Reengineering and Reinvention of the Direct Section 502 and 504 Single Family Housing (SFH) Programs

SUMMARY: The Rural Housing Service (RHS), formerly Rural Housing and

Community Development Service (RHCDS), a successor Agency to the

Farmers Home Administration (FmHA), is streamlining and reengineering

its regulations and will be utilizing private sector processes and

techniques in the administration of its direct SFH portfolio. This

action is taken to reduce unnecessary federal regulations, improve

customer service, and improve the agency's ability to achieve greater

efficiency, flexibility and effectiveness in managing its SFH

portfolio. The intended effect of this action is to improve service to

rural America and comply with the National Performance Review's (NPR's)

goal of reducing unnecessary federal regulations.

DATES: The effective date of this interim final rule is December 26,

1996.

Written comments are requested on Secs. 3550.53(g), 3550.57(a),

3550.63, and 3550.68. Comments are due on or before December 26, 1996.

ADDRESSES: Submit written comments in duplicate to the Director,

Regulations and Paperwork Management Division, Rural Housing Service,

U.S. Department of Agriculture, Stop 6348, 1400 Independence Ave., SW,

Washington, D.C. 20250-6348. Comments may be submitted via the Internet

by addressing them to ``comments'rus.usda.gov'' and must contain the

word ``DLOS'' in the Subject. All comments made pursuant to this notice

will be made available for public inspection during regular work hours

at the above address.

FOR FURTHER INFORMATION CONTACT: David J. Villano, Special Assistant to

the Administrator for Regulatory and Policy Development, Rural Housing

Service, U.S. Department of Agriculture, Stop 0781, 1400 Independence

Ave., S.W., Washington, D.C. 20250-0781, telephone (202) 720-1628.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be significant, but not

economically significant, and was reviewed by the Office of Management

and Budget (OMB) under Executive Order 12866.

Congressional Review

In accordance with section 251 of the Small Business Regulatory

Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), this rule was

determined to be a major rule by OMB and has been submitted to Congress

and the Comptroller General. The aforementioned Act stipulates that a

major rule may not take effect until the later of: submission of a

report to Congress on the rule; or 60 days after publication in the

Federal Register unless the Agency finds good cause that such timeframe

is impracticable, unnecessary, or contrary to the public interest.

As discussed in this rule, this regulatory action is taken to

consolidate, streamline and simplify existing regulations, make them

clearer and easier to understand, improve the delivery of service to

our customers, and save the Government $250 million over the next five

years. A delay in implementing these regulations would forestall these

savings to the public. For these reasons, RHS has determined that

delaying implementation of these regulations is impracticable and

contrary to the public interest.

It should also be noted that, in accordance with section 534(b) of

the Housing Act of 1949, as amended, these regulations cannot take

effect until 30 days after publication in the Federal Register.

Further, section 534(b) requires that copies of the rule be sent to

Chairman and Ranking Member of the Committee on Banking Housing and

Urban Affairs of the senate and the Chairman and Ranking Member of the

Committee on Banking, Finance and Urban Affairs of the house before

being published in the Federal Register. Copies were submitted to these

members on August 29, 1996.

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 number 0575-0166, in accordance with the Paperwork

Reduction Act (PRA) of 1995. No comments were received with regard to

the proposed information collection requirements during the 60-day

comment period under PRA and this rule does not impose any new

information collection requirements from those previously approved by

OMB. The only change RHS has made to the proposed information

collection package is to change the acronym before the form number. The

proposed rule was developed when the RHS was known as the RHCDS and was

part of the Rural Economic and Community Development (RECD) mission

area within the USDA. The name of the RECD mission area has been

changed to Rural Development. The proposed rule included the use of the

acronym ``RECD'' before the form number. RHS has changed the acronym

from ``RECD'' to ``RHS'' for forms used strictly in RHS, or ``RD'' for

forms which may be used by other services within the Rural Development

mission area or the Farm Service Agency (FSA).

The information collection requirements for the Handbooks which

accompany this regulation were published in the Federal Register for a

60-day comment period on July 18, 1996 (61 FR 37440). No comments were

received on this information collection package which is currently

under review by OMB. RHS is proposing an overall 11 percent reduction

in information collection hours and 20 percent reduction in information

collection costs.

