housing Act of 1949, as

amended.

Eligible lender. A Lender meeting the criteria outlined in

Sec. 1980.309 who has requested and received RHCDS approval for

participation in the program.

Existing dwelling. A dwelling which has been completed for more

than 1 year as evidenced by an occupancy permit or a similar document.

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 is

parents living with their adult children.

Federal National Mortgage Association (Fannie Mae) rate. The rate

authorized in exhibit B of FmHA Instruction 440.1 (available in any

RHCDS office).

Finance Office. The office which maintains RHCDS's financial

records.

First-time homebuyer. Any individual who (and whose spouse) has had

no present ownership in a principal residence during the 3 year period

ending on the date of purchase of the property acquired with a

guaranteed loan under this subpart. A first-time homebuyer includes

displaced homemakers and single parents even though they might have

owned, or resided in, a dwelling with a spouse. This definition is used

to determine RHCDS processing priority in accordance with

Sec. 1980.353.

Guaranteed loan. A loan made, held, and serviced by a Lender for

which RHCDS has entered into an agreement with the Lender in accordance

with this subpart.

Household or family. The applicant, coapplicant, and all other

persons who will make the applicant's dwelling their primary residence

for all or part of the next 12 months. The temporary absence of a child

from the home due to placement in foster care shall not be taken into

account in considering family composition and size. Foster children

placed in the borrower's home and live-in aides shall not be counted as

members of the household.

Interest assistance. Loan assistance payments made by RHCDS to the

Lender on behalf of the borrower.

Lender. The organization making, holding, and/or servicing the loan

which is guaranteed under the provisions of this subpart. The Lender is

also the party requesting the guarantee. The Lender includes an entity

purchasing an RHCDS guaranteed loan. A purchasing Lender acquires all

the privileges, duties, and responsibilities of the originating Lender.

The Lender is primarily responsible for originating, underwriting,

servicing, and, where necessary, liquidating the loan and disposing of

the property in a manner consistent with maximizing the Government's

interest.

Lender agreement. The signed master agreement between RHCDS and the

Lender setting forth the Lender's loan responsibilities for loan

processing and servicing guaranteed RH loans.

Lender record change. The Lender's notice to RHCDS of a change of

Lender or a change of servicer.

Liquidation. Liquidation of the loan occurs when the Lender

acquires title to the security, a third party buys the property at the

foreclosure sale, or the borrower sells the property to a third party

in order to avoid or cure a default situation with the prior approval

of the Lender and RHCDS. In states providing a redemption period, the

Lender does not typically acquire title until after expiration of the

redemption period.

Liquidation expense. The Lender's cost of liquidation including

those costs that do not qualify as a protective advance.

Loan note guarantee. The signed commitment issued by RHCDS setting

forth the terms and conditions of the guarantee.

Manufactured home. A structure built to the Federal Manufactured

Home Construction and Safety Standards and RHCDS thermal requirements.

Master interest assistance agreement. The agreement among RHCDS,

the borrower, and the Lender which provides the basis for payment of

interest assistance and shared equity.

Minor. A person under 18 years of age. Neither the applicant,

coapplicant, or spouse may be counted as a minor. Foster children

placed in the borrower's home are not counted as minors for the purpose

of determination of annual or adjusted income.

Net family assets. Include:

(1) The value of equity in real property, savings, individual

retirement accounts (IRA), demand deposits, and the market value of

stocks, bonds, and other forms of capital investments, but exclude:

(i) Interests in Indian Trust land,

(ii) The value of the dwelling and a minimum adequate site,

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

loan,

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

furniture and automobiles and the debts against them,

(v) 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

(vi) The value of a trust fund that has been established and the

trust is not [[Page 26987]] revocable by, or under the control of, any

member of the household, so long as the funds continue to be held in

trust.

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

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

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

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

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

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

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

receives important consideration not measurable in dollar terms.

Net proceeds. The proceeds remaining from the property after it is

sold or its net value as determined in accordance with this subpart.

The determination of net proceeds depends upon whether the property is

sold or acquired by the Lender. Net proceeds may be determined using

the appraised value and subtracting authorized deductions when the

Lender acquires the property.

Protective advance. Advances made by the Lender when the borrower

is in liquidation or otherwise in default to protect or preserve the

security from loss or destruction.

Qualifying income. The amount of the applicant's income which the

lender determines is adequate and dependable enough to consider for

repayment ability. This figure may be different from the adjusted

income which is used for RHCDS program eligibility. Qualifying income

is typically less than adjusted income unless the applicant has income

from the sources listed in Sec. 1980.347(e).

Rural area. An area meeting the requirements of Sec. 1980.312.

Rural areas are designated on maps available in the RHCDS office

servicing that area.

Single parent. An individual who is unmarried or legally separated

from a spouse and has custody or joint custody of one or more minor

children or is pregnant.

State Director. Director of RHCDS programs within a state office

area.

Veteran. A veteran is a person who has been discharged or released

from the active forces of the United States Army, Navy, Air Force,

Marine Corps, or Coast Guard under conditions other than dishonorable

discharge including ``clemency discharges'' and who served on active

duty in such forces:

(1) From April 6, 1917, through March 31, 1921;

(2) From December 7, 1941, through December 31, 1946;

(3) From June 27, 1950, through January 31, 1955; or

(4) For more than 180 days, any part of which occurred after

January 31, 1955, but on or before May 7, 1975.

(b) The following abbreviations are applicable to this subpart:

Fannie Mae--Federal National Mortgage Association.

FCS--Farm Credit Service.

FHA--Federal Housing Administration.

Freddie Mac--Federal Home Loan Mortgage Corporation.

Ginnie Mae--Government National Mortgage Association.

HUD--Department of Housing and Urban Development.

IRS--Internal Revenue Service.

MCCs--Mortgage Credit Certificates.

PITI--Principal, Interest, Taxes, and Insurance.

RHCDS--Rural Housing and Community Development Service.

URAR--Uniform Residential Appraisal Report.

VA--Department of Veterans Affairs.

Secs. 1980.303-1980.307 [Reserved]

Sec. 1980.308 Full faith and credit.

The loan note guarantee constitutes an obligation supported by the

full faith and credit of the United States and is incontestable except

for fraud or misrepresentation of which the Lender has actual knowledge

at the time it becomes such Lender or which the Lender participates in

or condones. Misrepresentation includes negligent misrepresentation. A

note which provides for the payment of interest on interest shall not

be guaranteed. Any guarantee or assignment of a guarantee attached to

or relating to a note which provides for the payment of interest on

interest is void. Notwithstanding the prohibition of interest on

interest, interest may be capitalized in connection with reamortization

over the remaining term with written concurrence of RHCDS. The loan

note guarantee will be unenforceable to the extent any loss is

occasioned by violation of usury laws, negligent servicing, or failure

to obtain the required security regardless of the time at which RHCDS

acquires knowledge of the foregoing. Negligent servicing is defined as

servicing that is inconsistent with this subpart and includes the

failure to perform those services which a reasonably prudent Lender

would perform in servicing its own loan portfolio of loans that are not

guaranteed. The term includes not only the concept of a failure to act,

but also not acting in a timely manner or acting contrary to the manner

in which a reasonably prudent Lender would act up to the time of loan

maturity or until a final loss is paid. Any losses occasioned will be

unenforceable to the extent that loan funds are used for purposes other

than those authorized in this subpart. When the Lender conducts

liquidation in an expeditious manner, in accordance with the provisions

of Sec. 1980.374, the loan note guarantee shall cover interest until

the claim is paid within the limit of the guarantee.

Sec. 1980.309 Lender participation in guaranteed RH loans.

(a) Qualification. The following Lenders are eligible to

participate in the RHCDS guaranteed RH loan program upon presentation

of evidence of said approval and execution of the RHCDS Lender

Agreement.

(1) Any state housing agency;

(2) Any Lender approved by HUD as a supervised or nonsupervised

mortgagee for submission of one to four family housing applications for

Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae

mortgage backed securities;

(3) Any Lender approved as a supervised or nonsupervised mortgagee

for the VA;

(4) Any Lender approved by Fannie Mae for participation in one to

four family mortgage loans;

(5) Any Lender approved by Freddie Mac for participation in one to

four family mortgage loans;

(6) An FCS institution with direct lending authority; and

(7) Any Lender participating in other RHCDS, Rural Business and

Cooperative Development Service, Rural Utilities Service, and/or

Consolidated Farm Service Agency guaranteed loan programs.

(b) Lender approval. A Lender listed in paragraph (a) of this

section must request a determination of eligibility in order to

participate as an originating Lender in the program. Requests may be

made to the state office serving the state jurisdiction or to the

National office when multiple state jurisdictions are involved.

(1) The Lender must provide the following information to RHCDS:

(i) Evidence of approval, as appropriate, for the criteria under

paragraph (a) of this section, which the Lender meets.

(ii) The Lender's Tax Identification Number.

(iii) The name of an official of the Lender who will serve as a

contact for RHCDS regarding the Lender's guaranteed loans.

(iv) A list of names, titles, and responsibilities of the Lender's

principal officers.

(v) An outline of the Lender's internal loan criteria for issues of

credit history [[Page 26988]] and repayment ability and a copy of the

Lender's quality control plan for monitoring production and servicing

activities.

(vi) An executed certification regarding debarment, suspension, or

other matters--primary covered transactions. The certification will be

obtained using a form prescribed by RHCDS.

(2) The Lender must agree to:

(i) Obtain and keep itself informed of all program regulations and

guidelines including all amendments and revisions of program

requirements and policies.

(ii) Process and service RHCDS guaranteed loans in accordance with

Agency regulations.

(iii) Permit RHCDS employees or its designated representatives to

examine or audit all records and accounts related to any RHCDS loan

guarantee.

(iv) Be responsible for the servicing of the loan, or if the loan

is to be sold, sell only to an entity which meets the provisions of

paragraph (a) of this section.

(v) Use forms which have been approved by FHA, Fannie Mae, Freddie

Mac, or, for FCS Lenders, use the appropriate FCS forms.

(vi) Maintain its approval if qualification as an RHCDS Lender was

based on approval by HUD, VA, Fannie Mae, or Freddie Mac including

maintaining the minimum allowable net capital, acceptable levels of

liquidity, and any required fidelity bonding and/or mortgage servicing

errors and omissions policies required by HUD, VA, Fannie Mae, or

Freddie Mac, as appropriate.

(vii) Operate its facilities in a prudent and business-like manner.

(viii) Assure that its staff is well trained and experienced in

loan origination and/or loan servicing functions, as necessary, to

assure the capability of performing all of the necessary origination

and servicing functions.

(ix) Notify RHCDS in writing if the Lender:

(A) Ceases to meet any financial requirements of the entity under

which the Lender qualified for RHCDS eligibility;

(B) Becomes insolvent;

(C) Has filed for bankruptcy protection, has been forced into

involuntary bankruptcy, or has requested an assignment for the benefit

of creditors;

(D) Has taken any action to cease operations or discontinue

servicing or liquidating any or all of its portfolio of RHCDS

guaranteed loans;

(E) Has any change in the Lender name, location, address, or

corporate structure;

(F) Has become delinquent on any Federal debt or has been debarred,

suspended, or sanctioned by any Federal agency or in accordance with

any applicable state licensing or certification requirements.

