Single Family Rural Housing Loans

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

amending the regulations on Single Family Rural Housing Loans. Under

the reorganization of the Department of Agriculture, RHCDS is the

successor to the former Farmers Home Administration (FmHA) for the

administration of rural housing (RH) programs under title V of the

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

FmHA prior to the reorganization. Regulations regarding Receiving and

Processing Applications, Borrower Supervision, Servicing, and

Collection of Single Family Housing Loan Accounts, and Security

Servicing for Single Family Rural Housing Loans are also impacted by

the proposed revisions. This action is taken to implement the

provisions of section 315 of the Housing and Community Development Act

of 1987, Pub. L. 100-242, to improve the delivery of the program to the

public, provide for the orderly processing of loan applications, reduce

workload of RHCDS field staffs, and to conform the RH direct loan

program under section 502 of the Housing Act of 1949 with the

Guaranteed Rural Housing Loan program and industry standards.

EFFECTIVE DATE: October 27, 1995.

FOR FURTHER INFORMATION CONTACT: Betsy McDaniel, Senior Loan

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

5346-S, South Agriculture Building, 14th and Independence SW,

Washington, DC 20250, Telephone (202) 720-1486.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been reviewed under Executive Order 12866 and the

Office of Management and Budget has determined that this is a

``significant regulatory action.'' The rule provides significant

changes which are customer friendly and have reduced the paperwork

burden. Additionally, the cost of the program is reduced as a direct

result of changing the method of subsidy determination. Size and cost

containment restrictions on properties have been removed to allow

applicants to chose a dwelling that meets their needs within their

repayment ability. The result of this rule serves to limit the rate of

subsidy and encourage the applicant to purchase a modestly priced

property within their repayment ability.

Regulatory Flexibility Act

This final rule has been reviewed with respect to the Regulatory

Flexibility Act (5 U.S.C. 601-612). The undersigned has determined that

this action will not have a significant economic impact on a

substantial number of small entities since the regulatory changes

affect RHCDS processing of section 502 loans and individual applicant

eligibility for the program.

Environmental Impact Statement

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

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

that this 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 1949, Pub. L.

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

Programs Affected

This program is listed in the Catalog of Federal Domestic

Assistance under No. 10.410, Low Income Housing Loans.

Intergovernmental Consultation

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

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

excluded from the scope of Executive Order 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)pursuant to the Department of Agriculture Reorganization Act of

1994, Public Law 103-354 (October 13, 1994), administrative appeal

proceedings must be exhausted before bringing suit in court challenging

actions taken under this rule unless those regulations specifically

allow bringing suit at an earlier time.

Paperwork Reduction Act

The information collection requirements contained in this

regulation have been approved by the Office of Management and Budget

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

assigned OMB control 0575-0059 in accordance with the Paperwork

Reduction Act of 1980. The collection requirements have been reduced as

a result of reducing the need for Form FmHA 1944-3, Budget and/or

Financial Statement for loanmaking decisions relating to the

applicant's repayment ability. The Agency is now relying on the use of

ratios for determining repayment ability. The total reduction in burden

is 247,000 hours, or 19 percent as a direct result of the changes in

this rule. These results are in keeping with the National Performance

Review goal of reducing burden imposed on the public by Government

programs. This final rule does not impose any new information

collection or recordkeeping requirement in addition to those approved

by OMB.

Regulatory Reform: Less Burdensome or More Efficient Alternatives

The Department of Agriculture is committed to carrying out its

statutory and regulatory mandates in a manner that best serves the

public interest. Therefore, where legal discretion permits, the

Department actively seeks to promulgate regulations that promote

economic growth, create jobs, are minimally burdensome and are easy for

the public to understand, use or comply with. In short, the Department

is committed to issuing regulations that maximize the net benefits to

society and minimize costs imposed by those regulations. The Department

has utilized comments and suggestions from the public to develop this

regulation in accordance with these principles.

Background

Section 534 of the Housing Act of 1949 requires that all rules and

regulations issued pursuant to that Act will be effective 30 days from

the publication date. The one exception is for a rule or regulation

issued on an emergency basis. This action is effective

[[Page 55113]]

immediately. The justification for the immediate effectiveness of this

regulation is based on the administrative problems and expense to

operate the program which will arise if the funding for the Fiscal Year

1996 single family housing loan program is commenced under the old part

1944, subpart A, regulation and shortly after the beginning of the

fiscal year a complete and inconsistent revision becomes effective,

with the new requirements and new provisions. Secondly, the Agency's

budget for Fiscal Year 1996 was submitted in anticipation that the

revised regulation would become effective on October 1, 1995. The

revised regulation reduces the cost of the program by decreasing the

subsidy and therefore makes more money available for additional loans

from the appropriated funds to assist low-income families. The most

effective way to avoid undue expense of operating the program and

inconsistencies is to apply the new rule to all loans made during the

new fiscal year. For the same reasons the Agency finds that good cause

exists for an immediate effective date under section 553 of the

Administrative Procedure Act.

This final rule incorporates two proposed rules and includes issues

and comments from both. Both proposed rules are being finalized in this

single final rule. The proposed rule published in the Federal Register

(60 FR 25629) on May 12, 1995, provided for a 60-day comment period

which ended on July 11, 1995. This proposed rule was a complete

revision of the entire regulation and incorporates the appropriate

changes from the first proposed rule published in the Federal Register

(58 FR 507) on January 6, 1993. The Agency wishes to thank all of the

commenters who responded to the proposed rules. The comments were

helpful in formulating this final rule.

Proposed Rule Published on May 12, 1995

This proposed rule proposed a complete revision to the regulation

with major changes in determining the amount of maximum dollar

limitation for the property financed, use of ratios to determine

repayment ability, changes to the calculation of payment assistance,

and revisions to the procedures for loan processing.

Interested persons have been afforded an opportunity to participate

in the making of this rule. Due consideration has been given to the 52

comments received. Twenty six comments were from RHCDS or other federal

agency personnel. Twenty six comments were received from groups

representing various public and private interest groups.

Many respondents issued strong support for the rule and requested

that it be published as written. Other respondents were in support of

the rule with particular suggested revisions. Several negative comments

were received opposing the use of ratios as a replacement for the use

of family budgets. Others supported the use of ratios with suggested

changes to other percentages. Other negative comments were received

regarding payment assistance calculations. These comments were reviewed

and adjustments made. Other negative comments were received on

restricting the loan amount so as not to exceed 85 percent of the

maximum dollar limitation established under section 203(b) of the

National Housing Act (12 U.S.C. Sec. 1709). These comments were

considered and changes made to allow the maximum amount under this law.

The proposed rule used the term ``monthly obligation to income''

(MOTI) defined as the principal, interest, taxes, insurance, (PITI) and

homeowner and other assessments, and long term obligations. This term

is generally not consistent with that used in the private sector and in

subpart D of part 1980, Guaranteed Rural Housing Program. In order to

be consistent, RHCDS has revised the final rule to change the term for

this ratio from ``MOTI'' to ``total debt'' (TD).

Other administrative changes were made to the final rule as a

result of comments received. RHCDS has defined ``participation loans''

and ``payment assistance'' in the definition section and has changed

the term ``disabled person'' to ``person with a disability.''

Eleven comments were in favor of the use of ratios to determine

repayment ability in lieu of the use of family budgets. Seven of these

respondents felt the provisions of allowing the use of family budgets

in unusual circumstances is not reasonable and too inconsistent to

administer effectively. RHCDS concurs with these comments and has

removed this language and replaced it with language describing

compensating factors which may be used for exceptions to ratios. Family

budgets may be used when an applicant presents documented evidence of

having met housing related costs in the past six months that are equal

to or greater than the projected housing costs after approval of the

proposed loan. Several respondents felt that an applicant should

provide documented evidence of having met housing related costs in the

past 12 months. RHCDS has considered this comment and has made the

decision not to adopt it at this time because the proposed requirement

of six months provides sufficient documentation to demonstrate

repayment ability. A family budget may be used in conjunction with the

ratios in justifying the need for allowing compensating factors.

Three respondents from high cost areas were concerned about the

effect the PITI and TD ratios would have on the amount of loan that can

be made and stated it would curtail loan making in the respondents'

States. RHCDS has provided for these situations by allowing the use of

documented evidence of having met related costs in the past 6 months

that are equal to or greater than the projected housing costs after

approval of the proposed loan.

Ten respondents contend the changes in this rule are not conducive

to participation loans with other lenders, particularly with the change

in the way payment assistance is calculated and the use of ratios to

determine repayment ability. It was suggested that the ratios for

participation loans be increased to 33 percent for principal, interest,

taxes and insurance and 38 percent for total debt. RHCDS considered

this request and made a determination that a revision to the ratios

would be advantageous and justified the revision based on comments from

affordable lenders in the industry. The Agency decided to use ratios of

33 percent PITI and 38 percent TD for all loans to low-income

applicants (as opposed to very low-income applicants), whether such

loans are participation loans or are fully RHCDS funded direct section

502 loans. Because very low-income applicants have less flexibility in

covering their basic living expenses, the Agency will use a 29 percent

PITI ratio and a 38 percent TD ratio for all RHCDS section 502 direct

rural housing loans for very low-income applicants. This will assist

very low- and low-income applicants while allowing for a reasonable

percentage of income for housing payments. For participation loans the

PITI ratio will include the applicant's payments of principal and

interest on the participation loan.

Participation loans will be obtained by those low-income families

with higher incomes who can better afford a higher PITI ratio of 33

percent. This ratio will give some flexibility to participation loans

charging market interest rates. Payment assistance in connection with

the RHCDS portion of a participation loan will always be based on the

equivalent interest rate matching the applicant's percent of median

income. The payment ``floors''

[[Page 55114]]

will not be considered because in most cases the applicant will be

exceeding the ``floors'' when including the participation loan. The

change in ratios has been adopted in the final rule. Applicants

receiving a participation loan are not eligible for deferred mortgage

assistance.

Payment assistance subsidy is based the greater of either an

equivalent interest rate based on the applicant's percentage of median

income or on a minimum ``floor'' percentage of the applicant's adjusted

income for principal, interest, taxes, and insurance. Other shelter

costs such as utilities and maintenance, are not included as part of

the calculation of subsidy. The Agency, in revising the regulation to

streamline the process and model the regulations after industry

practices, decided, like private industry, that other shelter costs are

paid by the applicant over and above the PITI and TD expenses.

Twenty comments were received on the calculation of payment

assistance and the use of ``floors,'' which are the minimum percentages

of adjusted family income for PITI. Ten respondents were completely in

favor with the change as proposed. Several respondents had conducted

their own studies based on data supplied from various section 502 user

organizations in different geographic locations. The other respondents

opposing the change used these studies as their basis for opposition.

The studies showed that the impact was most severe for those with

income between 50.01 and 65 percent of median. These respondents

advised the use of step increases for the percentages of adjusted

family income at 22, 23, 24, 25, and 26 percent. Their study showed

that some applicants/borrowers will pay more than 30 percent for total

shelter costs which includes PITI, utilities and maintenance.

RHCDS has considered these comments and has determined there is

merit to making a change in the determination of payment assistance for

the 50.01 to 65 percent of median income category mentioned in the

preceding paragraph. The abrupt jump from 22 to 26 percent of adjusted

family income could cause undue hardship to these applicants and

borrowers and could possibly result in increased delinquency and

foreclosure rates. RHCDS has adopted the use of an additional ``floor''

of 24 percent of adjusted family income for applicants falling above 50

and at or below 65 percent of median income.

Twenty nine comments were received on restricting the loan amount

so as not to exceed 85 percent of the maximum dollar limitation

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

Sec. 1709). The majority of respondents felt 85 percent was too

restrictive for their local market and would only provide financing for

existing homes in their communities. The respondents were concerned

that RHCDS financing could not be provided for new construction based

on this cap. Several respondents were concerned that RHCDS would not be

providing decent, safe and sanitary housing for eligible applicants as

a result of this change. One respondent stated this change would

effectively stop the program delivery in the respondents' particular

community because there is no existing housing meeting decent, safe,

and sanitary requirements falling at or below the prescribed loan

maximum. All of these respondents wanted the cap to be set at 100

percent of the maximum dollar limitation established under section

203(b) of the National Housing Act (12 U.S.C. Sec. 1709). Several

respondents stated that the maximum dollar limitation established under

section 203(b) is defined as modest housing by HUD and the section 502

Guaranteed Rural Housing program and that to limit this amount for the

direct program is without reason and unfounded.

The Agency has considered these comments and has made the decision

to increase the amount to the full amount of the maximum dollar

limitation established under section 203(b). This decision was made

because in most cases the limiting factor in the amount of the loan

will be the affordability issue based on the percentage of the

applicant's income as determined by the ratios. Loan amounts will be

limited by the applicant's income and this change should not increase

the cost of the program overall. There are provisions for exceptions to

this limitation by the Administrator in rare circumstances.

Another respondent was concerned that 85 percent is too high in the

respondent's community and will present opportunities for unnecessarily

high loan amounts. RHCDS, in making this change, considered this

possibility but has determined it will not affect the majority of

applicants because of the use of ratios to determine repayment ability.

An approved applicant will be presented a ``Certificate of

Eligibility'' which states the amount of loan the applicant qualifies

for based on current income and debt information. An applicant will be

able to select a property that best suits the applicant's needs based

on the applicant's resources.

Three respondents were concerned that RHCDS employees will no

longer do inspections of existing properties to determine repairs

needed to make a house financed structurally sound and functionally

adequate. Another respondent was concerned that a third party

inspection would cause undue hardship on the buyer and seller to pay.

Third party inspections are not required and RHCDS will continue to

inspect the property if a third party disinterested party has not done

an inspection to determine if there is adequate security for the loan;

however, the buyer has always had the right to obtain his or her own

inspections to protect the buyer's interests.

We received nine comments from natural gas distributors applauding

the elimination of ``prohibited features'' in the existing 7 CFR

Sec. 1944.16(e) particularly the prohibition in paragraph (6) ``Central

air conditioning systems separate and apart from heat pumps.'' The

natural gas industry has felt for a long time that this regulation was

biased in the favor of electric space and water heating and has

resulted in higher heating costs for consumers.