(c) [Reserved]

(d) Handling applications for Lender eligibility. Upon

determination of a Lender's eligibility to originate loans, RHCDS and

the Lender will execute the RHCDS Lender Agreement. The Lender

Agreement establishes the Lender's authorization for participation in

the program as an originator, servicer, or holder of RHCDS single

family mortgage loans. The Lender Agreement shall be in effect until

terminated by either the Agency or the Lender in accordance with the

terms of the Lender Agreement and this subpart.

(e) Lender sale of guaranteed loans. Loans guaranteed under this

subpart may be sold only to entities which meet the qualifications in

paragraphs (a) and (b) of this section or directly to Fannie Mae or

Freddie Mac. Such entities are referred to as a Lender and are to be

treated as a Lender for all purposes under this subpart. The selling

Lender shall provide the original loan note guarantee to the purchasing

Lender. The selling Lender is responsible for reporting the sale of any

loan to RHCDS within 30 days using a reporting form provided by RHCDS.

The purchasing Lender must execute a Lender Agreement or have a valid

Lender Agreement on file with RHCDS. The purchasing Lender shall

succeed to all rights, title, and interest of the Lender under the loan

note guarantee. Any necessary or convenient assignments or other

instruments relating to the loan and any other actions necessary or

convenient to perfect or record such transaction are the responsibility

of the purchasing Lender. The purchasing Lender assumes the obligations

of, and will be bound by and will comply with, all covenants,

agreements, terms, and conditions contained in any note, security

instrument, loan note guarantee, and of any outstanding agreements in

connection with such loan purchased. The purchasing Lender shall be

subject to any defenses, claims, or setoffs that RHCDS would have

against the Lender if the Lender had continued to hold the loan.

(f) Lender responsibility. The Lender will be responsible for the

processing, servicing, and liquidation (if necessary) of the loan. The

Lender may use agents, correspondents, branches, financial experts, or

other #institutions in carrying out its responsibilities. Lenders are

fully responsible for their own actions and the actions of those acting

on the Lender's behalf.

(1) Processing. The Lender must abide by limitations on loan

purposes, loan limitations, interest rates, and terms set forth in this

subpart. The Lender will obtain, complete, and submit to RHCDS the

items required in Sec. 1980.353(c). The Lender may utilize the services

of a non-RHCDS approved lender for originating residential loans. The

RHCDS approved lender is responsible for the loan underwriting and for

obtaining the RHCDS conditional commitment. The agent may close the

loan in its name provided the loan is immediately transferred to the

approved lender to whom the guarantee will be issued.

(2) Servicing. Lenders are fully responsible for servicing and

protecting the security for all guaranteed loans. When servicing is

carried out by a third party, the Lender will inform RHCDS of the name

and address of the servicer.

(3) Liquidation. The Lender will complete any liquidation of loans

guaranteed under the provisions of the Lender Agreement. Loss claims

will be submitted on the RHCDS Loss Report form. The loss report will

be accompanied by supporting information to outline disposition of all

security pledged to secure the loan. The Lender shall also effect

collection of the debt from other assets of the borrower to the extent

practicable.

(4) Counseling. Lenders are encouraged to offer or provide for home

ownership counseling. Lenders may require first-time homebuyers to

undergo such counseling if it is reasonably available in the local

area. When home ownership counseling is provided or sponsored by RHCDS

or another Federal agency in the local area, the Lender must require

the borrower to successfully complete the course.

(g) Monitoring a Lender's processing and servicing of loans. If

RHCDS determines that the Lender is not fulfilling the obligations of

the Lender Agreement or that the Lender fails to maintain the required

criteria, the Lender will be notified in writing of the deficiencies

and allowed a maximum of 30 days to correct them. If the Lender fails

to make the required corrections, RHCDS will proceed as provided in

paragraph (h) of this section.

(1) Loan processing review for new Lenders. RHCDS may review loans

developed by an eligible Lender to assure compliance with, and

understanding of, Agency regulations.

(2) [Reserved]

(3) [Reserved]

(h) Termination of Lender eligibility. The Lender remains eligible

as long as the Lender meets the criteria in [[Page 26989]] paragraph

(a) of this section unless that Lender's status is revoked by RHCDS or

by another Federal agency. RHCDS shall revoke the eligible Lender

status of any Lender who fails to comply with requirements of paragraph

(b) or (e) of this section. Status may also be revoked if the Lender

violates the terms of the Lender Agreement, fails to properly service

any guaranteed loan, or fails to adequately protect the interests of

the Lender and the Government. If the Lender is determined to be no

longer eligible, the Lender will continue to service any outstanding

loans guaranteed under this subpart which are held by the Lender or

RHCDS may require the Lender to transfer the servicing of the loan. In

addition to revocation of eligible Lender status, the Lender may be

debarred by RHCDS.

Sec. 1980.310 Loan purposes.

The purpose of a loan guaranteed under this subpart must be to

acquire a completed dwelling and related facilities to be used by the

applicant as a primary residence. The loan may be to purchase a new

dwelling or an existing dwelling. The guaranteed loan may be for ``take

out'' financing for a loan to construct a new dwelling or improve an

existing dwelling when the construction financing is arranged in

connection with the loan package. The loan may include funds for the

purchase and installation of necessary appliances, energy saving

measures, and storm cellars. Incidental expenses for tax monitoring

services, architectural, appraisal, survey, environmental, and other

technical services may be included. Subject to Sec. 1980.311, eligible

loan purposes also include:

(a) Necessary related facilities such as a garage, storage shed,

walks, driveway, and water and/or sewage facilities including

reasonable connection fees for utilities which the buyer is required to

pay.

(b) Special design features or equipment necessary to accommodate a

physically disabled member of the household.

(c) The cost of establishing an escrow account for real estate

taxes and/or insurance premiums.

(d) Title clearance, title insurance, and loan closing; stock in a

cooperative lending agency necessary to obtain the loan; and, for low-

income applicants only, loan discount points to reduce the note

interest rate from the rate authorized in Sec. 1980.320 not exceeding

the amount typical for the area.

(e) Provide funds for seller equity and/or essential repairs when

an existing guaranteed loan is to be assumed simultaneously.

Sec. 1980.311 Loan limitations and special provisions.

(a) Prohibited loan purposes. Conditional commitments will not be

issued if loan funds are to be used for:

(1) Payment of construction draws.

(2) The purchase of furniture or other personal property except for

essential equipment and materials authorized in accordance with

Sec. 1980.310.

(3) Refinancing RHCDS debts, debts owed the Lender (other than

construction/development, financing incurred in conjunction with the

proposed loan), or debts on a manufactured home.

(4) Purchase or improvement of income-producing land, or buildings

to be used principally for income-producing purposes, or buildings not

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

largely or in part specifically designed to accommodate a business or

income-producing enterprise.

(5) Payment of fees, charges, or commissions, such as finder's fees

for packaging the applications or placement fees for the referral of a

prospective applicant to RHCDS.

(6) Improving the entry of a homestead entryman or desert entryman

prior to receipt of patent.

(7) Purchase a dwelling with an in-ground swimming pool.

(b) Limitations. The principal purpose of the loan, except for a

subsequent loan to an existing borrower, must be to buy or build a

dwelling. The loan may include additional funds in accordance with

Sec. 1980.310. The amount of the loan may not exceed the maximum dollar

limitation of section 203(b)(2) of the National Housing Act (12 U.S.C.

1702).

(1) A loan for the acquisition of a newly constructed dwelling that

meets the requirements of Sec. 1980.341(b) of this subpart may be made

for up to 100 percent of the appraised value or the cost of acquisition

and any necessary development including those purposes in

Sec. 1980.310, whichever is less.

(2) A loan for the acquisition of an existing dwelling and

development, if any, in conjunction with the acquisition of an existing

dwelling may be made for up to 100 percent of the appraised value or

the cost of acquisition and necessary development including those

purposes in Sec. 1980.310, whichever is less.

(3) A loan for the acquisition of a newly constructed dwelling (a

dwelling that does not meet the definition for an existing dwelling)

that does not meet the requirements of Sec. 1980.341(b) is limited to

90 percent of the present market value.

(c) Subdivisions. Housing units may be financed in existing

subdivisions approved by local, regional, state, or Federal government

agencies before issuance of a conditional commitment. The subdivision

must meet the requirements of Sec. 1901.203. An existing subdivision is

one in which the local government has accepted the subdivision plan,

its principal developments and right-of-ways, the construction of

streets, water and water/waste disposal systems, and utilities; is at a

point which precludes any major changes; and provisions are in place

for continuous maintenance of the streets and the water and water/waste

disposal systems. A dwelling served by a homeowners association (HOA)

may be accepted when the project has been approved or accepted by HUD,

VA, Fannie Mae, or Freddie Mac.

Sec. 1980.312 Rural area designation.

A rural area is an area which is identified as rural by RHCDS in

accordance with Sec. 1944.10. Current county maps showing ineligible

areas are available in RHCDS field offices.

Sec. 1980.313 Site and building requirements.

(a) Rural area. The property on which the loan is made must be

located in a designated rural area as identified in Sec. 1980.312. A

nonfarm tract to be purchased or improved with loan funds must not be

closely associated with farm service buildings.

(b) Access. The property must be contiguous to and have direct

access from a street, road, or driveway. Streets and roads must be hard

surface or all-weather surface.

(c) Water and water/waste disposal system. A nonfarm tract on which

a loan is to be made must have an adequate water and water/waste

disposal system and other related facilities. Water and water/waste

disposal systems serving the site must be approved by a state or local

government agency. When the site is served by a privately owned and

centrally operated water and water/waste disposal system, the system

must meet the design requirements of the State Department of Health or

comparable reviewing and regulatory agency. Written verification must

be obtained from the regulatory agency that the private water and

water/waste system complies with the Safe Drinking Water Act (42 U.S.C.

300F et seq.), and the Clean Water Act (33 U.S.C. 1251 et seq.),

respectively. A system owned and/or operated by a private party must

have a binding agreement which allows interested third parties, such as

the Lender, to enforce the obligation of the operator to provide

satisfactory service at reasonable rates.

(d) [Reserved] [[Page 26990]]

(e) Modest house. Dwellings financed must provide decent, safe, and

sanitary housing and be modest in cost. A dwelling that can be

purchased with a loan not exceeding the maximum dollar limitation of

section 203(b)(2) of the National Housing Act (12 U.S.C. 1702) is

considered modest. Generally, the value of the site must not exceed 30

percent of the total value of the property. When the value of the site

is typical for the area, as evidenced by the appraisal, and the site

cannot be subdivided into two or more sites, the 30 percent limitation

may be exceeded.

(f) Thermal standards. Dwellings financed shall meet the standards

outlined in exhibit D of subpart A of part 1924 except for an existing

dwelling, if documentation is provided to establish that the actual

cost of heating and cooling is not significantly greater than those

costs for a dwelling that meets RHCDS's thermal standards. If the

dwelling is excepted, only the perimeter of the house at the band beam

and the heat ducts in unheated basements or crawlspace must be

insulated.