Two respondents were in favor of including loan packaging fees as

an eligible loan purpose; however, they were both concerned with

allowing State Directors discretion to determine what is reasonable

within their jurisdiction. They continued by stating that in the past

some State Directors and housing staffs opposed packaging fees. RHCDS

believes the sections 1944.3(a)(17)(ii)(A), (B), and (C) give adequate

guidance to allow geographic flexibility. RHCDS has added a sentence to

Sec. 1944.3(a)(17)(iii) to prohibit the amount from exceeding the

amount prescribed in exhibit B of subpart B of part 1944.

One respondent commented that the RHCDS requirements for lending on

manufactured homes are too restrictive and that any HUD approved unit

should be accepted. No significant changes were proposed to be made to

the existing regulations regarding manufactured housing. The

requirements currently are, and have been since the inception of this

authority, that the new unit must be built to the Federal Manufactured

Home Construction and Safety Standards (FMHCSS) and RHCDS thermal

requirements. FMHCSS standards are commonly known as the HUD standards

for the construction, design, and performance of a manufactured home

which meets the needs of the public including the need for quality,

durability, and safety.

Eleven comments were received on the subject of deferred mortgage

assistance. Two respondents stated that

[[Page 55115]]

the program is unreliable, difficult to interpret and puts the

recipient in a worse position at the end of 15 years. They both

recommended removing the entire section and eliminating deferred

mortgage assistance. The deferred mortgage program provides a means of

getting a home for applicants who would not otherwise qualify, however,

it is correct that in many cases the borrower will owe a great deal on

the property when it is sold due to interest credit recapture. This

results from the tremendous reduction in interest received while making

deferred payments. While RHCDS admits this assistance is potentially

burdensome, there is a need for this type of assistance for very low-

income applicants. At this time the section will not be eliminated.

Several respondents were concerned with the wording which allows

deferred mortgage assistance to continue to a qualified borrower

provided it is renewed without interruption. The intent of section

502(g) of the Housing Act of 1949 is to make this assistance available

to qualified applicants at loan closing. RHCDS has determined that

deferred mortgage assistance can be continued uninterrupted for up to

15 years. The purpose of deferred mortgage assistance is for very low-

income applicants to obtain a loan initially. There are other servicing

options available to borrowers whose deferred mortgage assistance has

expired or whose income made them no longer eligible.

Two comments were received on the calculation of annual income. One

respondent agreed with the use of historical data based on the previous

12 months or the last fiscal year when a projection could not logically

be made. This decision by RHCDS is consistent with the private lending

community.

Another respondent was concerned in Sec. 1944.5(b) that persons

seeking, but unable to find employment would have to use projected

income from former employment. The intent of this paragraph is to

prevent excluding income from employers that historically lay off

seasonal employees and then rehire them at a later date. Annual family

income should include projected income from this type of situation if

the applicant or coapplicant has a recent history of this type of

employment. An example of this would be a factory that seasonally shuts

down production and lays employees off. These employees are later

rehired to continue in the same job. If there is recent history of an

applicant's employment at this factory, then this income should be

included based on historical information unless the applicant provides

a statement that the person does not intend to resume employment in the

foreseeable future or during the terms of the payment assistance

agreement.

Two comments were received regarding credit history review,

specifically related to collection accounts. The first respondent felt

Sec. 1944.9(f)(1)(ix) was too liberal in allowing an applicant to have

collection accounts which were paid in full within 3 months prior to

application. The respondent stated the limit should be increased to at

least 6 months. RHCDS has considered this comment and has made the

determination that the regulation as proposed provides a sufficient

time period for satisfying unresolved collection accounts.

The second respondent agreed with the changes made to Sec. 1944.9

to make credit history requirements more reasonable; however, the

respondent wanted clarification on Sec. 1944.9(f)(1)(viii). Upon review

by RHCDS, it was noted that under certain circumstances this section

and the following section seemed to be incompatible. A decision was

made to eliminate this sentence entirely and renumber the paragraphs of

this section. Another respondent wanted clarification on when

bankruptcy will not indicate unacceptable credit history. The Agency

considered this and adopted the respondent's proposed language in

Sec. 1944.9(f)(2)(ii). Another respondent wanted clarification on

Sec. 1944.9(f)(2)(iii) regarding the timeframe for satisfied judgments.

Clarification was made in this section that a judgment satisfied more

than 12 months before the date of application would not be considered

unacceptable credit history.

One respondent commented that if RHCDS intends to emulate the

private industry then Sec. 1944.8(a)(2) should be changed to require an

applicant to be employed at one place of employment for at least 12

months prior to submitting the application. RHCDS does not require

income to be obtained only from employment. Additionally, commercial

residential mortgage lenders do not require 12 month employment history

with one employer prior to application. Each case must be evaluated to

determine if the situation was beyond the applicant's control or if the

change in employment was to better the applicant's situation. Also, an

applicant who did not have any break in employment and paid all bills

when due demonstrates an adequate, dependable income.

Two comments were received regarding the use of section 502 funds

to refinance existing mortgages for applicants. These comments fully

supported the removal of the provision that a debt has to be delinquent

to be eligible for refinancing.

One respondent commented that the wording in Sec. 1944.17(a)(2) was

confusing and could be misconstrued in relation to participation loans.

It was suggested that the wording be changed to clarify the maximum

loan amount when there is a senior loan. The Agency has considered this

suggestion but has determined that the wording provides the necessary

language to convey the maximum loan amount when there is a lien in a

senior position to the RHCDS debt.

Two respondents commented that to change the language in the

application processing section to ``rejected'' in Sec. 1944.27(d)(2) is

not customer-friendly. The use of the word ``withdrawn'' was suggested

as an alternative. The Agency has considered this change and has

adopted it in the final rule. A similar suggestion was made in

Sec. 1944.27(f) to change the wording from ``the borrower/applicant

will submit to a personal interview with RHCDS'' to ``RHCDS will

conduct a personal interview with an applicant.'' This suggested

language was incorporated in the final rule.

Comments were received regarding net family assets. A respondent

commented on the statement in the preamble of the proposed rule where

the Agency allowed that the provision of a net family asset limit for

receiving payment assistance is removed. The respondent commented that

the Agency still defines net family assets. The Agency will continue to

include as income either the actual derived income from all family

assets or a percentage of the value of such assets based on the current

passbook savings rate. Another respondent wanted more examples on

inclusions to net family assets. The Agency considered this and

determined that the broad description already defining net family

assets is the most appropriate method of description for interpretation

on a nationwide basis.

In the preamble to the proposed rule the Agency requested comments

on the idea of implementing a 20-year balloon payment using the 33 or

38 year amortization period. This concept was not included as part of

the proposed rule other than in the preamble. Of the nine comments

received, the comments were evenly split between support and opposition

to this proposal. RHCDS has chosen not to implement the 20-year balloon

payment provision at this time.

Three comments were received regarding rates and terms as written

in the proposed rule. Two respondents were concerned about the

provision

[[Page 55116]]

where RHCDS will charge the lower of the two interest rates in effect

at the time of loan approval or loan closing. The comments were

concerned that lenders should have the ability to lock into a rate when

they have a commitment from a secondary lender. The final rule has not

been changed as this process is only for the RHCDS loan. A

participation lender will treat their portion of the loan the same as

any other loan they would be making. The other respondent wanted a

provision added for a 15-year term for loans of $7,500 or less to be

written with a best mortgage obtainable. The Agency considered this

request and has elected not to adopt this suggestion at this time so as

to better protect the Government's interest.

Seven comments were received regarding the use of HUD Handbook

4905-1 for repairs to existing properties. All respondents were opposed

to using this handbook as it is rarely used by HUD anymore and

establishes yet another guideline which is adequately covered in

existing instructions. The Agency considered these comments and made

the decision to remove the use of this handbook and replace it with a

reference to subpart A of part 1924.

A comment was received regarding the definition of household or

family concerning the language ``* * * all other persons who will make

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

next 12 months * * *'' It was suggested that the wording be changed to

prevent the possibility of the borrower renting out a portion of the

site for the placement of a mobile home or other dwelling on the

property. The wording has been changed to clarify that the income from

the entire property financed with a section 502 loan will be included

in the income eligibility determination.

Six comments were received on site requirements. Several

respondents commented that the paragraph under minimum adequate site,

Sec. 1944.11(c), would be more comprehensible if the sentences were

reversed. The Agency considered this request and made the suggested

change to the paragraph. Also changes were made to be consistent with

the Agency's recent change to its regulation in subpart C of part 1924

of title 7. One respondent was concerned with the Agency's new

description of minimum adequate site. The Agency determined this

description would reduce the administrative burden on its field offices

in requesting waivers for properties that exceed 1 acre. This criteria

for a minimum adequate site also lessens the ability of local

government to use zoning requirements for lot size to deter agency

financed single family housing.

The Agency received a number of comments regarding the

unavailability of exhibit J in the published regulation regarding

income exempted by Federal statute. This exhibit merely restates and

summarizes Federal law and will not be published in the final rule;

however, it is available in any Rural Economic and Community

Development (RECD) field office. This is income which applicable

Federal law provides cannot be used to determine eligibility for the

loan or eligibility for payment assistance.

There were eight comments on rural area determinations. Most of the

respondents were in favor of the more frequent reviews allowed by the

revision to this section. Several respondents stated that RHCDS

assistance should not be available in communities with populations

between 10,000 and 20,000 and objected to the term ``buffer'' zone. The

Agency has determined this type of provision is advisable to avoid

untenable situations where a loan would be made on one side of a street

and not on the other. Another respondent stated that in the

respondent's particular county one town is ineligible due to population

while another town is eligible but has Class I soils where subdivisions

are being developed. Pursuant to title V of the Housing Act of 1949,

the rural area eligibility is based on population and is unrelated to

soil type.

Two respondents supported public notification when an area is being

changed from rural to nonrural. Further, these respondents had concerns

regarding applications and conditional commitments already submitted

for financing in these redesignated areas in the community. The Agency

has allowed provisions for continuing with applications in areas

converted from rural to nonrural that were on hand prior to the

redesignation, new and existing conditional commitments received prior

to the redesignation, inventory properties, and subsequent loans.

One respondent wanted a provision for loans to be made for the

purchase of a dwelling located on land owned by a community land trust.

The Agency is complying with the law and has added provisions in

Sec. 1944.15(a)(4) and Sec. 1944.42 giving guidance on this subject.

One respondent wanted approval for planned unit developments and

homeowners associations to be at the State Director level. This was the

intent of the proposed rule and only if there is professional

management employed will it be necessary to receive National Office

approval. The wording was changed in Sec. 1944.3(b)(16) to clarify this

requirement.

One respondent was concerned that Agency personnel under

Sec. 1944.18(b)(2) and (3) would require mortgage insurance as security

on American Indian land. The Agency has stated this as an example but

clearly implies this is not the only form of security which will be

accepted. No change was made to this paragraph.

One respondent stated that an appraisal fee should be waived when

RHCDS uses another lender's appraisal in conjunction with a section 502

participation loan. The Agency has made the decision that it will lend

up to $280 over the market value which includes funding for the

appraisal fee. The money may be used at settlement to reimburse the

applicant for the appraisal done by the participation lender for which

the applicant previously paid.

One respondent commented that the definition of real estate taxes,

which provides for reducing the amount due by any tax exemption

available to the applicant, as too cumbersome in multi-county field

offices. The respondent stated that the applicant should be counseled

regarding the availability of tax exemptions. The Agency concurs that

counseling the applicant is a part of the application process but does

not agree that the exemption should only be used if the applicant has

claimed it. It is the RECD field office's responsibility to know what

tax exemptions are available in order to counsel applicants.

We received three comments regarding income from minors and

students. The Department of Housing and Urban Development (HUD)

recently changed its income eligibility restrictions. The Agency has

made the final rule consistent with the HUD final rule which includes

that income over $480 from a full-time student is not included.

Additionally, the Agency has added Sec. 1944.5(f) to designate income

which will not be included in annual income nor will it be considered

in determining repayment ability. These are: income from live-in aides,

income from minors, and income for educational scholarships.

One respondent discussed Sec. 1944.8(a)(3)(i) using 5 percent of

the current balance on all revolving credit cards and suggested that

the minimum payment on all credit cards with activity in the past 3

months be used. The Agency considered this comment and has decided to

not change this requirement at this time. Five percent of the current

balance is usually more than the minimum payment due and

[[Page 55117]]

provides some means for paying off the credit card debt. However, the

Agency does not want to use debt which is historical and not currently

owed to determine the total debt ratio as this is not an equitable

arrangement for the applicant.

One comment was received regarding alien status under

Sec. 1944.9(c) and recent changes made by the Immigration and

Naturalization Service (INS). It is the Agency's policy that loans will

only be made to United States citizens and those categories of non-

citizens covered in Section 501(b) of the Housing Act of 1949.

Four comments were received regarding when repairs are to be done

to existing houses. The proposed rule stated repairs must be done after

loan closing. The Agency considered the comments received and has made

a change to allow the buyer and the seller agree among themselves to

work out when and by whom the repairs will be done, and provide

documentation to that effect to the RECD field office. All parties

concerned must understand that prior to obligation of funds, there is a

risk in putting money into the property in case funding is not

available at a later date.

Five comments were received regarding the provision that the date

of loan closing is the date the mortgage is recorded rather than the

date the note and mortgage are signed. The actual date of closing is

the date the mortgage is recorded and not the date the note and

mortgage are signed.

Several comments were received related to loan purposes

(Sec. 1944.3). One respondent questioned the need for allowing housing

to be occupied by a farm manager, tenants, sharecroppers, or farm

laborers and the apparent redundancy with the Agency's Farm Labor

Housing regulations. The Agency has made the determination to maintain

this provision under loan purposes in the section 502 program.

Several comments were received including lender's fees in

connection with participation loans. Respondents recommended that the

wording be changed to be consistent with that used in subpart D of part

1980. The Agency considered this recommendations and has adopted the

same language as in subpart D of part 1980.

A respondent remarked that a paragraph was removed from the loan

restrictions section regarding an applicant having the ability to carry

out the required obligations of the loan, and maintaining a former

residence in a responsible manner. This paragraph was not deleted but

was moved to Sec. 1944.9(h).

Nine comments were received regarding participation loans. The

general consensus was the proposed rule was silent to any provision

other than lender fees. The respondents remarked that for this program

to be successful provisions would have to be made to fund these loans

as a priority. The final rule has incorporated funding priority for

participation loans.

Several comments were received regarding mutual self-help housing.

Two respondents commented that the language in Sec. 1944.38 indicates

only low-income applicants may build their homes by this method. The

words low-income have been removed as this was not the intent; the

program is available to both very low- and low-income applicants.