(g) Existing dwelling. An existing dwelling financed must be cost

effective to the applicant including reasonable costs of utilities and

maintenance for the area. Loan guarantees may be made on an existing

manufactured home when it meets the provisions of paragraph (i)(2)(i)

of this section.

(h) Repairs. Any dwelling financed with an RHCDS guarantee must be

structurally sound, functionally adequate, and placed in good repair

prior to issuance of the Loan Note Guarantee except as provided in

Sec. 1980.315.

(i) Manufactured homes. New units that meet the requirements of

exhibit J of subpart A of part 1924 and purchased through RHCDS

approved dealer-contractors may be considered for a guaranteed loan

under this subpart. The Lender may obtain a list of RHCDS approved

models and dealer-contractors from any RHCDS office in the area served.

(1) Loans may be guaranteed for the following purposes when the

security covers both the unit and the lot:

(i) A new unit and related site development work on a site owned or

purchased by the applicant which meets the requirements and limitations

of this section or a leasehold meeting the provisions of Sec. 1980.314.

(ii) Transportation and set-up costs for a new unit.

(2) Loans may not be guaranteed for:

(i) An existing unit and site unless it is already financed with a

Section 502 RH direct or guaranteed loan, is being sold from RHCDS

inventory, or is being sold from the Lender's inventory provided the

Lender acquired possession of the unit through a loan guaranteed under

this subpart.

(ii) The purchase of a site without also financing the unit.

(iii) Existing debts owed by the applicant/borrower.

(iv) A unit without an affixed certification label indicating the

unit was constructed in accordance with the Federal Manufactured Home

Construction and Safety Standards.

(v) Alteration or remodeling of the unit when the initial loan is

made.

(vi) Furniture, including movable articles of personal property

such as drapes, beds, bedding, chairs, sofas, lamps, tables,

televisions, radios, stereo sets, and similar items. Items such as

wall-to-wall carpeting, refrigerators, ovens, ranges, clothes washers

or dryers, heating or cooling equipment, or similar items may be

financed.

(vii) Any unit not constructed to the RHCDS thermal standards as

identified by an affixed label for the winter degree day zone where the

unit will be located.

Sec. 1980.314 Loans on leasehold interests.

A loan may be guaranteed if made on a leasehold owned or being

acquired by the applicant when the Lender determines that long-term

leasing of homesites is a well established practice and such leaseholds

are freely marketable in the area provided the Lender determines and

certifies to RHCDS that:

(a) Unable to obtain fee title. The applicant is unable to obtain

fee title to the property.

(b) Unexpired term. The lease has an unexpired term (term plus

option to renew) of at least 40 years from the date of approval.

Sec. 1980.315 Escrow accounts for exterior development.

When proposed exterior development work cannot be completed because

of weather and the work remaining to be done does not affect the

livability of the dwelling, an escrow account for exterior development

only may be established by the originating lender if the following

conditions are met:

(a) A signed contract and bid schedule is in effect for the

proposed exterior development work.

(b) The contract for development work must provide for completion

within 120 days.

(c) The Lender agrees to obtain a final inspection report and

advise RHCDS when the work has been completed.

(d) The escrow account must be funded in an amount sufficient to

assure the completion of the remaining work. This figure should be 150

percent of the cost of completion but may be higher if the Lender

determines a higher amount is needed.

Sec. 1980.316 Environmental requirements.

The requirements of subpart G of part 1940 apply to loan guarantees

made under this subpart. Lenders and applicants must cooperate with

RHCDS in the completion of these requirements. Lenders must become

familiar with these requirements so that they can advise applicants and

reduce the probability of unacceptable applications being submitted to

RHCDS. RHCDS may require that Lenders and/or applicants obtain

information for completing environmental assessments when necessary.

The RHCDS approval official will utilize adequate, reliable information

in completion of environmental review. Sources of information include,

but are not limited to, the State Natural Resource Management Guide

(available in any RHCDS office) and, as necessary, the technical

expertise available within the Agency as well as other agencies and

organizations to assist in the completion of the environmental review.

Sec. 1980.317 Equal opportunity and nondiscrimination requirements in

use, occupancy, rental, or sale of housing.

(a) Compliance. Loans guaranteed under this subpart are subject to

the provisions of various civil rights statutes. RHCDS and the Lender

may not discriminate against any person in making guaranteed housing

loans available, or impose different terms and conditions for the

availability of these loans based on a person's race, color, familial

status, religion, sex, age, physical or mental disability, or national

origin, provided the applicant possesses the capacity to enter into a

legal contract for services. These requirements will be discussed with

the applicant, builder, developer, and other parties involved as early

in the negotiations as possible.

(b) Reporting. If there is indication of noncompliance with these

requirements, the matter will be reported by the borrower, Lender, or

RHCDS personnel to the Administrator or the Director, Equal Opportunity

Staff. Complaints and compliance will be handled by RHCDS in accordance

with subpart E of part 1901.

(c) Forms and requirements. In accordance with Executive Order

11246, the following equal opportunity and nondiscrimination forms and

requirements are applicable when the loan guarantee involves a

construction [[Page 26991]] contract between the borrower and the

contractor that is more than $10,000. The Lender is responsible for

seeing that the requirements of paragraphs (c)(1) through (c)(5) of

this section are met:

(1) Equal Opportunity Agreement. Before loan closing, each borrower

whose loan involves a construction contract of more than $10,000 must

execute the RHCDS Equal Opportunity Agreement or the equivalent HUD

form.

(2) Construction contract or subcontract in excess of $10,000. If

the contract or a subcontract exceeds $10,000:

(i) The contractor or subcontractor must submit the Agency

Compliance Statement before or as a part of the bid or negotiation.

(ii) An Equal Opportunity Clause must be part of each contract and

subcontract.

(iii) With notification of the contract award, the contractor must

receive the Agency Notice to Contractors and Applicants signed by

RHCDS, with an attached Equal Employment Opportunity poster. Posters in

Spanish must be provided and displayed where a significant portion of

the population is Spanish speaking.

(iv) Under Executive Order 11246 and Executive Order 11375, the

contractor or subcontractor, subject to the requirements of paragraph

(c)(5) of this section, is prohibited from discriminating because of

race, color, religion, sex, or national origin to ensure equality of

opportunity in all aspects of employment.

(3) One hundred or more employees and construction contract or

subcontract exceeds $10,000. If the contractor or subcontractor has 100

or more employees and the contract or subcontract is for more than

$10,000, in addition to the requirements of paragraph (c)(2) of this

section, a report must be filed annually on or before March 31. Failure

to file timely, complete, and accurate reports constitutes

noncompliance with the Equal Opportunity Clause. Report forms are

distributed by the Joint Reporting Committee and any questions on this

form should be addressed by the contractor or subcontractor to the

Joint Reporting Committee, 1800 G Street, NW., Washington, D.C. 20006.

(4) Fifty or more employees and construction contract or

subcontract exceeds $50,000. If the contract or subcontract is more

than $50,000 and the contractor or subcontractor has 50 or more

employees, in addition to the requirements of paragraph (c)(2) of this

section, each such contractor or subcontractor must be informed that

the contractor or subcontractor must develop a written affirmative

action compliance program for each of the contractor's or

subcontractor's establishments and put it on file in each of the

personnel offices within 120 days of the commencement of the contract

or subcontract.

(5) [Reserved]

(6) Employee complaints. Any employee of or applicant for

employment with such contractors or subcontractors may file a written

complaint of discrimination with RHCDS.

(i) A written complaint of alleged discrimination must be signed by

the complainant and should include the following information:

(A) The name and address (including telephone number, if any) of

the complainant.

(B) The name and address of the person committing the alleged

discrimination.

(C) A description of the acts considered to be discriminatory.

(D) Any other pertinent information that will assist in the

investigation and resolution of the complaint.

(ii) Such complaint must be filed not later than 180 days from the

date of the alleged discrimination, unless the time for filing is

extended by RHCDS for good cause shown by the complainant.

Sec. 1980.318 Flood or mudslide hazard area precautions.

RHCDS policy is to discourage lending in designated flood and

mudslide hazard areas. Loan guarantees shall not be issued in

designated flood/mudslide hazard areas unless there is no practical

alternative.

(a) Dwelling location. Dwellings and building improvements located

in special flood or mudslide hazard areas, as designated by the Federal

Emergency Management Agency (FEMA) may be financed under this subpart

only if:

(1) The community, as a result of such designation by FEMA as a

special flood or mudslide prone area, has an approved flood plain area

management plan.

(2) The dwelling location and construction plans and specifications

for new buildings or improvements to existing buildings comply with an

approved flood plain area management plan (see paragraph (a)(1) of this

section).

(3) Potential environmental impacts and feasible alternatives have

been fully considered by RHCDS in accordance with the requirements of

subpart G of part 1940.

(4) The first floor elevation is above the 100 year flood zone

elevation.

(b) Flood insurance. If the dwelling is located in a special flood

or mudslide hazard area, flood insurance must be purchased by the

borrower prior to loan closing and maintained thereafter. See subpart B

of part 1806 (FmHA Instruction 426.2).

Sec. 1980.319 Other Federal, State, and local requirements.

In addition to the specific requirements of this subpart, on all

proposals financed with an RHCDS guarantee, Lenders and/or applicants

must coordinate with all appropriate Federal, state, and local

agencies. Applicants and/or Lenders will be required to comply with any

Federal, state, or local laws, regulatory commission rules, ordinances,

and regulations which exist at the time the loan guarantee is issued

which affect the dwelling including, but not limited to:

(a) Borrowing money and giving security therefore;

(b) Land use zoning;

(c) Health, safety, and sanitation standards; and

(d) Protection of the environment and consumer affairs.

Sec. 1980.320 Interest rate.

The interest rate must not exceed the established applicable usury

rate. Loans guaranteed under this subpart must bear a fixed interest

rate over the life of the loan. The rate shall be agreed upon by the

borrower and the Lender and must not be more than the lender's

published rate for VA first mortgage loans with no discount points or

the current Fannie Mae rate as defined in Sec. 1980.302(a), whichever

is higher. The lender must document the rate and the date it was

determined.

Sec. 1980.321 Terms of loan repayment.

(a) Note. Principal and interest shall be due and payable monthly.

(b) Term. The term for final maturity shall be not less than 30

years from the date of the note and not more than 30 years from the

date of the first scheduled payment.

Sec. 1980.322 Loan guarantee limits.

The amount of the loan guarantee is 90 percent of the principal

amount of the loan.

(a) The maximum loss payment under the guarantee of Single Family

Housing loans is the lesser of:

(1) Any loss of an amount equal to 90 percent of the principal

amount actually advanced to the borrower, or

(2) Any loss sustained by the Lender of an amount up to 35 percent

of the principal amount actually advanced to the borrower, plus 85

percent of any additional loss sustained by the Lender of an amount up

to the remaining 65 [[Page 26992]] percent of the principal amount

actually advanced to the borrower.