Several respondents supported the addition of personal liability

insurance for self-help borrowers as an eligible loan purpose.

Two comments were received regarding conditional commitments. One

respondent stated the subtitle to Sec. 1944.45(d) was misleading and

did not convey the proper message for cases where the property is

presold to an applicant and the seller is submitting the package. The

Agency considered this comment and agreed that the wording was

misleading. The wording has been changed for clarification. Another

respondent questioned the reimbursement of the appraisal fee at loan

closing. The applicant will be charged for the appraisal and since this

amount is included in the conditional commitment contractor's fee, the

contractor should logically be reimbursed for the appraisal.

One respondent commented that requirements for graduating borrowers

had been removed and should be included in the regulation as required

by subpart F of part 1951. The Agency considered this comment and has

included a paragraph on graduation requirements in Sec. 1944.44.

Three respondents commented on the use of HUD's Credit Alert

Interactive Voice Response System (CAIVRS). They were all in agreement

that an application should be held in suspense rather than rejected

upon identification by CAIVRS of a delinquent Federal debt. The Agency

agrees applicants will have to contact the Federal agency in question

to resolve the delinquency and during this time the application will be

held in suspense.

One commenter disagreed with the proposal to change subpart J of

part 1944, paragraph 1944.457 (a)(2), which increases the section 504

grant limit from $5,000 to $7,500. The commenter stated that very often

an individual applicant would be able to use $7,500 to remove health

and safety hazards, and this will cause the grant funds per grantee to

increase. The commenter was concerned that unless there is going to be

additional funding the Agency will not be able to assist as many

families with this program. The Agency does not propose to change this

revision because of this comment. The commenter's statement is correct,

and the Agency has already considered this downside. The Agency

believes this change is justified because inflation has increased more

than the additional $2,500 since the $5,000 limit was established.

There are more cases each year where $5,000 will not remove all the

health and safety hazards.

One commenter agreed with the changes proposed in subpart J of part

1944, Sec. 1944.461. However, the commenter suggested that the wording

in (b) and (c) of that section, ``loans of $2,500 or more'' be changed

to ``loans that exceed $2,500'' to be consistent with section 502

regulations. The commenter also suggested that paragraph (b)(1) of that

section be changed to clarify that subsequent section 504 loans are

secured by a mortgage only when the subsequent and existing section 504

loan balance will exceed $2,500.

The Agency cannot change this wording to ``loans that exceed

$2,500'' as section 504(a) of the Housing Act of 1949 exempts only

loans for ``less than $2,500'' from security requirements. We

considered changing the section 502 regulation; however, that wording

is simpler and would cause even more confusion than just leaving it

alone. However, we do agree with the spirit of the last part of the

commenter's suggestion and are changing the wording in paragraph (b)(1)

to clarify that a mortgage will be taken when the subsequent and

existing section 504 loan balance will be $2,500 or more.

One commenter agreed with the changes proposed in subpart J of part

1944, Sec. 1944.463. However, the commenter suggested that changes be

made in paragraphs (d) and (e) of that section to clarify that

appraisals and title clearance are only required when the total section

504 indebtedness exceeds $7,500. The Agency agrees with the commenter

and the changes are being made in paragraphs (d) and (e) to clarify

that total section 504 indebtedness is all that is considered.

Three comments were received regarding the proposed changes to

subpart G of part 1951. One comment objected to the provision stated in

Sec. 1951.313(e)(2)(ii) whereby payment assistance would not be renewed

if the borrower's income exceeded the

[[Page 55118]]

moderate income limit for the area. The wording has been deleted from

the final rule. Another respondent was concerned that the

reorganization of offices would hinder the ability of RHCDS staff to

hold personal interviews with borrowers to renew payment assistance.

The Agency is aware of the reduction in staff in many areas of the

country; however, this provision is being left in the final rule.

Payment assistance renewals may be contracted out and the contractor

will perform the direct borrower interview; although the ultimate

decision on the continuation of and amount of payment assistance will

remain with the Agency.

Sixteen comments were received on differing aspects of the

provisions governing the calculation of applicant income. One

respondent referred to the definition of live-in aides under section

1944.2(4) and requested that it be expanded. The commenter notes that,

in many cases, live-in aides are actually household members who have

gotten a divorce from their spouse in order to receive the financial

resources needed to provide him or her essential care services. Under

the regulations as currently written and present definition of terms,

the former spouse's/live-in aide's income would not be counted as

household annual income. The respondent feels that live-in aide's

income should be considered in determining an applicant's annual income

even if the aide is an ex-spouse providing essential care services.

RHCDS does not concur with this recommended revision. While the

respondent's observations may have merit, RHCDS is unable to make

revisions to the provisions governing the definition of live-in aide

and the exclusion of live-in aide's income from consideration. RHCDS is

required under section 501(b)(5) of the Housing Act of 1949 to use the

income guidelines and formulae established by HUD and the provisions in

question were adopted in response to recent revisions to HUD's income

guidelines and formulae. Another respondent referred to section

1944.5(d)(2)(v) and suggested that RHCDS should cite the specific

Internal Revenue Service (IRS) publication related to allowable

business expenses deductions. RHCDS does not concur with this

recommendation. IRS publications may change on a periodic basis due to

revisions to taxation legislation and/or regulatory revisions initiated

by that Agency and, therefore, it would be inappropriate for RHCDS to

cite any particular publication, as this information could easily

become invalidated in the future. Information about IRS publications

can easily be obtained from the IRS if needed.

One commenter requested clarification of section 1944.5(e)(1),

which states that payments received for the care of foster children or

foster adults will not be included in annual income but will be

considered in determining repayment ability, in cases where foster care

payments may be the sole source of household income. This respondent

also considers foster care payments analogous to welfare payments and

feels that it is not equitable for one form of assistance to be

considered income while the other is not. Whether or not the

respondent's observations have merit, they are immaterial since RHCDS

is unable to make revisions to the provisions governing foster care

income. RHCDS is required to use the income guidelines and formulae

established by (HUD) and the provisions in question were adopted in

response to recent revisions to HUD's income guidelines and formulae.

One comment was received recommending that RHCDS provided a

deduction from annual income for child support payments. Agency

regulations include periodic allowances such as child support payments

received in an applicant's household as a part of the applicant's gross

annual income. However, child support payments are considered a

financial obligation and, therefore, RHCDS does not concur that payment

of child support by an applicant or other adult household member to a

former spouse should be included in the Agency's guidelines as a

deductible item in determining annual adjusted income. Child support

payments made to an outside household are considered analogous to debts

from bills or other miscellaneous expenses.

Six comments were received expressing concern about the provisions

under Sec. 1944.5(e)(2), which states that the income of an applicant's

spouse who has been living separately from that applicant, or spousal

income when court proceedings for a divorce or legal separation have

been commenced, will not be included in annual income but will be

considered in determining repayment ability. Four of these respondents

recommended that the term ``living apart'' be removed from this

provision, and the other commenters recommended that a minimum

separation time be included to provide greater guidance in those cases

where applicants and their spouses are apart or that the section be

otherwise clarified. RHCDS does not concur with these recommendations.

RHCDS must be a prudent lender, but, as a part of its supervisory

credit mission and the Department's goal to be customer friendly, the

Agency must have the flexibility to accommodate adverse situations that

its applicants may face. The Agency believes that these provisions are

reasonable and that they will not present an undue burden to loan

approval officials who are processing applications.

Two comments were received regarding the provisions under sections

1944.5(e)(6) and 1944.6(d)(1), which deal with the consideration of

medical expenses. One of these respondents noted that the language

under Sec. 1944.6(d)(1), stating that amounts which are granted

specifically for, or in reimbursement of, the cost of medical expenses

will not be included in annual income could be construed to include

insurance premiums paid by the employer, and recommended clarification

of this provision. RHCDS is unable to concur with this recommended

revision. While the respondent's observations may have merit, the

provision in question was adopted in response to recent revisions to

HUD's income guidelines and formulae. The second commenter questioned

why the medical expenses deduction is open only to elderly families,

expressed concern that this may constitute discrimination, and

recommended that the medical expenses deduction be open to all

applicants. Again, while the respondent's observations may have merit,

RHCDS is unable to make revisions to the provisions governing the

definition of an elderly family or the provisions that limit the

medical expenses deduction only to elderly families. RHCDS is required

to use the income guidelines and formulae established by HUD and the

provisions in question were adopted in response to recent revisions to

HUD's income guidelines and formulae.

Four comments were received regarding the various provisions

governing the consideration of loan co-signers. Two of these

respondents recommended that RHCDS revise Sec. 1944.8(c) so that co-

signers will be required to meet the same creditworthiness requirements

as applicants. The third respondent recommended that an applicant's

principal, interest, taxes and insurance (PITI) be used in determining

the co-signer's monthly obligations to income (MOTI) ratio. The fourth

commenter recommended that entities be allowed to serve as loan co-

signers as well as individuals. RHCDS has carefully considered all of

these suggestions and concurs with the commenters' recommendations.

Section 1944.8(c) has

[[Page 55119]]

been revised to incorporate these comments.

Three comments were received regarding differing aspects of the

provisions under Sec. 1944.9(f), which deal with the evaluation of

applicant credit history, and the respondents generally favored the

revisions to this section. However, one comment was received objecting

to Sec. 1944.9(f)(4)(ii), which requires RHCDS personnel, in cases

where an applicant disputes credit information received from an on-line

profile credit report made at the time of application, to determine if

the applicant has subsequently provided conclusive proof that the

report is in error. The commenter feels that errors could occur in

interpreting creditor correspondence or court documents and the like

which applicants submit to disprove the on-line report, and that

misinterpretations of this type of information could lead to erroneous

conclusions on RHCDS' part. The respondent recommends that the

applicant be responsible for ensuring the veracity of materials used to

invalidate information contained in the on-line report. RHCDS does not

concur with this recommendation. The Agency recognizes that the

information contained in such profile reports may not be complete or

accurate. The use of profile reports is intended as an initial tool to

assist applicants, who are in the preliminary stages of the

consideration process, in removing any potential problems that could

adversely affect them during the later stages of consideration, so that

their chances of obtaining RHCDS credit are enhanced. A standard

mortgage credit report must be requested at a later stage in the

consideration process, and, therefore, we believe that it is

appropriate for the loan approval official to use good judgment in

reviewing materials submitted by the applicant to dispute erroneous

profile report information.

One comment was received suggesting that RHCDS expand

Sec. 1944.9(f)(2)(ii), which outlines the circumstances under which a

bankruptcy will not be considered an indication of an unacceptable

credit history, to include specific information on the Chapter 7 and

Chapter 13 bankruptcy processes. RHCDS concurs with this recommendation

and has incorporated the respondent's proposed language in the final

rule.

One comment was received objecting to the provisions contained

under Sec. 1944.9(g), which outline the circumstances under which an

applicant may be considered for additional credit if the applicant had

a previous RHCDS debt which was settled, if the applicant was released

from personal liability for the debt, or if the applicant is currently

under consideration for debt settlement. The respondent feels that any

applicant who is being considered for debt settlement under subpart B

of part 1956 or was granted a debt settlement under this subpart should

be ineligible for further assistance from RHCDS. RHCDS does not concur

with this recommendation. The language under this section both clearly

delineates and limits the circumstances under which an applicant who

has not been successful with a present or previous RHCDS debt may be

considered for additional credit. In such cases, the applicant must

clearly demonstrate that the applicant's failure to meet the loan

obligation was due to circumstances beyond the applicant's control and

that the underlying reasons which created those circumstances will not

reoccur. This is consistent with RHCDS' mission of assisting those

individuals and families who have been denied economic advancement and

who are unable to obtain conventional credit.

Thirteen comments were received on differing aspects of the

provisions governing the processing of applications. One respondent

referred to Sec. 1944.27(a)(1) specifically with respect to Form FmHA

410-4, ``Application for Rural Housing Assistance (Nonfarm Tract)

Uniform Residential Loan Application'' (URLA), and recommended that the

URLA be completely revised for a number of reasons. While the

commenter's suggestions may have merit, the URLA itself was not a part

of the proposed rule and, therefore, it is not under consideration for

revision as a part of the final rule process at this time. However, we

will keep the respondent's comments on file should the URLA become

subject to review in the future.

Two comments were received recommending that Secs. 1944.27(b)(2)

and 1944.27(d)(1) be revised to indicate that a processing priority

will be provided to applicants who are leveraging RHCDS funds with

other resources and, accordingly, that Sec. 1944.26 be revised to

include a set-aside reserve for leveraging purposes. RHCDS concurs with

these respondents' recommendations and has adopted them in the final

rule.

One comment was received recommending minor, grammatical

improvements to Sec. 1944.27(b)(4) and (b)(5). RHCDS has revised this

section for greater clarity.

Two comments were received recommending that RHCDS conduct an

application ``open season,'' whereby public notice would be issued

advertising a specific timeframe in which applications would be

accepted in RECD field offices for processing within any given fiscal

year. These respondents felt that, in light of the reduced allocations

for the program, an open season would facilitate application processing

and assist in the reduction of application backlogs. RHCDS is unable to

concur with this recommendation. A revision to the program of this

nature which would permit rejection of applications made outside of

specific dates would not be consistent with the mission of giving very

low- and low-income applicants an opportunity for home ownership which

is not provided through any other means.

Seven comments were received objecting to the provisions contained

under Sec. 1944.27(c)(1)(ii), regarding the requirement that where

there are more than 50 unprocessed applications on hand, the RHCDS loan

approval official will inform each applicant, at least every 6 months,

of the current funding status and provide an estimate of when the loan

is to be processed, and these respondents generally felt that this

requirement would be unduly burdensome on field office personnel. RHCDS

does not concur with the recommendation that this provision be removed.

In order to provide the best possible service to RHCDS customers, RHCDS

personnel have a responsibility to keep applicants informed of the

status of their application and the potential availability of funds.

Since the notification process occurs only on a biannual basis, RHCDS

does not agree that it would be an undue burden for its field offices

to prepare and circulate such routine correspondence with its

applicants. One comment was received requesting further clarification

of Sec. 1944.27(c)(1)(ii) regarding the number of biannual notices to

be provided to applicants, and whether applicants have the right to

request an appeal if they should fail to respond to the biannual notice

regarding their continued interest in participating in the program.

This section clearly states that notification will be provided at least

every 6 months to each applicant whose application has not been

processed when there are more than 50 unprocessed applications on hand.

Thus, as long as the number of unprocessed applications exceeds 50,

there would be no limit on the number of biannual notices that could

potentially be provided. The failure of an applicant to respond will be

considered withdrawal of the application by the applicant.

One comment was received recommending that RHCDS add language to

Sec. 1944.27(c) to require the screening of all applicants for

eligibility

[[Page 55120]]

under the Guaranteed Rural Housing (GRH) loan program, and that any

applicant found eligible under the GRH program would be disqualified

for a direct loan with payment assistance. RHCDS does not concur with

this recommendation. Under the procedure, assessing an applicant's

ability to obtain other credit is required during the applicant

interview, which is conducted after all information needed to make a

determination of eligibility has been obtained. Therefore, RHCDS does

not feel that further additions to Sec. 1944.27(c) are needed at this

time.

One comment was received objecting to the provisions under

Sec. 1944.27(e)(1)(v) which require applicants to provide a copy of the

divorce decree or other legal document in order for RHCDS to verify the

amount of alimony or child support payments, and the respondent noted

that this information should not be solicited by RHCDS because this

action would constitute discrimination against divorced persons. In

order to provide financial assistance only to applicants who need it

and in the amounts needed, RHCDS is required under law to verify

applicant income, including alimony or child support payments, to

determine the applicant's and eligibility for program assistance, and,

therefore, requesting a copy of a divorce decree or other legal

document is not considered a discriminatory act, provided the request

is solely for the purpose of verifying income. Loan approval officials

cannot require this information from all applicants who are divorced;

it may be required only when it is necessary to verify alimony or child

support payments received. Loan approval officials should consider

obtaining other means of verification, such as checks, etc., when it is

feasible to do so.

One comment was received recommending that, prior to filing an

application, direct loan applicants should be required to take a

``Homebuyers' Education'' course, similar to provisions included under

subpart 1980-D as a part of the GRH program. While RHCDS agrees that

this type of course is beneficial to potential homeowners, and, in

fact, is requiring homebuyers' education in association with the direct

loan program as a pilot initiative in a small number of states, we are

unable to require such a measure at this time on a nationwide basis due

to budgetary constraints. We encourage RHCDS loan approval officials to

counsel their applicants on the homebuyers' education programs

available to them within their communities.

One comment was received suggesting that Sec. 1944.27(f)(1) be

revised to include partial participation loans when discussing other

credit options with applicants during the applicant interview. RHCDS

does not concur with this recommendation; however, it is expected that

loan approval officials in states with active partial participation

loan programs will routinely discuss participation options with

applicants.

Two comments were received regarding Sec. 1944.27(b)(5) regarding

the use of an on-line profile credit report as one of the steps to

process applications. Both commenters felt that the use of on-line

profile credit reports have merit, but that RHCDS loan approval

officials should be provided with the latitude to make an eligibility

determination on the basis of the information contained in the profile

report if it contains adverse information. RHCDS does not concur with

this recommendation. The information contained in the profile report

may not be complete or accurate and, therefore, it would be

inappropriate and premature for the loan approval official to proceed

with an eligibility determination on the basis of such a report. The

use of profile reports is intended as a tool to assist applicants, who

are in the preliminary stages of the consideration process, in removing

any potential problems that could adversely affect them during the

latter stages of consideration so that their chances of obtaining RHCDS

credit are enhanced.

Seven comments were in favor of the requirement that all applicants

will be required to submit a complete, legible copy of their most

recently filed Federal income tax return to verify income. Three of

these respondents felt that the provision requiring returns to be

stored in a secure place separate from the loan docket to prevent any

wrongful release of the tax return information is a cumbersome and

inconvenient requirement, with one of the commenters who objected to

this provision noting that RHCDS' files are already protected under the

Privacy Act of 1974 and, thus, are secure and not made available to the

public. RHCDS does not concur with the comments that the separate

storage of tax return information is unnecessary.

Two of the respondents requested clarification of this provision,

questioning who would be responsible for the separate maintenance of

the returns and, further, noting that RHCDS already controls its

applicant files and restricts access to those files. In order to assure

the confidentiality of this information the Agency has determined that

it is necessary for field offices to store tax return information

separately in a locked storage facility as a result of Internal Revenue

Service procedures governing taxpayer information.

One respondent recommended that RHCDS revise this provision and

include language to require applicants to submit a copy of their most

recent W-2 Form in addition to their return. RHCDS does not concur with

this recommendation. W-2 Forms do not necessarily contain all

information concerning an applicant's income. For example, certain

types of business income not derived through the applicant's employer

will not be revealed on the W-2 Form. For this reason, RHCDS believes

that the applicant's tax returns are a more reliable tool for RHCDS'

purposes and that they are a better source of comprehensive income

information.

Another respondent recommended that RHCDS revise Sec. 1944.27(a)(1)

to indicate that a completed application will consist of Form FmHA 410-

4, ``Application for Rural Housing Assistance (Nonfarm Tract) Uniform

Residential Loan application'' (hereinafter called URLA) properly

filled out, dated, and signed; an RHCDS form for verifying employment

signed by the applicant or household member for each employer, all of

which are available in any RECD field office; and a complete, legible

copy of the applicant's most recently filed income tax return. The

commenter suggests that this change would be consistent with the

language included under Sec. 1944.27(e) and industry standards. RHCDS

does not concur with this suggestion. RHCDS does not believe that an

applicant's tax return should be required to constitute a completed

application because a tax return is not necessary in order to make a

preliminary determination of eligibility for assistance. The tax return

is intended to be used during the application processing phase as a

means of verifying applicant income.

Five comments were received on the provisions contained in the

proposed rule governing the issuance of a certificate of eligibility to

applicants. Two of the respondents were in favor of the certificate,

but felt that it should be issued to all eligible applicants and that

applicants who submit packaged applications which already contain

information necessary to complete a real estate appraisal should not be

excluded from receipt of such a certificate. RHCDS does not concur with

this recommendation. The certificate of eligibility provides an

applicant who has not submitted a contract for a house, information

that is necessary to

[[Page 55121]]

complete an appraisal and the amount of loan the applicant can afford

based on current income and ratios. It is expected that packagers

participating in the program who are responsible for assisting

applicants in preparing applications in connection with the sale of a

specific house will be well familiar with the program and will advise

their clients of the eligibility requirements of an RHCDS loan, as well

as the maximum loan amount that the applicants will be able to afford.

Applicants who submit packaged applications in connection with the

information necessary to complete a real estate appraisal will be

provided written notice of their eligibility by the loan approval

official rather than the certificate of eligibility.

Two respondents were opposed to the certificate and felt that it

would be a cumbersome process that would remove processing flexibility

from RHCDS personnel. These commenters recommended that this provision

be removed. RHCDS does not concur with this recommendation. RHCDS

believes that the certificate of eligibility is a better method of

providing applicants with information concerning their loan repayment

and affordability limits. The certificate is designed to provide

information tailored to each individual applicant.

One respondent expressed concern over the certificate of

eligibility in terms of the provisions that allow a maximum of two 60-

day extensions to applicants if they are unable to provide the

information needed to complete a real estate appraisal within 90 days,

but satisfactorily demonstrate to RHCDS that they are actively working

on compiling the information requested. The commenter recommended that

the provisions authoring extensions be removed. RHCDS does not concur

with this request. The Agency's requirements governing the suitability

of dwellings to be financed under the program have been substantially

revised to provide applicants greater flexibility in locating

appropriate housing. Because RHCDS' property requirements are more

relaxed under the new guidelines, extensions to prolong the viability

of certificates of eligibility should not be necessary on a frequent

basis, and we expect that loan approval officials will exercise this

authority only under very limited circumstances.

Proposed Rule Published on January 6, 1993

Twelve comments were received from a variety of sources on this

proposed rule, including six RHCDS employees. This rule proposed

changes to eligibility restrictions, determination of annual income and

payment assistance, and loan processing and servicing procedures.

The following changes were made in the final rule due to the

comments received: (1) Earned income tax credits will be excluded in

the determination of annual income; (2) income exempted by Federal

statutes cannot be used to withhold an applicant's eligibility for

assistance; (3) Income exclusion for Nazi victims has been included in

this final rule; (4) The requirement that RHCDS post the selected Rural

Housing applicants' names has been eliminated; (5) RHCDS's applicants

are to submit Federal income tax returns as part of a completed loan

application; and (6) revisions to the payment assistance regulation

have been made.

All comments submitted with respect to this proposed rule were

given due consideration and are discussed further in the following

paragraphs:

One commenter indicated that the definition of income in

Sec. 1944.5(f)(3) needs to be revised in accordance with section 479B

of the Higher Education Technical Amendments of 1987, Public Law 100-

50, Act, as well as the changes required in Section 103 of the Housing

and Community Development Act of 1992, Public Law 102-550. RHCDS agrees

with this and has adopted the changes as final rule. This policy is

consistent with current HUD regulations.

Regarding Sec. 1944.5(e)(8) on earned income tax credit, section

11111(b) of the Omnibus Budget Reconciliation Act of 1990, Public Law

101-508, provided that the earned income tax credit may not be treated

as income for purposes of title V of the Housing Act of 1949. One

comment was received from an RHCDS employee. The employee supported the

elimination of Earned Income Tax Credit as income because it caused the

field offices to estimate earned income. This section excludes treating

any earned income tax credit as income and is being adopted as a final

rule.

Referencing Sec. 1944.5(e)(7) on income exclusion for Nazi victims,

Public Law 103-286, August 1, 1994, provided that payments made to

individuals because of their status as victims of Nazi persecution must

be disregarded in determining eligibility for and the amount of

benefits under any federally assisted program which provides benefits

or services based, in whole or in part, on need. We are therefore,

adopting and including this exclusion in the final rule.

Of the three comments received regarding removing the posting of

selected applicants' names on RECD field office bulletin boards, the

majority of commenters supported the provision as proposed. One

commenter stated loan officers can simply refer applicants to real

estate brokers and contractors when the applicants are informed of

their selection for processing. Two commenters supported the proposal,

but expressed concern about the unavailability of services. They felt

that the instruction should be revised to provide notice to the public

that applicants, or their representative, upon request, may obtain a

list of such applicants, including date of application and priority

listed. Under the Freedom of Information Act (FOIA) as interpreted in

United States Department of Justice v. Reporters Committee for Freedom

of the Press, 489 U.S. 749 (1989), RHCDS applicants have a right to

privacy and publication of names of related RHCDS selected applicants

who must have low- or very low- income violates this right.

The payment assistance regulation under Sec. 1944.34 is being

updated and discrepancies with previously published regulations are

removed in the final rule. Revisions to the payment assistance

regulation are made to: (1) Provide a method for the verification of

income from sources other than employment to make verification of

miscellaneous income easier for the RHCDS personnel; (2) allow existing

borrowers whose incomes have risen above the Department of Housing and

Urban Development's yearly published low income levels to continue to

receive payment assistance; (3) revise the effective period of the

payment assistance agreement in situations where the borrower is

unemployed; (4) ensure that the Agency handles a reduction in income

consistently between the servicing regulations and the payment

assistance regulation; and (5) remove the provision for canceling

payment assistance benefits to a family that improved its property

beyond what is considered to be modest for the area.

The following material discusses the amendments to payment

assistance by sections:

Of the three comments received on Sec. 1951.313(f) regarding the

cancellation of payment assistance agreements (reasons for

cancellation), all commenters requested clarification regarding

cancellation of payment assistance agreements when a borrower is living

in a nursing home, but the borrower's household goods remain in their

dwelling financed by RHCDS. Several commenters pointed out that

sometimes a stay in a nursing home or other care facility is temporary.

One commenter stated that non-occupancy should be defined. RHCDS has

analyzed

[[Page 55122]]

all comments received on this proposal and based on that analysis and

its own review, we are providing additional guidance as follows: (1)

While nursing homes and specialized care facilities are considered full

time residences, only indefinite and prolonged stays should be

considered as non-occupancy of the dwelling. A short term or

specifically limited stay at full-care facilities that does not exceed

6 months, such as when an individual is recuperating from a serious

accident or illness, should not be grounds for terminating payment

assistance. If the stay at a special facility exceeds 6 months, the

borrower must supply appropriate medical documentation to support this

situation.

Section 1951.313(f)(1) on indicators of non-occupancy is being

amended to state that the primary indicators of non-occupancy are when

the borrower and his or her household belongings are absent from the

property and the borrower fails to maintain the property or to arrange

for its care. Several comments were received on the various indicators

of non-occupancy and clarification was requested. In listing various

indicators of non-occupancy, it was intended that the loan approval

official should consider the circumstances and obtain information, as

needed, to determine the appropriate action.

One comment was received on Sec. 1951.313(f)(3) concerning a

borrower who provides fraudulent or materially inaccurate financial

information in connection with a payment assistance application/

renewal. The commenter recommended that this provision be eliminated

because it conflicts with existing regulations (7 CFR section

1951.608(b)(2) of subpart M of part 1951) and because it grants RHCDS

staff too much discretion in determining when information is materially

inaccurate or fraudulently provided. RHCDS disagrees and we are not

amending this section. The Departmental appeals procedure will provide

for a review of the materiality of inaccurate or fraudulently provided

information.

Other Affected Regulations

Due to the revisions in the final rule to subpart A of part 1944,

conforming changes were necessary to the following regulations as

noted.

List of Subjects in 7 CFR Parts 1900, 1910, 1924, 1940, 1944, 1950,

1951, 1955, and 1965

Loan programs--Agriculture, Loan programs--Housing and community

development, Low and moderate income housing, Rural areas.

Therefore, chapter XVIII, title 7, Code of Federal Regulations, is

amended as follows:

1. The authority citation for parts 1900, 1950, 1951, 1955, and

1965 is revised to read as follows:

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

CHAPTER XVIII--[AMENDED]

2. 7 CFR chapter XVIII is amended by removing the words ``interest

credit'' and adding in their place, the words ``payment assistance'',

in the following places:

a. Sec. 1950.105(c)

b. Sec. 1965.26(c)(2) introductory text

c. Sec. 1965.26(c)(3) (2 times)

Sec. 1955.66 [Amended]

3. Section 1955.66(e)(2) is amended by removing the words

``interest credits'' and adding in their place, the words ``payment

assistance''.

4. Section 1900.52(l) is added to read as follows:

Sec. 1900.52 Definitions.