(b) Loss includes only:

(1) Principal and interest evidenced by the guaranteed loan note;

(2) Any loan subsidy due and owing; and

(3) Any principal and interest indebtedness on RHCDS approved

protective advances for protection and preservation of security.

(c) Interest (including any subsidy) shall be covered by the loan

note guarantee to the date of the final loss settlement when the Lender

conducts liquidation in an expeditious manner in accordance with the

provisions of Sec. 1980.376.

Sec. 1980.323 Guarantee fee.

The Lender will pay a nonrefundable fee which may be passed on to

the borrower. The amount of the fee is determined by multiplying the

figure in exhibit K of FmHA Instruction 440.1 (available in any RHCDS

office) times 90 percent of the principal amount of the loan.

Sec. 1980.324 Charges and fees by Lender.

(a) Routine charges and fees. The Lender may establish the charges

and fees for the loan, provided they are the same as those charged

other applicants for similar types of transactions.

(b) Late payment charges. Late payment charges will not be covered

by the guarantee. Such charges may not be added to the principal and

interest due under any guaranteed note. Late charges may be made only

if:

(1) Maximum amount. The maximum amount does not exceed the

percentage of the payment due as prescribed by HUD or Fannie Mae or

Freddie Mac.

(2) Routine. They are routinely made by the Lender in similar types

of loan transactions.

(3) Payments received. Payments have not been received within the

customary time frame allowed by the Lender. The term ``payment

received'' means that the payment in cash, check, money order, or

similar medium has been received by the Lender at its main office,

branch office, or other designated place of payment.

(4) Calculating charges. The Lender does not change the rate or

method of calculating the late payment charges to increase charges

while the loan note guarantee is in effect.

(5) Interest-assisted loans. The Lender will not penalize or charge

any fee to the borrower when the only delinquency is a loan subsidy

payment, which the Lender is entitled to but has not received.

Sec. 1980.325 Transactions which will not be guaranteed.

(a) Lease payments. Payments made on a lease will not be

guaranteed.

(b) Loans made by other Federal agencies. Loans made by other

Federal agencies will not be guaranteed. This does not preclude

guarantees of loans made by an FCS institution with direct lending

authority. This also does not preclude loans made by state or local

government agencies assisted by a Federal agency.

Secs. 1980.326-1980.329 [Reserved]

Sec. 1980.330 Applicant equity requirements.

A loan to purchase a new or existing dwelling may be made up to the

appraised market value of the security.

Sec. 1980.331 Collateral.

(a) General. The entire loan must be secured by a first lien on the

property being financed (second lien when the loan is for a subsequent

loan to an existing borrower or there is a transfer and assumption of

an existing loan) and the Lender will maintain this lien priority. The

Lender is responsible for assurance that proper and adequate security

interest is obtained, maintained in existence, and of record to protect

the interests of the Lender and RHCDS.

(b) Third party liens, suits pending, etc. Among other things in

obtaining the required security, it is necessary to ascertain that

there are no adverse claims or liens against the property or the

borrower, and that there are no suits pending or anticipated that would

affect the property or the borrower.

(c) All collateral must secure the entire loan. The Lender will not

take separate collateral, including but not limited to mortgage

insurance, to secure that portion of the loss not covered by the

guarantee.

Sec. 1980.332 [Reserved]

Sec. 1980.333 Promissory notes and security instruments.

(a) Loan instruments. The Lender may use its own forms for

promissory notes, real estate mortgages, including deeds of trust and

similar instruments, and security agreements provided there are no

provisions that are in conflict or otherwise inconsistent with the

provisions of Sec. 1980.309(b)(2)(v). The Lender is responsible for

determining that the security instruments are adequate and are properly

maintained of record.

(b) Interest assistance instruments. When the loan guarantee is

authorized from interest assisted funds, RHCDS will provide the Lender

with the necessary forms and security instruments related to the

interest assistance. The Lender will complete the Master Interest

Assistance Agreement, assure that the closing agent properly records a

junior mortgage or deed of trust which grants RHCDS a lien on the

property in order to protect RHCDS's equity share subject only to the

first mortgage or deed of trust to the Lender or other authorized prior

lien, and forward the agreements and recorded instruments to RHCDS.

Sec. 1980.334 Appraisal of property serving as collateral.

An appraisal of all property serving as security for the proposed

loan will be completed and submitted to RHCDS for review with the

request for loan guarantee. The Lender may pass the cost of the

appraisal on to the borrower. The appraisal must have been completed

within 6 months of the date the request for a conditional commitment is

submitted to RHCDS.

(a) Qualified appraiser. The Lender will use an appraiser that is

properly licensed or certified, as appropriate, to make residential

real estate appraisals in accordance with the criteria set forth by the

Appraiser Qualification Board (AQB) of the Appraisal Foundation

regardless of the amount of the loan. Appraisers may not discriminate

against any person in making or performing appraisal services because

of race, color, familial status, religion, sex, age, disability, or

national origin.

(b) Appraisal report. Residential appraisals will be completed

using the sales comparison (market) and cost approach to market value.

(1) URAR. The appraiser will use the most recent revision of the

URAR.

(i) The ``Estimated Reproduction Cost-New of Improvements'' section

of the form must be completed when the dwelling is less than 1 year

old.

(ii) Not less than three comparable sales, which are not more than

12 months old, will be used unless the appraiser provides documentation

that such comparables are not available in the area. Comparable sales

should be located as close as possible to the subject dwelling. When

the need arises to use a comparable sale that is a considerable

distance from the subject, the appraiser must use his or her knowledge

of the area and apply good judgment in selecting comparable sales that

are the best indicators of value for the subject property.

(2) Supporting documentation. A narrative explanation supporting

unusual adjustments must be attached to the appraisal.

(3) Photographs. The appraisal report must include photographs

which clearly [[Page 26993]] provide front, rear, and street scene

views of the subject property, and a front view for each comparable

sale used in the completion of the appraisal.

(c) RHCDS acceptance. The Lender will be required to correct or

complete any appraisal returned by RHCDS for corrective action.

Secs. 1980.335-1980.339 [Reserved]

Sec. 1980.340 Acquisition, construction, and development.

(a) Acquisition of property. The Lender is responsible for seeing

that the property to be acquired with loan funds is acquired as planned

and that the required security interest is obtained.

(b) New construction. A new dwelling financed with a guaranteed

loan must:

(1) Have been built in accordance with building plans and

specifications that contain approved building code certifications

(eligible certifiers are listed in Sec. 1924.5(f)(1)(iii)).

(2) Conform to RHCDS thermal standards (exhibit D of subpart A of

part 1924).

(i) The builder may certify conformance with RHCDS thermal

standards contained in paragraph IV A of exhibit D of subpart A of part

1924.

(ii) A qualified, registered architect or a qualified, registered

engineer must certify conformance with RHCDS thermal standards

contained in paragraph IV C of exhibit D of subpart A of part 1924.

(c) Development. The Lender and borrower are responsible for seeing

that the loan purposes are accomplished and loan funds are properly

utilized. This includes, but is not limited to, seeing that:

(1) The applicable development standards are adhered to;

(2) Drawings and specifications are certified and complied with;

(3) Adequate water, electric, heating, waste disposal, and other

necessary utilities and facilities are obtained;

(4) Equal opportunity and nondiscrimination requirements are met,

(see Sec. 1980.317); and

(5) A builder's warranty is issued when new construction, repair,

or rehabilitation is involved, which provides for at least 1 year's

warranty from the date of completion or acceptance of the work.

Sec. 1980.341 Inspections of construction and compliance reviews.

(a) Qualified inspectors. Inspections will be made during

construction by a construction inspector deemed qualified and approved

by the Lender. A qualified inspector is one that a reasonable person

would hire to perform an inspection of his/her own dwelling.

(b) Inspections. Inspections shall be done by a party the Lender

determines to be qualified, such as a HUD approved fee inspector. The

sale agreement shall identify which party (i.e., purchaser or seller)

is responsible to obtain and pay for required inspections and

certifications. In connection with inspections involving construction

contracts, equal opportunity and nondiscrimination compliance reviews

must be made as required by Sec. 1980.317.

(1) For existing dwellings, inspections must be made to determine

that the dwelling:

(i) Meets the current requirements of HUD Handbooks 4150.1 and

4905.1 (available from the HUD Ordering Desk 1-800-767-7468).

(ii) Meets the thermal standards per Sec. 1980.313(f).

(2) For a newly constructed dwelling, when construction is planned,

the Lender must see that the following inspections are made in addition

to any additional inspections the Lender deems appropriate:

(i) When footings and foundations are ready to be poured but prior

to back-filling.

(ii) When shell is closed in but plumbing, electrical, and

mechanical work are still exposed.

(iii) When construction is completed prior to occupancy.

(iv) Inspections under paragraphs (b)(2) (i) and (ii) of this

section are not required when the builder supplies an insured 10 year

warranty plan acceptable under the requirements of exhibit L of subpart

A of part 1924.

(c) Water and water/waste disposal. The Lender will see that the

water and water/waste disposal systems have been approved by a state or

local government agency.

Secs. 1980.342-1980.344 [Reserved]

Sec. 1980.345 Applicant eligibility requirements for a guaranteed

loan.

Applicants who meet the requirements of this section are eligible

for a loan guaranteed under this subpart. Applicants desiring loan

assistance as provided in this subpart must file loan applications with

a Lender that meets the requirements set forth in Sec. 1980.309. The

Lender may accept applications filed through its agents,

correspondents, branches, or other institutions. The Lender must have

at least one personal interview with the applicant to verify the

information on the application and to obtain a complete picture of the

applicant's financial situation.

(a) Eligible income. The applicant's adjusted annual income

determined in accordance with Sec. 1980.348 may not exceed the

applicable income limit contained in exhibit C of FmHA Instruction

1980-D (available in any RHCDS office) at the time of issuance of the

conditional commitment. Adjusted annual income is used to determine

eligibility for the RHCDS loan guarantee.

(b) Adequate and dependable income. The applicant (and coapplicant,

if applicable) has adequate and dependably available income. The

applicant's history of income and the history of the typical annual

income of others in the area with similar types of employment will be

considered in determining whether the applicant's income is adequate

and dependable.

(1) A farm or nonfarm business loss must be considered in

determining repayment ability.

(2) A loss may not be used to offset other income in order to

qualify for or increase the amount of RHCDS assistance.

(c) Determining repayment ability. In considering whether the

applicant has adequate repayment ability, the Lender must calculate a

total debt ratio. The applicant's total debt ratio is calculated by

dividing the applicant's monthly obligations by gross monthly income.

(1) Monthly obligation consists of the principal, interest, taxes,

and insurance (PITI) for the proposed loan (less any interest

assistance under this program or any other assistance from a state or

county sponsored program when such payments are made directly to the

Lender on the applicant's behalf), homeowner and other assessments, and

the applicant's long term obligations. Long term obligations include

those obligations such as alimony, child support, and other obligations

with a remaining repayment period of more than 6 months and other

shorter term debts that are considered to have a significant impact on

repayment ability.

(i) Cosigned obligations. Debts which have been cosigned by the

applicant for another party must be considered unless the applicant

provides evidence (usually canceled checks of the co-obligor or other

third party) that it has not been necessary for the applicant to make

any payments over the past 12 months.

(ii) Liability on a previous mortgage. When the applicant has

disposed of a property through a sale, trade, or transfer without a

release of liability, the debt must be considered unless the applicant

provides evidence (usually canceled checks of the new owners) that the

new owners have successfully made all payments over the past 12 months.

(2) Income, for the purpose of determining the total debt ratio,

[[Page 26994]] includes the total qualifying income of the applicant,

coapplicant, and any other member of the household who will be a party

to the note.

(i) An applicant's qualifying income may be different than the

``adjusted annual income'' which is used to determine program

eligibility. In considering qualifying income, the Lender must

determine whether there is a historical basis to conclude that the

income is likely to continue. Typically, income of less than 24 months

duration should not be included in qualifying income. If the applicant

is obligated to pay child care costs, the amount of any Federal tax

credit for which the applicant is eligible may be added to the

applicant's qualifying income.

(ii) In considering income that is not subject to Federal income

tax, the amount of tax savings attributable to the nontaxable income

may be added for use with the repayment ratios. Adjustments for other

than the applicable tax rate are not authorized. The Lender must verify

that the income is not subject to Federal income tax and that the

income (and its nontax status) is likely to continue. The Lender must

fully document and support any adjustment made.

(3) The applicant meets RHCDS requirements for repayment ability

when the applicant's total debt ratio is less than or equal to 41

percent and the ratio of the proposed PITI to income does not exceed 29

percent.

(4) Applicants who do not meet the requirements of this section

will be considered ineligible unless another adult in the household has

adequate income and wishes to join in the application as a coapplicant.

The combined incomes and debts then may be considered in determining

repayment ability.

(5) If the applicant's total debt ratio and/or PITI ratio exceed

the maximum authorized ratio, the Lender may request RHCDS concurrence

in allowing a higher ratio based on compensating factors. Acceptable

compensating factors include but are not limited to the applicant

having a history over the previous 12 month period of devoting a

similar percentage of income to housing expense to that of the proposed

loan, or accumulating savings which, when added to the applicant's

housing expense and shows a capacity to make payments on the proposed

loan. A low total debt ratio, by itself, does not compensate for a high

PITI.

(d) Credit history. The applicant must 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 the cause of the problem was beyond the

applicant's control and the criteria in paragraph (d)(3) of this

section are met:

(i) Incidents of more than one debt payment being more than 30 days

late if the incidents have occurred within the last 12 months. This

includes more than one late payment on a single account.

(ii) Loss of security due to a foreclosure if the foreclosure has

occurred within the last 36 months.

(iii) Outstanding tax liens or delinquent Government debts with no

satisfactory arrangements for payments, no matter what their age as

long as they are currently delinquent and/or due and payable.

(iv) A court-created or affirmed obligation (judgment) caused by

non-payment that is currently outstanding or has been outstanding

within the last 12 months.

(v) Two or more rent payments paid 30 days or more past due within

the last 3 years.

(vi) Accounts which have been converted to collections within the

last 12 months (utility bills, hospital bills, etc.).

(vii) Collection accounts outstanding, with no satisfactory

arrangements for payments, no matter what their age as long as they are

currently delinquent and/or due and payable.

(viii) Any debts written off within the last 36 months.

(2) The following will not indicate an unacceptable credit history:

(i) ``No history'' of credit transactions by the applicant.

(ii) A bankruptcy in which applicant was discharged more than 36

months before application.

(iii) A satisfied judgment or foreclosure with no loss of security

which was completed more than 12 months before the date of application.

(3) The Lender may consider mitigating circumstances to establish

the borrower's intent for good credit when the applicant provides

documentation that:

(i) The circumstances were of a temporary nature, were beyond the

applicant's control, and have been removed (e.g., loss of job; delay or

reduction in government benefits or other loss of income; increased

expenses due to illness, death, etc.); or

(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.

(e) Previous RHCDS loan. RHCDS shall determine whether the

applicant has had a previous RHCDS debt which was settled, or is

subject to settlement, or whether RHCDS otherwise suffered a loss on a

loan to the applicant. If RHCDS suffered any loss related to a previous

loan, a loan guarantee shall not be issued unless RHCDS determines the

RHCDS loss was beyond the applicant's control, and any identifiable

reasons for the loss no longer exist.

(f) Other Federal debts. The loan approval official will check

HUD's Credit Alert Interactive Voice Response System (CAIVRS) to

determine if the applicant is delinquent on a Federal debt. The Lender

will clearly document both its CAIVRS identifying number and the

borrower and coborrower's CAIVRS access code near the signature line on

the mortgage application form. No decision to deny credit can be based

solely on the results of the CAIVRS inquiry. If CAIVRS identifies a

delinquent Federal debt, the Lender will immediately suspend processing

of the application. The applicant will be notified that processing has

been suspended and will be asked to contact the appropriate Federal

agency, at the telephone number provided by CAIVRS, to resolve the

delinquency. When the applicant provides the Lender with official

documentation that the delinquency has been paid in full or otherwise

resolved, processing of the application will be continued. 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 to receive a loan guarantee

until the judgment is paid in full or otherwise satisfied. RHCDS loan

guarantee funds may not be used to satisfy the judgment. If the

judgment remains unsatisfied or if the applicant is delinquent on a

Federal debt and is unable to resolve the delinquency, the Lender will

reject the applicant.

Sec. 1980.346 Other eligibility criteria.

The applicant must:

(a) Be a person who does not own a dwelling in the local commuting

area or owns a dwelling which is not structurally sound, functionally

adequate;

(b) Be without sufficient resources to provide the necessary

housing and be unable to secure the necessary conventional credit

without an RHCDS guarantee upon terms and conditions which the

applicant could reasonably be expected to fulfill.

(c) Be a natural person (individual) who resides as a citizen in

any of the 50 [[Page 26995]] States, the Commonwealth of Puerto Rico,

the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the

Northern Marianas, Federated States of Micronesia, and the Republics of

the Marshall Islands and Palau, or a noncitizen who resides in one of

the foregoing areas after being legally admitted to the U.S. for

permanent residence or on indefinite parole.

(d) Possess legal capacity to incur the loan obligation and have

reached the legal age of majority in the state or have had the

disability of minority removed by court action.

(e) Have the potential ability to personally occupy the home on a

permanent basis. Because of the probability of their moving after

graduation, full-time students will not be granted loans unless:

(1) The applicant intends to make the home his or her 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.

Sec. 1980.347 Annual income.

Annual income determinations will be thoroughly documented in the

Lender's casefile. Historical data based on the past 12 months or

previous fiscal year may be used if a determination cannot logically be

made. Annual income to be considered includes:

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

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

household, including any coapplicant/coborrower.

(b) If 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 considered unless the applicant/borrower and

the person involved sign a statement that the person is not presently

employed and does not intend to resume employment in the foreseeable

future, or if interest assistance is involved, during the term of the

Interest Assistance Agreement.

(c) Income from such sources as seasonal type work of less than 12

months duration, commissions, overtime, bonuses, and unemployment

compensation must be computed as the estimated annual amount of such

income for the upcoming 12 months. Consideration should be given to

whether the income is dependable based on verification by the employer

and the applicant's history of such income over the previous 24 months.

(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

compensation for personal services of all adult members of the

household.

(2) The net income from operation of a farm, business, or

profession. Consider the following:

(i) Expenditures for business or farm expansion and payments of

principal on capital indebtedness shall not be used as deductions in

determining income. A deduction is allowed in the manner prescribed by

IRS regulations only for interest paid in amortizing capital

indebtedness.

(ii) Farm and nonfarm business losses are considered ``zero'' 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 that could be 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 for verified business expenses, such as for

lodging, meals, or fuel, for overnight business trips made by salaried

employees, such as long-distance truck drivers, who must meet these

expenses without reimbursement.

(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. 1980.302(a), 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.

(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.

(5) Payments in lieu of earnings; such as unemployment, disability

and worker's compensation, and severance pay.

(6) Public assistance except as indicated in paragraph (e)(2) of

this section.

(7) Periodic allowances, such as:

(i) Alimony and/or child support awarded in a divorce decree or

separation agreement, unless the payments are not received and a

reasonable effort has been made to collect them through the official

entity responsible for enforcing such payments and they are not

received as ordered; 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 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 coapplicant/coborrower, whether or not that

family member lives in the unit.

(10) The income of an applicant's spouse, unless the spouse has

been living apart from the applicant for at least 3 months (for reasons

other than military or work assignment), or court proceedings for

divorce or legal separation have been commenced.

(e) The following are not included in annual income but may be

considered in determining repayment ability:

(1) Income from employment of minors (including foster children)

under 18 years of age. The applicant and spouse are not considered

minors.

(2) The value of the allotment provided to an eligible household

under the Food Stamp Act of 1977.

(3) Payments received for the care of foster children.

(4) Casual, sporadic, or irregular cash gifts.

(5) Lump-sum additions to family assets such as inheritances;

capital gains; insurance payments from 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) Amounts of education scholarships paid directly to the student

or to the educational institution and [[Page 26996]] amounts paid by

the Government to a veteran for use in meeting the costs of tuition,

fees, books, and equipment. Any amounts of such scholarships or

veteran's payments, which are not used for the aforementioned purposes

and are available for subsistence, are considered to be income. Student

loans are not considered income.

(8) The hazardous duty pay to a service person applicant/borrower

or spouse away from home and exposed to hostile fire.

(9) Any funds that a Federal statute specifies must not be used as

the basis for denying or reducing Federal financial assistance or

benefits. (Listed in exhibit F of FmHA Instruction 1980-D, available in

any RHCDS office.)

(f) Income of live-in aides who are not relatives of the applicant

or members of the household will not be counted in calculating annual

income and will not be considered in determination of repayment

ability.

Sec. 1980.348 Adjusted annual income.

Adjusted annual income is annual income as determined in

Sec. 1980.347 less the following:

(a) A deduction of $480 for each member of the family residing in

the household, other than the applicant, spouse, or coapplicant, who

is:

(1) Under 18 years of age;

(2) Eighteen years of age or older and is disabled as defined in

Sec. 1980.302(a); or

(3) A full-time student aged 18 or older.

(b) A deduction of $400 for any elderly family as defined in

Sec. 1980.302(a).

(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 or 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. Full

justification for such deduction must be recorded in detail in the loan

docket.

(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. 1980.302(a)). This includes medical expenses for any household

member the applicant/borrower anticipates incurring over the ensuing 12

months and which are not covered by insurance (e.g., dental expenses,

prescription medicines, medical insurance premiums, eyeglasses, hearing

aids and batteries, home nursing care, monthly payments on accumulated

major medical bills, and 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.

Secs. 1980.349--1980.350 [Reserved]

Sec. 1980.351 Requests for reservation of funds.

Upon receipt of a viable loan application and prior to loan

underwriting, the Lender may request a reservation of loan guarantee

funds for the loan application. The request should be made as follows:

(a) The Lender must have a complete application on file that

clearly indicates the borrower has sufficient qualifying income and an

adequate credit history.