* * * * *

(l) Interest credit. The terms ``interest credit'' and ``interest

credit assistance,'' as they relate to Single Family Housing (SFH), are

interchangeable with the term ``payment assistance.'' Payment

assistance is the generic term for the subsidy provided to eligible SFH

borrowers to reduce mortgage payments.

PART 1910--GENERAL

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

follows:

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

Subpart A--Receiving and Processing Applications

6. Section 1910.1(d) is added to read as follows:

Sec. 1910.1 General.

* * * * *

(d) The terms ``interest credit'' and ``interest credit

assistance,'' as they relate to Single Family Housing (SFH), are

interchangeable with the term ``payment assistance.'' Payment

assistance is the generic term for the subsidy provided to eligible SFH

borrowers to reduce mortgage payments.

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

Sec. 1910.4 Processing applications.

* * * * *

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

described in Sec. 1944.27 (copies available in any RECD office), and

all applications for Rural Housing loans will be processed as outlined

in that instruction.

* * * * *

8. Section 1910.5 is amended in paragraph (c)(6) by revising the

reference ``Sec. 1944.4(c)'' to read ``Sec. 1944.9,'' and revising

``FmHA or its successor agency under Public Law 103-354'' to read

``CFSA or RHCDS,'' and by adding paragraph (e) to read as follows:.

Sec. 1910.5 Evaluating applications.

* * * * *

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

Urban Development Credit Alert Interactive Voice Response System

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

on any Federal debt.

Sec. 1910.6 [Amended]

9. Section 1910.6 is amended in the first sentence of paragraph (g)

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

by revising the reference ``Sec. 1944.26'' to read ``Sec. 1944.27,'' by

revising the words ``section 41'' to ``section 44'' in the second

sentence of paragraph (g)(1) and by revising the words ``section 41 of

Form FmHA'' to read ``section 44 of Form FmHA 1940-1;'' in paragraph

(j).

PART 1924--CONSTRUCTION AND REPAIR

10. The authority citation for part 1924 continues to read as

follows:

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

Subpart A--Planning and Performing Construction and Other

Development

Sec. 1924.6 [Amended]

11. Section 1924.6(c) introductory text is amended in the first

sentence by removing the words ``Exhibit E of.''

Sec. 1924.9 [Amended]

12. Section 1924.9(a) is amended in the second sentence by revising

the references ``Sec. 1944.17(a)(2)(iv)'' to read

``Sec. 1944.17(a)(2)(iii)'' and ``subpart A of part 2024 of this

chapter (available in any FmHA or its successor agency under Public Law

103-354 office)'' to read ``FmHA Instruction 2024-A (available in any

RECD field office),'' and by revising ``FmHA'' to read ``RHCDS'' in the

fourth and sixth (2 places) sentences.

PART 1940--GENERAL

13. The authority citation for part 1940 is revised to read as

follows:

[[Page 55123]]

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

Subpart I--Truth in Lending--Real Estate Settlement Procedures

Sec. 1940.401 [Amended]

14. Section 1940.401(c)(3)(ii) is amended by revising the reference

``Sec. 1951.314'' to ``Sec. 1951.315.''

Subpart S--Accountability Requirements of Persons Paid To Influence

the Making of an FmHA Housing Loan and/or Grant

15. Section 1940.903 is amended by removing the definitions of

``FmHA'' and ``FmHA housing loan and/or grant'' by adding new

definitions of ``Interest Credit'' and ``RHCDS housing loan and/or

grant'' in alphabetical order to read as follows:

Sec. 1940.903 Definitions

* * * * *

Interest credit. The terms ``interest credit'' and ``interest

credit assistance,'' as they relate to Single Family Housing (SFH), are

interchangeable with the term ``payment assistance.'' Payment

assistance is the generic term for the subsidy provided to eligible SFH

borrowers to reduce mortgage payments.

* * * * *

RHCDS housing loan and/or grant. Any loan: insured; direct or

guaranteed, made pursuant to the Housing Act of 1949, as amended. The

term includes rental assistance (RA) and interest credits. The term

does not include contracts, such as procurement contracts, which are

subject to the Federal Acquisition Regulation (FAR).

* * * * *

PART 1944--HOUSING

16. The authority citation for Part 1944 is revised to read as

follows:

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

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

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

Authorizations

Sec.

1944.1 General.

1944.2 Definitions.

1944.3 Loan purposes.

1944.4 Loan restrictions.

1944.5 Annual income.

1944.6 Adjusted annual income.

1944.7 [Reserved]

1944.8 Income eligibility requirements.

1944.9 Other eligibility requirements.

1944.10 Rural area designation.

1944.11 Site requirements.

1944.12 Environmental requirements.

1944.13 National flood insurance.

1944.14 [Reserved]

1944.15 Ownership requirements.

1944.16 Dwelling requirements.

1944.17 Maximum loan amounts.

1944.18 Security requirements.

1944.19-1944.21 [Reserved]

1944.22 Refinancing non-RHCDS debts.

1944.23 [Reserved]

1944.24 Technical services.

1944.25 Rates and terms.

1944.26 Fund allocation.

1944.27 Application processing.

1944.28-1944.30 [Reserved]

1944.31 Loan approval.

1944.32 [Reserved]

1944.33 Loan closing.

1944.34 Payment assistance.

1944.35 Deferred mortgage payments.

1944.36 [Reserved]

1944.37 Subsequent section 502 RH loans.

1944.38 Mutual Self-Help Housing loans.

1944.39 RH loans to RHCDS employees and loan closing officials.

1944.40 [Reserved]

1944.41 Housing demonstration programs.

1944.42 Condominium and community land trust requirements.

1944.43 [Reserved]

1944.44 Borrower graduation.

1944.45 Conditional commitments.

1944.46 Appeals.

1944.47-1944.48 [Reserved]

1944.49 Administrative instructions.

1944.50 OMB control number.

PART 1944--HOUSING

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

Authorizations

Sec. 1944.1 General.

This subpart sets forth the policies and procedures and delegates

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

individuals under section 502 of title V of the Housing Act of 1949, as

amended. The objective of section 502 RH loans is to provide eligible

persons who will live in rural areas with an opportunity to own

adequate but modest, decent, safe, and sanitary dwellings and related

facilities. The requirements of subpart E of part 1901 will be applied

as appropriate. Loans and services provided under this subpart shall

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

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

or mental disability (applicant must possess the capacity to enter into

a legal contract for services or have a court appointed guardian or

conservator empowered to obligate the applicant in real estate

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

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

Consumer Credit Protection Act, 15 U.S.C. Sec. 1601 et seq.

(a) In compliance with the Fair Housing Act as amended and the

Americans with Disabilities Act of 1990, reasonable accommodation must

be given to individuals who are developmentally disabled so that they

have the opportunity to become successful homeowners. When an applicant

or an applicant's representative indicates the existence of a

disability during the loan process, e.g., by requesting the Rural

Housing and Community Development Service (RHCDS) disability deduction

to income due to mental or physical disability or through verification

of income from a Federal or state government source because of mental

or physical disability, RHCDS must ask the applicant or the applicant's

representative what reasonable accommodation should be made in order

for the loan to be processed. The reasonable accommodation request must

be provided to RHCDS by the applicant or the applicant's

representative. Reasonable accommodation can include allowing a court

appointed guardian or conservator to execute appropriate loan making

and loan closing documents on behalf of the applicant; the court order

must show that the guardian or conservator has the power and

responsibility to obligate the applicant in real estate matters and a

copy of the court order must be made a part of the loan docket.

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

subpart involving authorized assistance to RHCDS employees, members of

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

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

Applicants for this assistance are required to identify any known

relationship or association with an RHCDS employee.

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

appraisals, and conditional commitment applications when appropriate.

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

carrying out its responsibilities under this subpart.

Sec. 1944.2 Definitions.

The following definitions apply to this subpart:

Annual payment borrowers. Borrowers who signed promissory notes

providing for annual payments, including borrowers converted to monthly

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

Change.''

Certificate of Eligibility. Certificate issued by RHCDS to

applicants who have received a final determination of

[[Page 55124]]

eligibility after verification of all income. Applicants can present

this to real estate agents, builders, and sellers to indicate their

eligibility for an RH loan in the amount set forth on the certificate.

Conditional commitment. Assurance from RHCDS, in exchange for a

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

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

qualified RH loan applicant under specified limited conditions.

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

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

The cosigner becomes jointly liable to comply with the terms of the

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

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

transferred to the cosigner, the cosigner may assume the RHCDS

indebtedness on program or nonprogram (NP) terms, as applicable.

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

following conditions:

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

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

occupant;

(2) Lacks adequate heating;

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

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

damage, dangerous electrical service; or

(4) Overcrowding situations which will be corrected after loan

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

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

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

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

applicant or borrower or the coapplicant or coborrower; or

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

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

borrower or coapplicant or coborrower; or

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

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

surviving household member shall continue to be classified as an

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

though the surviving members may not meet the definition of elderly

family on their own, provided:

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

the time of the death; and

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

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

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

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

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

Equivalent interest rate. The interest rate charged under payment

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

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

property is located, based on income figures published by the

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

exhibit C (available in any RECD field office).

Existing dwelling. A dwelling which is:

(1) More than 1 year old; or

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

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

contractor provides complete plans and specifications, together with a

certification that construction was completed in compliance with said

plans and specifications, applicable building codes, and thermal

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

contractor must provide evidence that the contractor meets any

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

standing under the approved 10-year warranty plan.

Extended family. A family unit comprised of adult relatives who

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

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

circumstances, could maintain separate households. An example would be

parents living with their adult children.

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

which:

(1) Is owned by the applicant;

(2) Is operated as a single unit;

(3) Is in agricultural production; and

(4) Annually will produce agricultural commodities for sale and

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

Floor. A minimum percentage of adjusted family income which the

borrower must pay for principal, interest, taxes and insurance.

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

considered full-time for day students (excluding correspondence

courses) under the standards and practices of the educational

institution attended. An educational institution includes a vocational

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

offering a college degree.

Homeowners association. An association of individual unit owners

that is responsible for the common property and improvements for the

benefit of all the individual owners, and enforcement of the

organization's rules and regulations.

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 (excluding foster children placed

in the home and live-in aides). Children who are members of the family,

but have been removed and placed in foster care, will be counted as

residents of the household. Children who are subject to a joint custody

agreement and live in the unit at least 50 percent of the time are

considered to be household members.

HUD. The Department of Housing and Urban Development.

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

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

(available in any RECD office).

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

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

by HUD for the county or MSA where the property is or will be located.

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

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

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

MSA where the property is or will be located.

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

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

moderate-income households.

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

the maximum limit for moderate-income households.

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

approval, including homeowners insurance, fire and extended coverage

insurance including flood insurance, when applicable.

Insured warranty. Plan which offers new homeowners varying degrees

of protection against builder default or major structural defects in

their home.

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

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

member

[[Page 55125]]

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

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

supportive services.

Market value. For the purposes of this instruction, market value is

defined as the appraised value of the property as improved.

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

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

property is or will be located.

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

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

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

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

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

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

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

additional counties having strong economic and social ties to the

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

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

terminology.

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

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

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

are not counted as minors for determining annual or adjusted annual

income.

Monthly payment borrowers. Borrowers who signed promissory notes

providing for payment of monthly installments.

MSA. Metropolitan Statistical Area.

Net family assets. Include:

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

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

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

investments, including voluntary retirement plans that are accessible

to the applicant such as individual retirement accounts (IRAs), 401(k)

plans, and Keogh accounts, as well as amounts that can be withdrawn

from other retirement and pension funds without retiring or terminating

employment, but exclude:

(i) Interests in American Indian trust land,

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

loan,

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

furniture and automobile,

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

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

engaged in such operation, and

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

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

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

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

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

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

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

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

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

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

member receives important consideration not measurable in dollar terms.

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

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

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

Payment assistance. The generic term for the subsidy provided to

eligible borrowers to reduce mortgage payments. This term is used

interchangeably with the terms ``interest credit,'' ``interest credit

assistance,'' and ``payment assistance in the form of interest

credit.''

Participation loan. A loan that is made by another lender in

conjunction and simultaneously with a loan made under this part.

Person with a disability. 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: is

expected to be of long or indefinite duration; substantially impede his

or her ability to live independently; and is of such a nature that the

person's ability to live independently could be improved by more

suitable housing conditions. In the case of an individual who has

attained the age of 55 and is blind, disability is defined as inability

by reason of such blindness to engage in any substantially gainful

activity requiring skills or abilities comparable to those of any

gainful activity in which the individual has previously engaged with

some regularity over a substantial period of time. Receipt of veteran's

benefits for disability, whether service-oriented or otherwise, does

not automatically establish disability. A person with a disability also

includes a person with a developmental disability. A developmental

disability means a severe, chronic disability of a person which:

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

combination of mental and physical impairments;

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

(3) Is likely to continue indefinitely;

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

of the following areas of major life activity:

(i) Self-care,

(ii) Receptive and expressive language,

(iii) Learning,

(iv) Mobility,

(v) Self-direction,

(vi) Capacity for independent living, or

(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.

Place. An area containing a concentration of inhabitants within a

determinable unincorporated area.

Real estate taxes. The amount of real taxes and the annual portion

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

dwelling site, reduced by the amount of any tax exemption available to

the borrower, regardless of whether such an exemption is actually

claimed. Tax exemptions may include such things as homestead

exemptions, special exemptions for low-income families, senior

citizens, veterans, and others.

Rehabilitation. Major repairs and improvements to existing

dwellings such as the installation or completion of bathroom

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

structural changes.

RHCDS. Rural Housing and Community Development Service.

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

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

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

states.

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

combination thereof which, with the immediately adjacent densely

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

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

Sec. 1944.3 Loan purposes.