(b) The reservation shall be valid for 60 days. The Lender must

submit a request for a loan guarantee on or before the expiration date

of the reservation. Substitutions of borrowers or dwellings are not

authorized.

(c) Reservations may be granted only when adequate funding

authority is available. Reservations are subject to the availability of

funds. Reservations will not exceed 90 percent of the funds available

during that quarter.

(d) [Reserved]

(e) All reservations will expire at the end of 60 days or no later

than the pooling date published in subpart L of part 1940 whichever

occurs first.

(f) [Reserved]

Sec. 1980.352 [Reserved]

Sec. 1980.353 Filing and processing applications.

(a) Loan priorities. Complete applications will be considered by

RHCDS in the order received from Lenders authorized to participate in

the program except as provided in paragraph (b) of this section.

(b) Preference. Preference is considered when there is a shortage

of funds and there is more than one request for a conditional

commitment or reservation of funds ready for approval. Applications for

guarantees on loans to first-time homebuyers or veterans, their

spouses, or children of deceased servicemen who died during one of the

periods described in the definition of ``Veteran'' in Sec. 1980.302(a)

will be given preference by RHCDS. Displaced homemakers and single

parents are first-time homebuyers even though they previously owned or

resided in a dwelling with a spouse.

(c) Applications. If, upon completion of the loan underwriting

process of an application, the Lender concludes that the application

can be considered for an RHCDS guarantee, the Lender will provide

written documentation addressing each of the loan eligibility

requirements of this subpart and the basis for the conclusion in the

applicant's file. The Lender will submit a request for the guarantee

using a Form FmHA 1980-21, ``Request for Single Family Housing Loan

Guarantee.'' The form should contain or be supplemented with all of the

following information:

(1) Name, address, telephone number, social security number, age,

citizenship status of the applicant, and number of persons in the

household.

(2) Amount of loan request and proposed use of loan funds.

(3) Name, address, contact person, and telephone number of the

proposed Lender.

(4) Anticipated loan rates and terms, the date and amount of the

Fannie Mae or VA rate used to determine the interest rate, and the

Lender's certification that the proposed rate is in compliance with

Sec. 1980.320.

(5) Statement from the Lender that it will not make the loan as

requested by the applicant without the proposed guarantee and that the

applicant has been advised in writing that the applicant is subject to

criminal action if he or she knowingly and willfully gives false

information to obtain a federally guaranteed loan.

(6) If the applicant is not a United States citizen, evidence of

being legally admitted for permanent residence or indefinite parole.

(7) The applicant's sex, race, and veteran status and whether

applicant is a first-time homebuyer.

(8) An appraisal report including information about the dwelling

location with respect to neighborhood and community services and

facilities, business and industrial enterprises, and streets or roads

serving the housing.

(9) Credit report obtained by the Lender.

(10) An equal opportunity agreement supplied by RHCDS for

construction contracts costing more than $10,000.

(11) Evidence of compliance with the Privacy Act of 1974.

[[Page 26997]]

(12) Lender's loan underwriting (repayment ability,

creditworthiness, and security value).

(13) A certification from the borrower regarding debarment,

suspension, ineligibility, and voluntary exclusion from Federal

programs using a form supplied by RHCDS.

(14) A statement signed by the borrower acknowledging that the

borrower understands that RHCDS approval of the guarantee is required

and is subject to the availability of funds.

(15) A copy of a valid verification of income for each adult member

of the household.

(16) A copy of the purchase agreement or bid for construction

contract.

(d) [Reserved]

(e) Verifying information provided. Written documentation from

third parties is the preferred method of verifying information.

Verifications must pass directly from the source of information to the

Lender and shall not pass through the hands of a third party or

applicant.

(1) Income verification. Employment verifications and other income

verifications obtained in accordance with this paragraph are valid for

120 days (180 days for proposed new construction). Income verifications

must be valid at the time the conditional commitment is issued.

(i) An RHCDS approved form or the equivalent HUD/FHA/VA or Fannie

Mae form will be used to verify employment income of the loan applicant

except when the applicant is self-employed. The form will be signed by

the applicant or borrower or accompanied by an authorization for a

release of information form signed by the applicant or borrower and

sent directly to the employer by the Lender. The Lender should also

obtain copies of the three most recent paycheck stubs. The information

in the employer verification should be compared to the information in

the paycheck stubs for consistency.

(ii) Income information that cannot be obtained by use of this form

will be obtained in writing from third parties to the extent possible.

(iii) Alimony and/or child support payments will be verified by

obtaining a copy of the divorce decree or other legal document

indicating the amount of the payments. When the applicant states that

less than the amount awarded is received, the Lender will request

documentation from the official entity through which payments are

received or other third party able to provide the verification when

payment is not made through an official entity indicating the amounts

and dates of payments to the applicant during the previous 12 months.

(iv) When it is not feasible to verify income in paragraph

(e)(1)(iii) of this section through third parties, the Lender is

authorized to accept an affidavit from the applicant stating the effort

made to collect the amount awarded and the amounts and dates of

payments received during the previous 12 months.

(v) Applicants and borrowers deriving their income from a farming

or business enterprise will provide current documentation of the income

and expenses of the operation. In addition, historic information from

the previous fiscal year must be presented.

(vi) Social Security, pension, and disability income may be

verified by obtaining a copy of the most recent award or benefit letter

prepared and signed by the authorizing agency. This verification will

be considered valid only for 1 year from the date of the award or

benefit letter.

(2) Verification of disability. An RHCDS supplied form will be used

to verify disability in cases where State Review Board or Social

Security records are not available. Receipt of veteran's benefits for

disability, whether service-oriented or otherwise, does not

automatically establish disability.

(3) Verification of alien status. Aliens are required to present

documentation of their status. Section 1944.9 outlines the acceptable

forms of documentation.

(4) Verification of credit history and current debt. The Lender

shall determine all liabilities of all parties responsible for

repayment of the proposed loan. Credit reporting information must pass

directly between the Lender and the credit reporting agency or source.

(i) Mortgage credit reports shall be used to determine

creditworthiness unless the applicant resides in a remote rural area

and conclusive or sufficient information would not be available.

Information relative to judgments, garnishments, foreclosures, and

bankruptcies must be obtained when a credit report is not obtained.

(ii) The credit report must be the most recent revision of the

Residential Mortgage Credit Report form and meet the standards

prescribed by Fannie Mae, Freddie Mac, HUD, VA, or RHCDS.

Sec. 1980.354 [Reserved]

Sec. 1980.355 Review of requirements.

Upon the Lender's review of the conditional commitment, the Lender

may determine whether to accept the conditions outlined in it.

(a) Accepting conditions. Immediately after reviewing the

conditions and requirements in the conditional commitment and the

options listed on the back of the form, the Lender may proceed with

loan closing. If the conditions cannot be met, the Lender and borrower

may propose alternate conditions to RHCDS.

(b) Canceling commitment. If the Lender indicates in the acceptance

or rejection of conditions that it desires to obtain a loan note

guarantee and subsequently decides prior to loan closing that it no

longer wants a loan note guarantee, the Lender should immediately

advise the RHCDS approval official.

Secs. 1980.356--1980.359 [Reserved]

Sec. 1980.360 Conditions precedent to issuance of the loan note

guarantee.

(a) Lender certification. The Lender must certify to RHCDS that:

(1) No major changes have been made in the Lender's loan conditions

and requirements since the issuance of the conditional commitment,

except those approved in writing by RHCDS. In the event the interest

rate has not been fixed at the time the conditional commitment is

issued, and the interest rate increases between the time of issuance of

the conditional commitment and loan closing, the Lender should note the

change when submitting the package to RHCDS for loan guarantee. If

either or both of the underwriting ratios are exceeded as a result of

the interest rate increase, the Lender should list the compensating

factors that demonstrate that sufficient repayment ability still

exists.

(2) All planned property acquisition has been completed and:

(i) All development has been completed; or

(ii) An escrow account has been established in accordance with

Sec. 1980.315.

(3) Required insurance coverage is in effect and an escrow account

has been established for the payment of taxes and insurance.

(4) Truth-in-lending requirements have been met.

(5) All equal employment opportunity and nondiscrimination

requirements have been met.

(6) The loan has been properly closed by a party skilled and

experienced in conducting loan closings and the required security

instruments, including any required shared equity instruments, have

been obtained and recorded in the appropriate office in a timely and

accurate manner.

(7) The borrower has a marketable (clean and defensible) title to

the property then owned by the borrower, [[Page 26998]] subject to the

instrument securing the loan to be guaranteed, and any other exceptions

approved in writing by RHCDS.

(8) Lien priorities are consistent with the requirements of the

conditional commitment.

(9) The loan proceeds have been disbursed for purposes and in

amounts consistent with the conditional commitment.

(10) There has been no adverse change in the borrower's situation

since the conditional commitment was issued by RHCDS.

(11) All other requirements of the conditional commitment have been

met.

(b) Inspections. The Lender will certify to RHCDS that inspections

in accordance with Sec. 1980.341 have been completed.

(c) Lender agreement. There must be a valid lender agreement on

file.

(d) Lender file. The Lender will maintain a file for each

guaranteed RH loan containing originals or copies, as appropriate, of

all documents pertaining to that loan.

Sec. 1980.361 Issuance of loan note guarantee.

(a) When the Lender has certified that all requirements have been

met, delivered a completed Loan Closing Report, and paid the guarantee

fee, the RHCDS approval official will concurrently execute the loan

note guarantee. The original will be provided to the Lender and be

attached to the note.

(b) [Reserved]

(c) [Reserved]

Sec. 1980.362 [Reserved]

Sec. 1980.363 Review of loan closing.

The Lender must provide RHCDS with documentation that all of the

closing conditions have been met within 10 days of issuance of the loan

note guarantee. The Lender is responsible for deficiencies regardless

of whether RHCDS discovers them in the loan closing review and/or

notifies the Lender at that time. RHCDS reviews do not constitute any

waiver of fraud, misrepresentation, or failure of judgment by the

Lender.

Secs. 1980.364-1980.365 [Reserved]

Sec. 1980.366 Transfer and assumption.

(a) General. Lenders may, but are not required to, permit a

transfer to an eligible applicant. A transfer and assumption must be

approved by RHCDS in writing. Transfers without assumption are not

authorized. Transfers and assumptions under this subpart are subject to

the RHCDS guarantee fee.

(b) Eligible transferee. An eligible transferee is one who meets

the eligibility requirements of this subpart and includes situations

involving transfers of housing in an area that has ceased to be rural.

Loans made and guaranteed under this subpart prior to March 29, 1989,

may be transferred to an applicant meeting all eligibility requirements

of this subpart except the applicant's adjusted annual income may

exceed the maximum income for the area by not more than 10 percent.

(c) Determinations by the Lender. Before the transfer and

assumption can be approved with the guarantee remaining in force, the

Lender must determine that all of the following conditions can be met:

(1) The transferee is an eligible applicant.

(2) The transferee will assume the total remaining debt and acquire

all of the property securing the guaranteed loan balance.

(3) The transfer and assumption would not be made without the

continuation of the loan guarantee.