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

purposes:

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

and provide related facilities for use by the applicant as a permanent

residence;

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

and

[[Page 55126]]

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

occupied by the farm manager, tenants, sharecroppers, or farm laborers;

and

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

Sec. 1944.22, except the Agency will not refinance debts for

manufactured homes;

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

be used to:

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

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

applicant does not own an adequate site;

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

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

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

wastewater disposal facility;

(4) Provide site preparation, including grading, foundation

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

driveways to building sites;

(5) Purchase and install essential equipment in the dwelling

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

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

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

loan;

(6) Provide special design features or equipment when necessary

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

household;

(7) Purchase and install approved energy saving measures and

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

commonly used, and is economical and dependably available;

(8) Provide storm cellars and similar protective structures;

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

clearance, and loan closing services; appraisal, surveying,

environmental, and tax monitoring; personal liability insurance fees

for self-help housing applicants; and incidental expenses authorized in

exhibit G (available in any RECD field office);

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

loans, (except as provided in Sec. 1944.4), provided they are the same

as those charged other applicants for similar types of transactions;

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

sewer, electricity, and gas, which are required to be paid by the

applicant and which cannot be paid from other funds;

(12) Pay the applicant's share of Social Security taxes and similar

taxes for labor hired by the applicant in connection with making the

planned improvements;

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

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

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

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

and property insurance premiums in those states where the use of escrow

accounts is authorized by the National office;

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

household, including ``extended family;''

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

a condominium development, community land trust, or planned unit

development with a homeowners association. If professional management

is employed (prior National office approval is required);

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

applications and related actions to public and private nonprofit

organizations which are tax exempt under the Internal Revenue Code of

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

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

(available in any RECD field office) and the limitations of

Sec. 1944.17; and

(ii) The charges are reasonable considering:

(A) The amount and purpose of the assistance;

(B) The repayment ability of the recipient; and

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

area.

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

what is considered a reasonable amount for the jurisdiction. In no case

may the amount exceed that found in exhibit B of subpart B of part 1944

(available in any RECD office).

Sec. 1944.4 Loan restrictions.

Loan funds may not be used to:

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

transfer with assumption.

(b) Refinance:

(1) RHCDS debts, except as authorized under Sec. 1951.316.

(2) Debts on a manufactured home.

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

used principally for income-producing purposes, or buildings not

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

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

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

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

require specifically designed features to accommodate the enterprise,

are not restricted under this subpart; however, housing related

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

which may be claimed as business expense deductions for income tax

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

assistance.)

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

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

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

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

purchase of an RHCDS inventory property or where the packager is

receiving a grant under subpart B of part 1944.

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

prior to receipt of patent.

(g) Finance manufactured homes which are not constructed and

installed in accordance with exhibit F of this subpart and exhibit J of

subpart A of part 1924. (Both exhibits are available in any RECD field

office.)

Sec. 1944.5 Annual income.

Annual income determinations will be thoroughly documented in the

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

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

be made. Annual income will be calculated as follows:

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

received by the applicant and all adult members of the household

including the spouse is derived by multiplying:

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

anticipated annual hours); or

(2) A weekly wage by 52 weeks; or

(3) A biweekly wage by 26 weeks; or

(4) A monthly wage by 12 months or a bimonthly wage by 24 pay

periods.

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

presently employed but there is a recent history of such employment,

that person's income will be projected unless the applicant or the

person involved signs a statement that the person is not presently

employed and does not intend to resume employment in the foreseeable

future, or, if payment assistance is involved, during the term of the

payment assistance agreement.

(c) Income from such sources as seasonal work of less than 12

months duration, commissions, overtime, bonuses, and unemployment

compensation will be computed as the

[[Page 55127]]

estimated annual amount of such income for the ensuing 12 months.

Temporary income such as unemployment benefits, worker's compensation,

etc., will be projected over 12 months when computing payment

assistance on an annual basis. Historical data based on the past 12

months may be used if a determination of expected income cannot

logically be made.

(d) The following are included in annual income:

(1) The gross amount, before any payroll deductions, of wages and

salaries, overtime pay, commissions, fees, tips, bonuses, and other

compensations for personal services of all adult members of the

household. If a cost of living allowance or a proposed increase in

income has been estimated to take place on or before loan approval,

loan closing, or the effective date of the payment assistance

agreement, it will be included as income.

(2) The net income from the operation of a farm, business, or

profession. The following provisions apply:

(i) Expenditures for business or farm expansion, capital

improvements, or payments of principal on capital indebtedness shall

not be used as deductions in determining income. A deduction is allowed

in the manner prescribed by Internal Revenue Service (IRS) regulations

only for interest paid in amortizing capital indebtedness.

(ii) Farm and nonfarm business losses are considered ``0'' in

determining annual income.

(iii) A deduction, based on straight line depreciation, is allowed

in the manner prescribed by IRS regulations for the exhaustion, wear

and tear, and obsolescence of depreciable property used in the

operation of a trade, farm, or business by a member of the household.

The deduction must be based on an itemized schedule showing the amount

of straight line depreciation.

(iv) Any withdrawal of cash or assets from the operation of a farm,

business, or profession will be included in income, except to the

extent the withdrawal is reimbursement of cash or assets invested in

the operation by a member of the household.

(v) A deduction is allowed for verified business expenses, such as

lodging, meals, and fuel, for business trips made by salaried

employees, such as long-distance truck drivers, who must meet these

expenses without reimbursement.

(vi) Housing related expenses for the property being financed such

as mortgage interest, real estate taxes, and insurance, which may be

claimed as business expense deductions for income tax purposes, will

not be deducted from annual income.

(3) Interest, dividends, and other net income of any kind from real

or personal property, including:

(i) The share received by adult members of the household from

income distributed from a trust fund.

(ii) Any withdrawal of cash or assets from an investment except to

the extent the withdrawal is reimbursement of cash or assets invested

by a member of the household.

(iii) Where the household has net family assets, as defined in

Sec. 1944.2, in excess of $5,000, the greater of the actual income

derived from all net family assets or a percentage of the value of such

assets based on the current passbook savings rate, as determined by

RHCDS.

(4) The full amount of periodic payments received from Social

Security (including Social Security received by adults on behalf of

minors or by minors intended for their own support), annuities,

insurance policies, retirement funds, pensions, disability or death

benefits, and other similar types of periodic receipts. Amounts

received from the United States Government which are attributable to

underpayment of benefits for one or more prior months shall be excluded

in the calculation of annual income as provided in 42 U.S.C. 1382b.

(5) Payments in lieu of earnings, such as unemployment and

disability compensation, worker's compensation, and severance pay.

(6) Public assistance except as indicated in exhibit H (available

in any RECD field office).

(7) Periodic allowances, such as:

(i) Alimony and child support awarded in a divorce decree or

separation agreement, unless the applicant certifies the payments are

not received, and the applicant provides documentation to RHCDS that a

reasonable effort has been made to collect the payments through the

official entity responsible for enforcing such payments; or

(ii) Recurring monetary gifts or contributions from someone who is

not a member of the household.

(8) 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 or spouse, whether or not that family member lives in the

home.

(e) The following are not included in annual income but may be

considered in determining repayment ability:

(1) Payments received for the care of foster children or foster

adults (usually individuals with disabilities, unrelated to the

applicant, who are unable to live alone);

(2) The income of an applicant's spouse, when the spouse has been

living apart from the applicant for less than 3 months (for reasons

other than military or work assignment), but not if court proceedings

for divorce or legal separation have commenced;

(3) Temporary, nonrecurring, or sporadic income (including gifts);

(4) Lump-sum additions to family assets such as inheritances,

capital gains, insurance payments included under health, accident,

hazard, or worker's compensation policies, and settlements for personal

or property losses (except as provided in paragraph (d)(5) of this

section);

(5) Amounts which are granted specifically for, or in reimbursement

of, the cost of medical expenses;

(6) Earnings in excess of $480 for each full-time student 18 years

old or older (excluding the head of household and spouse);

(7) Reparation payments paid by a foreign government arising out of

the Holocaust. If an applicant for an RHCDS loan was deemed ineligible

because the applicant's income exceeded the low income (moderate income

for guaranteed loans) because of the applicant's Nazi persecution

benefits, the RHCDS approval official should notify the applicant to

reapply for a loan;

(8) Any earned income tax credit;

(9) Adoption assistance payments in excess of $480 per adopted

child;

(10) Deferred periodic payments of supplemental security income and

Social Security benefits that are received in a lump sum;

(11) Amounts received by the family in the form of refunds or

rebates under state or local law for property taxes paid on the

dwelling unit;

(12) Amounts paid by a State agency to a family with a

developmentally disabled family member living at home to offset the

cost of services and equipment needed to keep the developmentally

disabled family member at home; and

(13) Any other revenue which a Federal statute exempts shall not be

considered income or used as a basis for determining eligibility for an

RHCDS loan, payment assistance, or denying or reducing Federal

financial assistance or benefits to which the recipient would otherwise

be entitled. Additional financial assistance which is considered exempt

income under Federal statutes. (See exhibit H available in any RECD

field office).

(f) The following will not be counted when calculating annual

income and

[[Page 55128]]

will not be considered in determination of repayment ability:

(1) Income of live-in aides as described in 1944.2.

(2) Income from employment of minors (including foster children)

under 18 years of age. The applicant, coapplicant, or spouse may never

be considered minors.

(3) The full amount of student financial assistance paid directly

to the student or to the educational institution.

Sec. 1944.6 Adjusted annual income.

Adjusted annual income is annual income as determined in

Sec. 1944.5 less the following:

(a) A deduction of $480 for each member of the family residing in

the household, as defined by Sec. 1944.2, other than the applicant,

coapplicant, or spouse who is:

(1) Under 18 years of age; or

(2) Eighteen years of age or older and is disabled; or

(3) A full-time student, aged 18 or older.

(b) A deduction of $400 for any elderly family.

(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's family to be

gainfully employed or to further the applicant's education. The

deduction will be based only on moneys 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 is entitled to

claim as dependents for income tax purposes.

(d) A deduction of the amount by which the aggregate of the

following expenses of the household exceeds 3 percent of gross annual

income:

(1) Medical expenses for any elderly family. This includes medical

expenses, for any household member, the applicant anticipates incurring

over the ensuing 12 months which are not covered by insurance. Examples

of medical expenses are dental expenses, prescription medicines,

medical insurance premiums, eyeglasses, hearing aids and batteries, the

cost of home nursing care, the costs of transportation to and from

medical treatment, monthly payments on accumulated major medical bills,

and cost of full-time nursing or institutional care which cannot be

provided in the home for a member of the household; and

(2) Reasonable attendant care and auxiliary apparatus expenses for

each member of any household who is disabled to the extent necessary to

enable any member of such household (including such member who is

disabled) to be employed.

Sec. 1944.7 [Reserved]

Sec. 1944.8 Income eligibility requirements.

(a) Repayment ability. An applicant is eligible for a section 502

RH loan only if the following requirements are met:

(1) Income limit. The adjusted annual income as defined in

Sec. 1944.6 at the time of loan approval does not exceed the applicable

income limit. (See exhibit C available in any RECD field office).

(2) Adequate and dependable income. The applicant (and coapplicant

if applicable) has adequate and dependably available income. The

determination of income dependability will include consideration of the

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

typical annual income of others in the area with similar types of

employment. Such income must be sufficient to meet the income ratios

described in Sec. 1944.8(a)(3), as modified by Sec. Sec. 1944.34 and

1944.35.

(3) Determining repayment ability. In considering whether the

applicant has adequate repayment ability, RHCDS must calculate the

principal, interest, taxes, and insurance (PITI) and total debt (TD)

ratios. If a participation loan is involved, the PITI will also include

the principal and interest payments on the participation loan. The PITI

ratio is calculated by dividing the monthly PITI for the proposed loan

(less any payment assistance for which the applicant may qualify) by

the gross monthly family income. The TD ratio is calculated by dividing

the applicant's monthly obligations by total gross monthly family

income.

(i) Total monthly debt consists of the PITI for the proposed loan

(less any payment assistance for which the applicant may qualify),

homeowner and other assessments, and long term obligations. Long term

obligations include those obligations such as alimony, child support,

child care, and other obligations with a remaining repayment period of

more than 6 months, other shorter term obligations that are considered

to have a significant impact on repayment ability, plus 5 percent of

the current balance on all revolving credit cards.

(ii) Income, for the purpose of determining these ratios, includes

the total gross monthly income of the applicant, coapplicant, and any

other member of the household who will be a party to the note,

including any income that may be excepted under Sec. 1944.5.

(iii) The very low-income applicant is considered to have repayment

ability when the proposed PITI and TD ratios are less than or equal to

a PITI ratio of 29 percent and a TD ratio of 38 percent; however, the

low-income applicant is considered to have repayment ability when the

proposed PITI and TD ratios are less than or equal to a PITI ratio of

33 percent and a TD ratio of 38 percent as defined in

Sec. 1944.8(a)(3). Very low-income applicants whose PITI ratio exceeds

the authorized ratio shall be considered for deferred mortgage

assistance as provided in Sec. 1944.35.

(iv) When the ratios do not support repayment of the proposed loan,

at the applicant's request, RHCDS may make an exception to the above

income ratio calculations under the following circumstances or

compensating factors:

(A) When the applicant presents documented evidence of having met

housing related costs in the past 6 months that are equal to or greater

than the projected housing costs after approval of the proposed loan.

These housing costs must have been maintained when the applicant's

household income was equal to or less than the current annual income,

and the applicant's household debt load was equal to or greater than

the current debt load. Projected housing costs will include the RHCDS

monthly payment after application of any payment assistance for which

the applicant may qualify, projected real estate taxes and assessments,

premiums for required property and flood insurance, estimated utility

and maintenance costs, and any other costs expected to be incurred with

home ownership.

(B) If the applicant's TD ratio and/or PITI ratio exceed the

maximum authorized ratio, the State Director may allow a higher ratio

based on compensating factors. Acceptable compensating factors include,

but are not limited to, the applicant has recently entered a

profession, in which the applicant has adequate schooling, that would

historically lead to significant pay increases, the applicant has

accumulated savings which, when added to the applicant's housing

expense shows a capacity to make payments on the proposed loan, and the

availability of overtime income to increase the applicant's income. A

low TD ratio, by itself, does not compensate for a high PITI ratio.

(b) Additional coapplicant. Applicants applying who do not meet the

requirements of paragraph (a)(2) of this section will be considered

ineligible unless other adults in the household have adequate income

and wish to join in the application as a coapplicant. The

[[Page 55129]]

combined incomes and obligations shall then be considered in

determining repayment ability.

(c) Cosigner. RHCDS will also consider the use of a cosigner when

the applicant applying for assistance does not meet the requirements of

paragraph (a)(2) of this section. Cosigners must have adequate and

dependably available income sufficient to repay the applicant's monthly

installment with applicable payment assistance. Cosigners are subject

to the same determination of repayment ability outlined in paragraph

(a)(3) of this section as the applicant, with the amount of the

applicant's monthly installment with applicable payment assistance

considered as part of the cosigner's PITI ratio.

The cosigner may be an individual or an entity but may not be a

member of the applicant's household.

Sec. 1944.9 Other eligibility requirements.

In addition to the income eligibility requirements of Sec. 1944.8,

the applicant must:

(a) Qualify as one of the following:

(1) A person who does not own a dwelling, (except for refinancing

purposes), or owns a dwelling which is not structurally sound,

functionally adequate, or large enough to accommodate the needs of the

applicant, or,

(2) A farmowner without decent, safe, and sanitary housing for the

farmowner's own use or for the use of farm tenants, sharecroppers, farm

laborers, or farm manager.

(b) Be without sufficient resources to provide the necessary

housing or related facilities, and be unable to secure the necessary

credit from other sources upon terms and conditions which the applicant

could reasonably be expected to fulfill.

(1) If the applicant has only an undivided interest in the land to

be improved, those co-owners whose execution of the mortgage is

required under Sec. 1944.18(b)(8) must also be unable to provide the

improvement with their own resources or obtain the necessary credit

elsewhere, either individually or jointly with the applicant.

(2) Applicants are expected to reduce the need for loan funds by

utilizing available nonessential assets and/or cash on hand; however,

IRAs, Simplified Employee Pensions (SEPs), 401(k) plans, and similar

personal retirement accounts do not have to be liquidated when

considering other resources. Reasonable reserves may be retained for

unforeseen events.

(3) RHCDS will provide information on area lenders participating in

the section 502 guaranteed RH loan program and section 502

participation RH loan program to all applicants who are required to

seek other credit.

(c) Be a natural person (individual) who resides as a citizen in

any of the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin

Islands, Guam, American Samoa, the Commonwealth of the Northern

Marianas, the Federated States of Micronesia, the Republic of Palau, or

the Republic of the Marshall Islands, or a noncitizen who resides in

one of the foregoing areas after being legally admitted in one of the

alien entry categories set forth in section 214 of the Housing and

Community Development Act of 1980, 42 U.S.C. 1436a. An applicant who is

not a United States citizen is required to submit evidence that the

applicant has been lawfully admitted to the country as a resident in

one of the categories specified in the preceding sentence. Verification

is only required when the applicant is not a U.S. citizen.

(d) Possess legal capacity to incur the loan obligation (or have a

court appointed guardian or conservator who is empowered to obligate

the applicant in real estate matters), and have reached the legal age

of majority in the State, or have had the disability of minority

removed.

(e) Have the potential ability to personally occupy the home on a

permanent basis. Due to the probability of transfer, or moving after

graduation, military personnel on active duty and full-time students

will not be granted loans unless:

(1) The applicant, if military personnel, will be discharged at an

early date (usually within 1 year). The family must continue to occupy

the home in case the borrower is transferred to another duty station

before discharge;

(2) The applicant intends to make the home a permanent residence

and there are reasonable prospects that employment will be available in

the area after graduation; and

(3) An adult member of the household will be available to make

inspections as the home is being constructed and to sign checks for

work performed.

(f) Have a credit history which indicates a reasonable ability and

willingness to meet obligations as they become due.

(1) Any or all of the following are indicators of an unacceptable

credit history unless RHCDS determines that the cause was beyond the

applicant's control (except for Federal judgments described in

paragraph (f)(1)(i) of this section), and satisfies the criteria in

paragraph (f)(3) of this section:

(i) An outstanding judgment obtained by the United States in a

Federal Court (other than the United States Tax Court), which has been

recorded, shall cause the applicant to be ineligible for any loan or

grant until the judgment is paid in full or otherwise satisfied. RHCDS

loan or grant funds may not be used to satisfy the judgment. The

Administrator may waive the rejection of an application based on

verification of an outstanding Federal judgment upon specific

determination that it is in the best interest of the Government to do

so. Verification of delinquent Federal debt and processing of

applications with such debt must comply with Sec. 1944.27(b)(4).

(ii) Incidents of more than two debt payments being more than 30

days late if the incidents have occurred within the last 12 months.

This includes more than two late payments on a single account.

Instances of more than two late payments may be waived in the event

that the RHCDS loan will result in a significant reduction in shelter

costs, which will contribute to improved debt payment ability.

(iii) Loss of security due to a foreclosure if the foreclosure has

been completed within the last 36 months.

(iv) An outstanding IRS tax lien.

(v) Other outstanding tax liens with no satisfactory arrangements

for payments.

(vi) A court-created or affirmed obligation (judgment), caused by

non-payment, that is currently outstanding or has been outstanding

within the last 12 months, not including hospital or State motor

vehicle liens described under Sec. 1944.17.

(vii) Two or more rent payments paid 30 days or more past due, that

have occurred within the last 2 years. Notwithstanding the previous

sentence, if there have been no other credit problems in the

applicant's last 2 years general credit history, only the past rental

year will be considered. Instances of more than two late payments may

be waived in the event that the RHCDS loan will result in a significant

reduction in shelter costs, which will contribute to improved debt

payment capability.

(viii) Collection accounts outstanding with no satisfactory,

reasonable arrangements for repayment, or collection accounts which

have been outstanding within the last 12 months which were paid in full

within 6 months of an eligibility determination for RHCDS assistance,

where there is no record of regular payments being

[[Page 55130]]

maintained on the account prior to receipt of the final payment.

(ix) Non-Agency debts written off within the last 36 months.

(x) Agency debts (including debts to predecessors of the Agency)

which were debt settled pursuant to subpart B of part 1956, or by

release from personal liability under subpart A of part 1955 or subpart

C of part 1965, or debt settlement is being considered except where the

conditions of paragraph (g) of this section can be met.

(2) The following will not indicate an unacceptable credit history:

(i) ``No history'' of credit transactions by the applicant.

(ii) A bankruptcy in which the debts were discharged (Chapter 7)

more than 36 months prior to the date of the application or where an

applicant successfully completed a bankruptcy debt restructuring plan

or Chapter 13 plan, and has demonstrated a willingness to meet

obligations when due for the past 12 months prior to the date of

application.

(iii) A judgment satisfied more than 12 months before the date of

application, or foreclosure with no monetary loss which was completed

more than 12 months before the date of application.

(3) When an applicant has an unacceptable credit history, an

exception may be considered by the loan approval official (except for

Federal judgments described in paragraph (f)(1)(i) of this section)

when the applicant provides documentation that:

(i) The circumstances were of a temporary nature, were beyond the

applicant's control, and have been removed. Examples: loss of job;

delay or reduction in benefits, or other loss of income; increased

expenses due to illness, death, etc.

(ii) The adverse action or delinquency was the result of a refusal

to make full payment because of defective goods or services or as a

result of some other justifiable dispute relating to the goods or

services purchased or contracted for.

(4) Applicants will be advised of adverse credit which is

discovered as a result of an on-line profile credit report at the time

of application and will be provided the telephone number and address of

the credit repository so that the applicant may contact the repository

directly to correct the negative or incorrect information or discuss

the circumstances of the credit problem with the RHCDS staff.

Applicants will not be rejected on the basis of information contained

in an on-line credit report; however, once a full written credit report

is received by RHCDS, it will be the responsibility of the applicant to

work directly with the credit repository to correct any erroneous

credit bureau records. The credit history cannot be determined

satisfactory until:

(i) The credit repository issues a corrected report, showing that

the error has been removed, or

(ii) The credit repository has not issued a corrected report within

30 days of the applicant's submission of disputed credit information

but the applicant submits conclusive proof, acceptable to RHCDS, that

the report is in error, such as creditor correspondence, court

documents, etc.

(g) Meet the following conditions if the applicant had any previous

RHCDS debt settled pursuant to subpart B of part 1956, or by release

from personal liability under subpart A of part 1955 or subpart C of

part 1965, or debt settlement is being considered:

(1) RHCDS must determine that failure to pay the debt was the

result of circumstances beyond the applicant's control, or the

conditions which necessitated the debt settlement or release, other

than weather hazards, disasters, or price fluctuations, have been or

will be removed by making the loan, and

(2) Before causing the applicant to incur any expense in connection

with the loan, with the exception of the cost of a credit report, RHCDS

must determine the applicant's eligibility and notify the applicant of

same.

(h) Have the ability to carry out the required obligations of the

loan. If the applicant has demonstrated inability to do so by recent

failure to maintain a former residence in a habitable and responsible

manner, or by unauthorized conversion or alteration of the structure,

or by creating a public nuisance in or around a former residence, RHCDS

must determine that the reasons contributing to such inability have

been removed and are not likely to recur.

(i) Provide accurate and truthful application and financial

information to RHCDS at the time of application. Applicants who have

failed to fully disclose financial and application information will be

denied program assistance.

Sec. 1944.10 Rural area designation.

(a) For the purposes of this subpart, a rural area is:

(1) Open country which is not part of or associated with an urban

area.

(2) Any town, village, city, or place, including the immediately

adjacent densely settled area, which is not part of or associated with

an urban area and which:

(i) Has a population not in excess of 10,000 if it is rural in

character, or

(ii) Has a population in excess of 10,000 but not in excess of

20,000, and

(A) Is not contained within an MSA, and

(B) Has a serious lack of mortgage credit for low- and moderate-

income households as determined by the Secretary of Agriculture and the

Secretary of HUD.

(3) An area classified as a rural area prior to October 1, 1990,

(even if within an MSA), with a population exceeding 10,000, but not in

excess of 25,000, which is rural in character, and has a serious lack

of mortgage credit for low- and moderate-income families. This is

effective through receipt of census data for the year 2000.

(b) A determination that open country, or any town, village, city,

or place is not part of or associated with an urban area must include a

finding that any densely populated section of the area in question is

separated from the densely populated section of any adjacent urban area

by open spaces. Open spaces include undeveloped, agricultural, or

sparsely settled areas. Other spaces such as physical barriers (e.g.,

rivers, canals), public parks, commercial and industrial developments,

small areas reserved for recreational purposes, recognized open spaces

for which development is planned, and similar nonresidential areas, are

not considered open spaces for the purpose of this program. RHCDS files

must contain documentation that local planning boards, where available,

were contacted at the time of each review to verify that areas

considered as open spaces are not scheduled for development in the next

5 years.

(c) Two or more towns, villages, cities, and places may have

contiguous boundaries, and each be considered separately if they are

not otherwise associated with each other, and their densely populated

areas are not contiguous, as determined after consideration of

paragraphs (a) and (b) of this section.

(d) Population count in any area will be taken from the decennial

U.S. Census of Population, national population updates published by the

Bureau of the Census, any special population census conducted by the

Bureau of the Census, and the following:

(1) Significant new development on the periphery of ineligible

areas which requires a change in boundaries.

(2) Redesignation of corporate limits by local authorities which

affects the eligibility status of an area.

(e) In determining population count for area eligibility,

consideration must

[[Page 55131]]

be given to developed areas in counties or states which are contiguous

to, and, therefore, a part of developed areas in other counties or

states. This determination must be made in agreement between the State

Directors concerned.

(f) In order to ensure that the RH program is limited to eligible

areas, RHCDS will periodically review areas under their jurisdiction.

If the review shows that an area is not rural, RHCDS will limit the RH

program in that area after the date of the decision, to the loan

purposes prescribed in paragraph (i) of this section.

(g) [Reserved]

(h) [Reserved]

(i) If an area designation is changed from rural to nonrural, loans

may be made only in the following instances:

(1) Applications received by RHCDS prior to the change of

designation may be processed.

(2) New conditional commitments may be issued and existing

conditional commitments will be honored only in conjunction with the

approval of RH loan applications which were received prior to the date

the area was designated nonrural.

(3) Inventory property sales and transfers by assumption may be

processed in such areas as authorized by Sec. 1955.103 or

Sec. 1965.126, respectively.

(4) Subsequent loans may be made on property in an area where the

designation was changed from rural to nonrural after the initial loan

was made:

(i) To make necessary repairs.

(ii) To pay equity in connection with an assumption and transfer of

an RH loan.

Sec. 1944.11 Site requirements.

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

located in a designated rural area as defined in Sec. 1944.10, or in an

area where the designation has been changed as provided in

Sec. 1944.10(i) and must also meet the requirements of Secs. 1944.12

and 1944.13. A nonfarm tract to be purchased or improved with loan

funds must not include farm service buildings; however, a small

outbuilding such as a storage shed may be included.

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

access from a street, road, or driveway that meets the applicable

requirements of Sec. 1924.115(b).

(c) Minimum adequate site. The site must be of a size that it

cannot be subdivided into two or more adequate sites under existing

zoning ordinance requirements for the area. A site on which a loan is

to be made must have an adequate water and/or wastewater disposal

system, other related facilities, and a yard, or those items must be

provided with loan funds.

(1) The water and/or wastewater disposal system whether individual,

central or privately owned and operated must meet the applicable water

and wastewater disposal system requirements of subpart C of part 1924

as well as the design requirements of the state Department of Health or

comparable reviewing and regulatory agency.

(2) Written verification must be obtained from the regulatory

agency that the wastewater disposal systems comply with the Safe Water

Drinking Act and the Clean Water Act, respectively. There must be

assurance of continuous service at reasonable rates for central water

and wastewater disposal systems. A system owned or operated by a

private party must have a legally irrevocable agreement which allows

interested third parties to enforce the obligation of the operator to

provide satisfactory service at reasonable rates.

Sec. 1944.12 Environmental requirements.

All applications shall receive the appropriate level of

environmental review in accordance with subpart G of part 1940.

Sec. 1944.13 National flood insurance.

Flood insurance in accordance with 7 CFR part 1806, subpart B must

be obtained and maintained for the life of the loan for all property

located in a special flood hazard area as determined by the Federal

Emergency Management Agency (FEMA). If flood insurance is not available

in a special flood hazard area, the property is not eligible for

federal financial assistance.

Sec. 1944.14 [Reserved]

Sec. 1944.15 Ownership requirements.

(a) After the loan is closed, the borrower must have an interest in

the property to be purchased, improved, or refinanced, which qualifies

as one of the following:

(1) Full marketable title with a deed vesting a fee interest in the

property to the borrower. (The buyer and the seller will convert the

purchaser's interest under a recorded land purchase contract to a deed/

mortgage situation with full marketable title prior to loan closing.)

(2) An undivided interest if the co-owners meet the security

requirements imposed by Sec. 1944.18(b)(8).

(3) A life estate interest with rights of present possession,

control, and beneficial use of the property if the remaindermen meet

the security requirements imposed by Sec. 1944.18(b)(9).