(4) The market value of the security being acquired by the

transferee is at least equal to the secured indebtedness against it.

(5) The priority of the existing lien securing the guaranteed loan

will be maintained or improved.

(6) Proper hazard insurance will be obtained.

(7) The transfer and assumption can be properly closed and the

conveyance instruments will be filed, registered, or recorded, as

appropriate.

(8) The transferor acknowledges continued liability for the debt in

writing.

(d) Changes in the promissory note or security instrument. If the

assumption will result in changes in the repayment schedule or the

interest rate, the changes must be approved by the present debtors

since they will remain liable for the debt. Any changes in rates and

terms must not exceed rates and terms allowed for new loans under this

subpart and cannot exceed the interest rate on the initial loan. The

debt must not exceed the amount remaining due on the original loan. The

term of the loan may cover a period of up to 30 years from the date of

transfer and assumption. The Lender's request for approval to RHCDS

will be accompanied by:

(1) An explanation of the reasons for the proposed change in the

rates and terms.

(2) A statement that the Lender's determinations required by

paragraph (c) of this section can be made.

(e) Release of liability. The Lender may not release the transferor

of liability.

(f) Forms and case numbers. The assumption may be made on the

Lender's assumption agreement form. The assumption agreement must

contain the RHCDS case numbers of the transferor and the transferee.

(g) Lender's application to RHCDS. The Lender must submit the items

outlined in Sec. 1980.353(e) of this subpart to RHCDS, in addition to

items required in this section.

(h) Notations and notices. The Lender must notify RHCDS whether the

loan and security can be properly assumed and transferred. The Lender

shall assure that the conveyance instruments are properly filed,

registered, or recorded, as appropriate. Upon completion of the

transfer and assumption, the Lender must provide RHCDS a copy of the

transfer and assumption agreement. The Lender may present the loan note

guarantee to RHCDS if it desires RHCDS to note the transfer and

assumption on the loan note guarantee. If a new note is obtained, it

will also be attached to the loan note guarantee.

(i) Interest assistance. The original borrower's Master Interest

Assistance Agreement may be transferred to an eligible transferee.

Equity sharing, if any, owed by the transferor must be determined and

collected at the time the loan is assumed and title to the property is

transferred. See Sec. 1980.391.

(j) Closing the transfer and assumption. As soon as the Lender has

obtained RHCDS approval, the Lender may proceed with closing the

transaction. The closing must include, but need not be limited to, the

proper execution and delivery of the conveyance and assumption

documents, compliance with any legal requirements, and actions

necessary to perfect the transfer and the required lien priority.

(k) Loan note guarantee. The existing loan note guarantee will

continue to be in effect. RHCDS will note the transfer and assumption

on the original loan note guarantee by completing the Assumption

Agreement block by inserting the name of the assuming party.

(l) Material furnished to RHCDS after closing. Immediately after

closing, the Lender must furnish to RHCDS:

(1) A conformed copy of the executed assumption agreement.

(2) A statement showing:

(i) Any changes made in the provisions of the promissory note or

security instruments. [[Page 26999]]

(ii) That all conditions and requirements of paragraph (b) of this

section have been met.

(iii) That the required insertions have been made per paragraph (h)

of this section.

(m) Notification of Lender. The RHCDS approval official will review

the proposed transfer and assumption and notify the Lender of the

decision in writing. The request for transfer and assumption will be

treated as an application for guaranteed loan assistance and will be

handled in accordance with Sec. 1980.353. The Lender may proceed with

the transfer and assumption upon obtaining RHCDS approval.

Sec. 1980.367 Unauthorized sale or transfer of the property.

RHCDS consent is required to continue with the RHCDS guarantee in

the event of a sale or transfer of the property in accordance with

Sec. 1980.366. If the property is transferred without RHCDS consent,

the Lender must take one of the following actions:

(a) Obtain RHCDS consent if the conditions of Sec. 1980.366 can be

met;

(b) Satisfy the RHCDS guarantee and continue with the loan without

the loan note guarantee; or

(c) Notify the borrower and the transferee of the default and

service the loan in accordance with Sec. 1980.371.

Secs. 1980.368-1980.369 [Reserved]

Sec. 1980.370 Loan servicing.

RHCDS encourages Lenders to provide borrowers with the maximum

opportunity to become successful homeowners. Lenders should provide

sufficient servicing and counseling to meet the objectives of the loan.

Loan servicing should be approached as a preventive action rather than

a curative action. Prompt followup by the Lender on delinquent payments

and early recognition and solution of problems are keys to resolving

many delinquent loan cases. The Lender shall perform those services

which a reasonable and prudent Lender would perform in servicing its

own portfolio of loans that are not guaranteed.

(a) Normal loan servicing. The Lender is responsible for servicing

the loan under the Lender Agreement and this subpart even if the Lender

has engaged a third party to service the loan on its behalf. Normal

servicing includes:

(1) Receiving all payments as they fall due and proper application

of payments to principal and interest and escrow accounts for taxes

(including special assessments) and insurance.

(2) Establishment and maintenance of an escrow account to pay real

estate taxes and assessments and required hazard and flood insurance on

the security. All escrow accounts must be fully insured by the Federal

Deposit Insurance Corporation (FDIC). The Lender is responsible for

maintaining escrow funds in a reasonable and prudent manner and for

assuring that real estate taxes and assessments and required hazard and

flood insurance are paid in a timely manner even if it requires

advancing the Lender's own funds. The monthly payment may be adjusted

when it is not adequate to meet established charges of the escrow

account for the coming year. Escrow funds may be used only for the

purpose for which they were collected.

(3) Obtaining compliance with the covenants, loan agreement (if

any), security instruments, and any supplemental agreements and

notifying the borrower in writing of any violations.

(b) Other servicing requirements. Other servicing requirements

include taking actions to offset the effects of liens, probate

proceedings, and other legal actions. The Lender's responsibility

includes assuring that:

(1) Insurance loss payments, condemnation awards, or similar

proceeds are applied on debts in accordance with lien priorities on

which the guarantee was based, or to rebuild or otherwise acquire

needed replacement collateral.

(2) The borrower complies with laws and ordinances applicable to

the loan and the collateral.

(3) The borrower is not released of liability for the loan except

as provided in Agency regulations.

(c) Servicing options. The Lender should make every effort to

assist borrowers who are cooperative and willing to make a good faith

effort to cure the delinquency. The Lender should consider the

borrower's financial condition in attempting to work out repayment

agreements. The Lender may revise the payment schedule of the loan on a

temporary basis with the written concurrence of the borrower. Changes

in the loan repayment such as reamortization of the unpaid balance

within the remaining term of the loan may be done with prior written

RHCDS concurrence. Reamortization shall not change the amount of the

loan guarantee.

(d) Lender reporting to RHCDS. Reports on Lender servicing case

loads and performance are required as follows:

(1) Monthly report. The Lender must prepare and submit a report in

a manner prescribed by RHCDS identifying each borrower with a loan that

is more than 30 days delinquent.

(2) Annual report. The Lender will submit an annual report

indicating the status of each borrower account as of December 31 using

the format prescribed by RHCDS.

(e) [Reserved]

Sec. 1980.371 Defaults by the borrower.

Default occurs when the borrower fails to perform under any

covenant of the mortgage or Deed of Trust and the failure continues for

30 days. The Lender will negotiate in good faith in an attempt to

resolve any problem. The borrower must be given a reasonable

opportunity to bring the account current before any foreclosure

proceedings are started.

(a) The Lender must make a reasonable attempt to contact the

borrower if the payment is not received by the 20th day after it is

due.

(b) The Lender must make a reasonable attempt to arrange and hold

an interview with the borrower for the purpose of resolving the

delinquent account before the loan becomes 60 days delinquent.

Reasonable effort consists of not less than one letter sent to the

borrower at the property address via certified mail or similar method

which the borrower refuses to accept or fails to respond.

(c) If the Lender is unable to make contact with the borrower, the

Lender must determine whether the property has been abandoned and the

value of the security is in jeopardy before the account becomes two

payments delinquent.

(d) When the loan becomes three payments delinquent, the Lender

must report borrower delinquencies to credit repositories and make a

decision with regard to liquidation of the account. The Lender may

proceed with liquidation of the account unless there are extenuating

circumstances.

Sec. 1980.372 Protective advances.

Protective advances must constitute an indebtedness of the borrower

to the Lender and be secured by the security instrument. Protective

advances are advances made for expenses of an emergency nature

necessary to preserve or protect the physical security. Attorney fees

are not a protective advance. The Lender will not make protective

advances in lieu of an additional loan. In order to assure that a

protective advance over $500 will be included in the loss payment,

Lenders are encouraged to obtain prior RHCDS approval. [[Page 27000]]

Sec. 1980.373 [Reserved]

Sec. 1980.374 Liquidation.

If the Lender concludes the liquidation of a guaranteed loan

account is necessary because of one or more defaults or third party

actions that the borrower cannot or will not cure or eliminate within a

reasonable period of time, the Lender will notify RHCDS of the decision

to liquidate. Initiation of foreclosure begins with the first public

action required by law such as filing a complaint or petition,

recording a notice of default, or publication of a notice of sale.

Foreclosure must be initiated within 90 days of the date the decision

to liquidate is made unless the foreclosure has been delayed by law.

When there is a legal delay (such as bankruptcy), foreclosure must be

started within 60 days after it becomes possible to do so.

(a) Expeditious liquidation. Once the decision to liquidate has

been made, the Lender must proceed in an expeditious manner. Lenders

must exercise due diligence in completing the foreclosure process.

Lenders are expected to complete foreclosure within the time frames

that are reasonable for the state in which the property is located.

(b) Maximum collection. The Lender is expected to make the maximum

collection possible on the indebtedness. The Lender will consider the

possibility of recovery of any deficiency apart from the acquisition or

sale of collateral. The Lender will submit a recommendation on such

recovery considering the borrower's assets and ability to pay,

prospects of future recovery, the costs of pursuing such recovery,

recommendation for obtaining a judgment, and the collectability of a

judgment in view of the borrower's assets.

(c) Allowable liquidation costs. Certain reasonable liquidation

costs (costs similar to those charged for like services in the area)

will be allowed during the liquidation process. No in-house expenses of

the Lender will be allowed including, but not limited to, employee

salaries, staff lawyers, travel, and overhead. Liquidation costs are

deducted from the gross sales proceeds of the collateral when the

Lender has conducted the liquidation.

(d) Servicing plan. The Lender must submit a servicing plan to

RHCDS when the account is 90 days delinquent and a method other than

foreclosure is recommended to resolve delinquency. RHCDS encourages

Lenders and delinquent borrowers to explore an acceptable alternative

to foreclosure to reduce loss and expenses of foreclosure. Although

prior approval is not required in all cases, the Agency may reject a

plan that does not protect the Government's interest.

(1) Continuation with the borrower. The Lender may continue with

the borrower when a clear and realistic plan to eliminate the

delinquency is presented. The Lender must fully document the borrower's

prospects of success and make this information available to RHCDS upon

request.