(4) Leasehold interest, including loans made for the purchase of a

dwelling located on land owned by a community land trust as described

in Sec. 1944.42, if all of the following conditions are met:

(i) The applicant is unable to obtain fee title to the property and

the rent charged for the lease does not exceed the rate being paid for

similar leases.

(ii) The lessor owns the fee simple title. This provision does not

apply to American Indians with leasehold interests on tribal allotted

or trust land.

(iii) Neither the leasehold nor the fee simple title is subject to

a prior lien unless RHCDS authorizes acceptance of the prior lien prior

to approval of the loan. The amount of the RH loan plus any prior liens

shall not exceed the market value of the leasehold.

(iv) The lease is in writing and contains the following provisions:

(A) The lessor's consent to the RH mortgage.

(B) Reasonable security of tenure. The borrower's interest must not

be subject to summary forfeiture or cancellation.

(C) The right of RHCDS to foreclose the RH mortgage and sell

without restrictions that would adversely affect the market value of

the security.

(D) The right of RHCDS to bid at foreclosure sale or to accept

voluntary conveyance of the security in lieu of foreclosure.

(E) The right of RHCDS, after acquiring the leasehold through

foreclosure or voluntary conveyance in lieu of foreclosure, or in event

of abandonment by the borrower, to occupy the property or sublet it,

and to sell for cash or credit. In case of an inventory property sale

of the leasehold, the right of RHCDS to take a mortgage with rights

similar to those under the original RH mortgage.

(F) The right of the borrower, in the event of default or inability

to continue with the lease and the RH loan, to transfer the leasehold,

subject to the RH mortgage, to an eligible transferee with assumption

of the RH debt.

(G) Advance written notice of at least 90 days to RHCDS of the

lessor's intention to cancel or terminate the lease.

(H) Negotiated provisions as to the liability of RHCDS for unpaid

rentals or other charges accrued at the time RHCDS acquires possession

of the property or title to the leasehold, and those which become due

during RHCDS's possession or ownership, pending further servicing or

liquidation.

(v) An unexpired term which is at least 150 percent of the term of

the RHCDS loan, unless the RHCDS loan is guaranteed by a public

authority, Indian tribe, or Indian Housing Authority, in

[[Page 55132]]

which case the unexpired term of the lease must be at least 2 years

longer than the repayment period of the loan; Provided that: in no

event may the unexpired term of the lease be less than 15 years.

(5) Possessory rights on an American Indian reservation or State-

owned land if the security requirements imposed by Sec. 1944.18 are

met.

(6) The interest of an American Indian in land held in severalty

under trust patents or deeds containing restrictions against alienation

if the security requirements imposed by Sec. 1944.18(b)(3) are met.

(b) If an applicant's title to any part of the property does not

qualify as an ownership interest under paragraph (a) of this section,

an RH loan may nevertheless be made, if:

(1) The defect cannot be cured at a reasonable cost, and

(2) No improvements to be constructed or repaired with loan funds

will be located on the parcel to which title is defective, and

(3) No security value will be accorded to the parcel to which title

is defective.

Sec. 1944.16 Dwelling requirements.

Dwellings financed must provide modest, decent, safe, and sanitary

housing. Costs of dwellings financed cannot exceed the maximum dollar

limitation established under section 203(b) of the National Housing Act

(12 U.S.C. 1709) (available from any HUD office) for the area in which

the property is located unless authorized by RHCDS under

Sec. 1944.17(g). Loans shall not be approved for dwellings containing

in-ground swimming pools or structures designed for income-producing

facilities or purposes.

(a) New dwellings. Construction must meet the requirements

contained in subpart A of part 1924 including the thermal performance

standards for new construction outlined in exhibit D of subpart A of

part 1924.

(b) Existing dwellings. Consideration should be given to financing

existing dwellings in areas with a good supply of competitively priced,

suitable housing. Homes financed should be affordable to the applicant,

including operating and maintenance costs.

(1) Loans will not be made on an existing manufactured home unless

it is already financed by RHCDS or is being sold from RHCDS inventory.

(2) Existing homes, including those already financed with an

existing section 502 direct loan, must be inspected by RHCDS or by a

disinterested third party inspector satisfactory to RHCDS who will

determine and certify to RHCDS and the applicant that the dwelling

meets the criteria outlined in paragraphs (b)(2)(i), (ii), and (iii) of

this section. The sales agreement must identify the party (i.e.,

purchaser or seller) who has accepted responsibility for obtaining and

paying for these inspections and certifications. Inspections are not

required on public water and wastewater disposal systems. RHCDS

inventory property will be inspected and repaired in accordance with

subpart B of part 1955. The inspector will:

(i) Determine and certify to RHCDS and the applicant that the

dwelling is structurally sound, functionally adequate, in good repair,

or will be placed in good repair with loan funds, and meets the

``General'' requirements in Guide 2 of subpart A of part 1924

(available in any RECD field office).

(ii) Certify to RHCDS and the applicant that the dwelling meets

thermal performance standards for existing dwellings required in

exhibit D of subpart A of part 1924.

(iii) Certify to RHCDS and the applicant that the dwelling has

adequate electrical, heating, plumbing, water, and wastewater disposal

systems, and is free of termites and other wood damaging pests and

organisms.

(c) Repairs. Any dwelling repaired with RH funds must be

structurally sound, functionally adequate, and be placed in good repair

with loan funds. If the loan is not more than $7,500 and is scheduled

for repayment in not more than 15 years from the date of the note, the

dwelling, after repair, may lack some equipment or features such as a

complete bath, kitchen cabinets, closets, or completed finished

interior in some rooms. Such dwellings must meet the housing needs of

the applicant and provide decent, safe, and sanitary living conditions

when the improvements financed with the loan are completed. Repairs

required as a condition of loan approval will be performed in

accordance with subpart A of part 1924. The applicant in cooperation

with the seller will establish and provide documentation regarding who

is responsible for the required repairs and when the repairs will be

completed for RHCDS inspection. Repairs on manufactured homes are

limited to those financed by a subsequent loan for existing homes

currently financed with a section 502 RH loan, inventory property

sales, and transfers.

(d) Improvements. Improvements financed with loan funds must be on

land which, after loan closing, is part of a tract owned by the

borrower in accordance with Sec. 1944.15(a), or on an easement

appurtenant to such a tract.

(e) Manufactured homes. Exhibit F (available in any RECD field

office) contains supplemental information concerning construction

requirements for manufactured homes.

Sec. 1944.17 Maximum loan amounts.

The amount of the loan may not exceed the maximum dollar limitation

of section 203(b) of the National Housing Act (12 U.S.C. 1709)

(available from any HUD office) unless authorized by RHCDS as an

exception. Applicants are expected to reduce the need for loan funds by

using available non-essential assets including cash on hand as outlined

under Sec. 1944.9.

(a) The amount will be the lesser of the cost of:

(1) The acquisition and any necessary development or

(2) The market value of the security, less the unpaid principal

balance and past-due interest of any other liens against the security

property, plus an appraisal fee, for the following types of dwellings:

(i) An existing dwelling, as described in Sec. 1944.2, including

one being financed by transfer or inventory property sale, except as

provided in exhibit F (available in any RECD field office).

(ii) A new dwelling when any one of the following conditions exist:

(A) A conditional commitment was issued in accordance with

Sec. 1944.45.

(B) The RH loan will be closed prior to the start of construction,

and construction conforms to the requirements contained in subpart A of

part 1924.

(C) The required construction inspections were made by the Federal

Housing Administration (FHA) or Veterans Administration (VA). If

qualified under this paragraph, a complete set of plans and

specifications must be submitted together with copies of construction

phase inspection reports or certification by FHA or VA indicating the

dwelling was built in accordance with approved plans and

specifications. The builder will also furnish a certification of

compliance with RHCDS thermal standards for new construction. (See

exhibit D of subpart A of part 1924 available in any RECD office.)

(D) The manufactured home and site meet the requirements. (See

exhibits F and J of subpart A of part 1924 available in any RECD

office.)

(b) A loan will be limited to 90 percent of the market value of the

security, plus an appraisal fee, for any dwelling that does not meet

the requirements of paragraph (a) of this section, with the exception

of manufactured housing units.

[[Page 55133]]

(c) Notwithstanding the provisions of paragraph (a) of this

section, a loan on a dwelling which causes the total secured

indebtedness to exceed the requirements of paragraph (a) of this

section, may be made when the excess indebtedness is all or part of a

lien held by a public body (except for a lien arising out of a judgment

against the applicant in favor of the United States in a Federal Court

other than the United States Tax Court), hospital, or welfare

institution for advances made for medical bills, welfare payments, or

provided:

(1) The applicant is unable to settle or compromise such lien

sufficiently to avoid exceeding the market value;

(2) The lien securing the excess amount will at all times be

inferior to the RHCDS mortgage securing the initial loan and any

subsequent loan or advances determined by the RHCDS to be reasonably

necessary to carry out the purpose of the initial loan or to protect

the Government's financial interest;

(3) The existence of the excess lien will not jeopardize the

security or servicing so as to preclude the making of a sound RH loan;

(4) The applicant has the ability to meet any payments on the

excess debt as they become due or are likely to become due.

(d) Notwithstanding the provisions of paragraph (a) of this

section, when a subsequent loan for closing costs only is made

simultaneously with an inventory property sale (as provided in

Sec. 1955.117(f)) or a transfer, the total indebtedness may exceed the

sale price or market value of the security property, whichever is less,

by no more than 1 percent.

(e) Notwithstanding the provisions of paragraph (a) of this

section, when RHCDS is refinancing the loan of an existing RHCDS

borrower in accordance with Sec. 1951.316, the debt may exceed the

market value of the security property to the extent necessary to

refinance the borrower's outstanding indebtedness plus closing costs

required in connection with the refinancing.

(f) Notwithstanding the provisions of paragraph (a) of this

section, when a subsequent loan is needed for repairs essential to

protect the Government's security interest, the total RHCDS

indebtedness may exceed the market value of the security by no more

than the amount of the subsequent loan consisting of the cost of

essential repairs and reasonable closing costs.

(g) RHCDS may grant exceptions to allow the amount of the loan to

exceed the maximum dollar limitation of section 203(b) of the National

Housing Act (12 U.S.C. 1709) under the following conditions:

(1) RHCDS may increase the loan amount in selected areas when the

existing mortgage limit is insufficient to provide adequate housing for

applicants and modest housing costs in the area exceed maximum loan

limits or where different maximum loan limits exist in adjacent areas

of the same community, for example: One limit on one side of the street

compared to a higher limit on the other side.

(2) RHCDS may increase the loan amount where necessary to

accommodate the specific needs of the family such as a larger home to

correct overcrowding situations for exceptionally large households and

reasonable accommodation for a household member who is disabled. When

the request is to allow reasonable accommodation for a household member

who is disabled, the additional loan amount will not exceed the cost of

the special features provided and the amount of the appraisal fee.

Sec. 1944.18 Security requirements.

(a) Adequate security. Except as provided below, to protect the

interests of RHCDS, all loans must be adequately secured. Except as

provided in Sec. 1944.17(c) and paragraph (b) of this section, a loan

is adequately secured only when all of the following requirements are

met:

(1) RHCDS obtains at closing a mortgage on all ownership interests

in the entire tract.

(2) No liens prior to the RHCDS mortgage exist at the time of

closing, and no junior liens are likely to be taken immediately

subsequent to or at the time of closing.

(3) The provisions of subpart B of part 1927 regarding title

clearance and the use of legal services are complied with.

(4) The property improvements and proposed improvements are totally

on the site and do not encroach on adjoining property. RHCDS may

require a survey, at the buyer's or seller's expense.

(b) Exceptions. Exceptions to the usual security requirements will

be made only as follows:

(1) Note only. A loan of $2,500 or less, scheduled for repayment in

not more than 10 years from the date of the note, that is not subject

to recapture of subsidy in accordance with subpart I of part 1951, may

be secured by the borrower's promissory note alone when RHCDS

determines that:

(i) The applicant has a credit history which indicates an ability

and willingness to pay debts when they are due;

(ii) The applicant will have sufficient income to readily meet all

obligations; and

(iii) The applicant's equity in the real estate as improved,

equals, or exceeds the amount of the proposed loan.

(2) Mortgage insurance. When the applicant is the holder of

possessory rights on an American Indian reservation or State-owned

land, adequate security is required. This may include mortgage

insurance guaranteeing payment from a State agency or American Indian

tribe. States will issue a State Supplement covering special security

and title clearance requirements needed for loans of this type.

(3) American Indian land. American Indian land in trust or

restricted status acquired with an RH loan will remain in trust or

restricted status. These mortgages must be approved by the Secretary of

the Interior. A State Supplement will be issued to prescribe the

actions to be taken by RHCDS personnel to implement the making of loans

under such conditions.

(4) Best mortgage obtainable. Loans of $7,500 or less scheduled for

repayment in not more than 15 years from the date of the note and

subsequent loans made for minimal essential repairs necessary to

preserve the Government's security must be secured by a mortgage,

except as provided in paragraph (b)(1) of this section, but title

clearance and the use of legal services in accordance with subpart B of

part 1927 are not required unless the loan approval official determines

that the procedures in subpart B of part 1927 are necessary to assure

repayment or accomplish the objective of the loan. Evidence of

ownership must be in accordance with Sec. 1944.24(d)(2).

(5) Leasehold. When the applicant owns only a leasehold interest

will treat the lessee's interest like any other type of ownership

interest in determining whether a mortgage on the leasehold is

required. The lease must meet the requirements of

Sec. 1944.15(a)(5)(iv) and (v). In any state in which applicants are

likely to own a leasehold interest, the State Director will issue a

state supplement outlining the technical requirements for making such

loans.

(6) Security by junior lien. RHCDS may take a junior mortgage as

security for an RH loan if the tract, which will secure the RHCDS

mortgage, provides adequate security for the entire prior lien debt and

the RH loan, and

(i) The prior mortgage does not contain provisions that may

jeopardize the RHCDS security position or the applicant's ability to

repay the loan, such as provisions for future advances,

[[Page 55134]]

forfeiture, cancellation, foreclosure without adequate notice to junior

lienholders, attorney's fees exceeding those customary for the area in

cases of foreclosure; or

(ii) Such provisions are satisfactorily limited, modified, or

waived; and

(iii) The conditions set forth i

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