(2) Voluntary liquidation. RHCDS may accept the Lender's plan to

use voluntary liquidation when the plan clearly addresses the

responsibilities of the parties, the Lender maintains oversight of the

progress of the sale, the property is listed for sale at a price in

line with its market value (if there is not already a bona fide

purchaser for the dwelling), and the expected cost to the Government is

the same as or less than the cost of foreclosure.

(3) Deed-in-lieu of foreclosure. The Lender may take a deed-in-lieu

of foreclosure from the borrower when it will not result in a cost to

the Government in excess of that expected for foreclosure.

(4) Other methods. RHCDS may accept a proposal submitted by the

Lender that is not specifically addressed in but is consistent with the

provisions of this subpart if the Lender fully documents how the

proposal will result in a savings to the Government.

(e) Handling shared equity. Interest assistance payments made under

Sec. 1980.390 of this subpart will not be subject to shared equity if

the loan is liquidated in accordance with the Lender Agreement unless:

(1) The property is sold at or prior to foreclosure for an amount

exceeding the Lender's unpaid balance and costs of foreclosure, or

(2) A junior lienholder takes over the Lender's loan.

Sec. 1980.375 Reinstatement of the borrower's account.

The Lender may reinstate an account when all delinquent payments

and any funds that were advanced to pay authorized expenses are paid or

as required under state law. When the Lender wishes to consider other

offers by the borrower to bring the account current, the Lender must

obtain RHCDS concurrence.

Sec. 1980.376 Loss payments.

Settlement of the guarantee will be processed in accordance with

this section.

(a) Loss payment. Loss payments will be made within 60 days of the

Lender's properly filed claim. The Lender must submit its loss claim

within 30 calendar days of loan liquidation. The claim may include

interest on the unpaid principal accrued to final loss settlement.

RHCDS will pay interest within the limits of the guarantee to the date

the claim is paid when the Lender promptly and properly files the

claim.

(1) Determination of loss payment. To calculate the loss payment,

first determine the unpaid debt by adding the unpaid principal and

interest on the loan and the unpaid balance for principal and interest

on authorized protective advances. The net proceeds from the property

will be first applied to the unpaid debt. Any other proceeds recovered

by the Lender from other sources shall also be applied to the total

unpaid debt. Determination of net proceeds will be different depending

on which of the following circumstances are involved.

(i) If, at liquidation, title to the property is conveyed to a bona

fide third-party purchaser, then final loss payment will be based on

the net sales proceeds received for the property.

(ii) If, at liquidation, title to the property is conveyed to the

Lender, then the Lender must prepare and submit a property disposition

plan to RHCDS for RHCDS concurrence. The plan will address the Lender's

proposed method for sale of the property, the estimated value and

minimum sale price, itemized estimated costs of the sale, and any other

information that could impact the amount of loss on the loan. The

Lender is allowed up to 6 months from the date the property is acquired

to sell the property. Upon the Lender's written request, RHCDS will

authorize one extension not to exceed 30 days to close the sale of a

purchase offer accepted near the end of the 6-month period. Net

proceeds will be based on the net proceeds received for the property

when the sale is conducted in accordance with the plan as approved by

RHCDS. If no sale offer is accepted within the 6-month period, then the

RHCDS approval official will obtain and use a liquidation value

appraisal of the property. When an appraisal is obtained, the amount of

the net proceeds from the security is then determined by subtracting a

cost factor, which is found in exhibit D of FmHA Instruction 1980-D

(available in any RHCDS office), from the current market value.

(iii) If a deficiency judgment is obtained, the Lender must enforce

the judgment against the borrower before loss settlement if the current

situation provides a reasonable prospect of recovery. A loss payment

will be made when the Lender holds a deficiency judgment but there are

not current [[Page 27001]] prospects of collection, even if there may

be in the future.

(2) Payment procedure. RHCDS will pay losses on the loan according

to the terms of the loan note guarantee unless RHCDS has determined

there is cause for reduction of the loss amount. See Sec. 1980.377 for

future recovery by the Lender.

(i) If there is no dispute between RHCDS and the Lender regarding

the amount of the loss and the Lender's eligibility for payment of

loss, RHCDS will pay the loss within the limits of the guarantee.

(ii) If RHCDS and the Lender do not agree on the amount of the

loss, or RHCDS has determined that part of the loss is not payable to

the Lender under the terms of the loan note guarantee, RHCDS will pay

the undisputed portion. The disputed portion of the claim will be

treated as an adverse decision and the Lender may appeal.

(iii) When RHCDS has cause to believe that Lender fraud or other

lender actions negating the guarantee exist, no loss payment may be

made unless the situation is resolved.

(3) The RHCDS approval official will conduct an audit of the

account and review the loan in its entirety to determine why the loan

failed and whether any reason exists for reducing or denying the loss

claim. This information will be documented in the RHCDS casefile.

(4) If a Lender's loss claim is denied or reduced, the RHCDS

approval official will notify the Lender of all of the reasons for the

action within 10 days of the decision and the Lender may appeal in

accordance with Sec. 1980.399 and subpart B of part 1900.

(5) The RHCDS approval official is authorized to approve loss

payments in amounts of up to 50 percent of his/her delegated loan

approval authority in accordance with exhibit D of FmHA Instruction

1901-A (available in any RHCDS office).

(b) Denial or reduction of loss claims. The RHCDS approval official

will fully document any loss claim which is denied or reduced including

an analysis of how the amount of the reduction was determined. A

connection must be made between the Lender's action or failure to act

and the loss amount on the loan. The amount of loss occasioned by such

action will be established. This information will be made available to

the Lender upon request. A Lender's loss claim may be denied or reduced

by RHCDS when:

(1) The Lender has committed fraud. (Denial of claim.)

(2) The Lender claims items not authorized under RHCDS regulations.

(Reduced by amount of unauthorized claim.)

(3) The Lender violated usury laws. (Reduction for amount of loss

caused by the violation.)

(4) The Lender failed to obtain required security or maintain the

security position. (Reduction for loss attributed to failure.)

(5) Loan funds were used for unauthorized purposes. (Reduction by

unauthorized amount.)

(6) The Lender was negligent in loan servicing. Negligent servicing

is a failure to perform those services which a reasonably prudent

Lender would perform in servicing its own portfolio of loans that are

not guaranteed. The term includes a failure to act, a failure to act in

a timely manner, or acting in a manner contrary to that in which a

reasonably prudent Lender would act. (Reduction for loss amount

attributable to Lender negligence.) Examples of negligent servicing

include:

(i) A failure to contact the borrower in a timely manner when the

borrower's account goes into default.

(ii) A failure to pay real estate taxes or hazard insurance when

due.

(iii) A failure to notify RHCDS within required time limits when

the borrower defaults on the loan.

(iv) A failure to request loan subsidy when the borrower was

eligible for loan subsidy and loan subsidy was available (subsidized

loans only).

(v) A failure to protect security during the liquidation phase.

(7) The Lender delayed filing the loss claim. (Reduction in claim

for interest accrued because the claim was not filed.)

Sec. 1980.377 Future recovery.

The proceeds of any amounts recovered shall be shared in proportion

to the amount of loss borne between RHCDS and the Lender. Although the

Lender's actual loss may be different than the amount on which loss

settlement was based, the proportion of recovery sharing must be based

on the loss percentage upon which the loss payment calculation was

based.

Secs. 1980.378-1980.389 [Reserved]

Sec. 1980.390 Interest assistance.

In order to assist low-income borrowers in the repayment of the

loan, RHCDS is authorized to provide interest assistance payments

subject to the availability of funds. Regardless of what date a

borrower's loan payment is due each month, interest assistance payments

will be made by RHCDS directly to the Lender on or before the 15th day

of the month in which the borrower's payment is due.

(a) Policy. It is the policy of RHCDS to grant interest assistance

on guaranteed loans to low-income borrowers to assist them in obtaining

and retaining decent, safe, and sanitary dwellings and related

facilities as long as the borrower remains eligible for payments when

funds are available for interest assistance. Interest assistance must

be established for the borrower at the time the loan guarantee is

authorized.

(b) Processing interest assistance agreements. The Lender will

process the interest assistance agreement and submit it to RHCDS for

approval.

(1) RHCDS will reimburse the Lender in the amounts authorized in

exhibit D of FmHA Instruction 1980-D (available in any RHCDS office)

for the cost of processing the agreement. The fee will be paid upon

receipt of a valid agreement which has been coded as requiring a

processing fee payment. The processing fee is payable when:

(i) A new agreement is made with the borrower except at the time of

loan closing.

(ii) The borrower had an agreement for the previous year and a new

agreement is made for the current year.

(iii) The borrower is eligible for but not presently on interest

assistance and enters into a new interest assistance agreement.

(iv) The borrower has a change in circumstances which requires a

revision to the current agreement. When the change in circumstances

results in an agreement with less than 90 days remaining, the agreement

for the subsequent year will be prepared at the same time. This action

is considered one agreement.

(2) A processing fee will not be paid when the revision to an

existing agreement is required due to an error on the part of the

Lender or the borrower.

(c) Amount of interest assistance. (1) The amount of interest

assistance granted will be the difference between the monthly

installment due on the promissory note eligible for interest assistance

and the amount the borrower would pay if the note were amortized at the

rate corresponding to the borrower's income range as outlined in the

master interest assistance agreement.

(2) The basis for the amount of interest assistance for each loan

is determined by the amount of interest assistance authorized to the

Agency as shown in exhibit D of FmHA Instruction 1980-D (available in

any RHCDS office) and the note interest rate.

(3) A borrower receiving a loan in a high cost area will be granted

an additional 1 percent interest assistance in order to assist the

borrower up to the [[Page 27002]] maximum rate in exhibit D of FmHA

Instruction 1980-D (available in any RHCDS office).

(i) The Administrator may designate an area as a high cost area for

interest assistance purposes. Such designation may be granted when the

State Director makes a written request for it and provides

documentation that low-income borrowers in the area could not afford to

purchase a dwelling under the interest assistance table in exhibit D of

FmHA Instruction 1980-D (available in any RHCDS office). The area must

also be designated by HUD as a high cost area. The amount of additional

interest assistance for high cost areas is 1 percent; however, in no

case will more interest assistance be granted than the amount necessary

to reach the lowest floor rate in exhibit D of FmHA Instruction 1980-D

(available in any RHCDS office).

(ii) The change in a designation to (or from) a high cost area will

not affect existing loans. An individual's loan eligibility for high

cost designation is determined at the time of issuance of the

conditional commitment for loan guarantee.

(d) Shared equity. Prior to loan closing, the Lender will advise

the applicant that interest assistance is subject to equity sharing.

(e) Eligibility. To be eligible for interest assistance, a borrower

must personally occupy the dwelling and must meet the following

additional requirements:

(1) Initial loans. Interest assistance may be granted at the time

the loan note guarantee is issued, or an assumption is processed in

accordance with Sec. 1980.366, when:

(i) The borrower's adjusted income at the time of loan guarantee

approval did not exceed the applicable low-income limit, the loan

guarantee was funded from interest assisted guaranteed loan funds, and

a master interest assistance agreement was completed at closing if the

borrower is ever to rec

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