Paperwork Reduction Act of 1995

Under the Paperwork Reduction Act of 1995, no persons are required

to respond to a collection of information unless it displays a valid

OMB control number. The valid OMB control number as assigned to the

collection of information in these final regulations is displayed at

the end of the affected section of the regulations.

Civil Justice Reform

This rule has been reviewed under Executive Order 12778, Civil

Justice Reform. In accordance with this rule: (1) All state and local

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

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

(3) administrative proceedings must be exhausted before bringing suit

in court challenging action taken under this rule in accordance with

subtitle H of title II of Pub. L. 103-354.

Unfunded Mandate Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.

L. 104-4, establishes requirements for

[[Page 59763]]

Federal agencies to assess the effects of their regulatory actions on

State, local, and tribal governments and the private sector. Under

section 202 of the UMRA, RHS generally must prepare a written

statement, including a cost-benefit analysis, for proposed and final

rules with ``Federal mandates'' that may result in expenditures to

State, local, or tribal governments, in the aggregate, or to the

private sector, of $100 million or more in any one year. When such a

statement is needed for a rule, section 205 of the UMRA generally

requires RHS to identify and consider a reasonable number of regulatory

alternatives and adopt the least costly, more cost-effective or least

burdensome alternative that achieves the objectives of the rule.

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the UMRA) for State, local, and tribal

governments or the private sector. Therefore, this rule is not subject

to the requirements of sections 202 and 205 of the UMRA.

National Performance Review

This regulatory action is being taken as part of the National

Performance Review (NPR) program to reduce or eliminate unnecessary

regulations and improve those that remain in force. Currently, the

administration of the SFH program is guided by 18 separate regulations

totaling 290 pages in the CFR.

RHS has purchased a commercial-off-the-shelf Dedicated Loan

Origination and Servicing System (DLOS) which includes escrow

capability to improve program performance and efficiency to its

customers. RHS intends to adopt processes and techniques currently

utilized by the private sector including centralized servicing and

automation of many forms and processes. The system is being customized

to provide the additional features and servicing benefits available to

RHS customers to assist them in becoming successful homeowners.

Rather than modify the current 18 regulations to implement DLOS,

RHS committed itself to meet the true spirit and intent of the NPR. RHS

has undertaken a massive effort to completely reinvent and reengineer

its regulatory process. RHS is combining the guidance provided in all

18 regulations into one consolidated rule. Administrative matters have

been eliminated, remaining text has been completely revised to be

consistent, simple, and clear. RHS estimates the final rule, after DLOS

is fully implemented, will cover approximately 30 pages in the CFR, for

a 90% reduction in regulations. This regulatory initiative follows our

final rule of October 27, 1995, in which the cost of the direct section

502 program was reduced by 30%.

Programs Affected

These programs are listed in the Catalog of Federal Domestic

Assistance under Number 10.410, Very-Low to Moderate Income Housing

Loans (Section 502 Rural Housing Loans) and 10.417 Very-Low Income

Housing Repair Loans and Grants (Section 504 Rural Housing Loans and

Grants).

Intergovernmental Consultation

For the reasons set forth in the Final Rule related Notice to 7 CFR

part 3015, subpart V, these programs are not subject to Executive Order

12372 which requires intergovernmental consultation with State and

local officials.

Environmental Impact Statement

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

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

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment and in

accordance with the National Environmental Policy Act of 1969, Public

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

Regulatory Flexibility Act

This rule has been reviewed with regard to the requirements of the

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

determined and certified by signature of this document that this rule

will not have a significant economic impact on a substantial number of

small entities since this rulemaking action does not involve a new or

expanded program.

Background Information

An Overview

The RHS is completing the final steps to the reengineering and

reinvention of the manner in which direct loans and grants under

sections 502 and 504 of the Housing Act of 1949 are made and serviced.

This follows our October 27, 1995, final rule in which the cost of our

direct single family housing low income loan program under section 502

of the Housing Act of 1949 was reduced by 30%. The regulations which

follow are a significant departure from business practices of the

former FmHA. As part of the USDA reorganization, RHS made a commitment

to make its programs more customer friendly, to streamline processes,

reduce costs to the taxpayer, and increase our level of customer

service. These regulations will accomplish these goals within our SFH

program and set the standard for future regulatory actions within RHS.

RHS has approximately 700,000 direct Section 502 and 504 loans with

approximately 600,000 customers in its portfolio. With our Fiscal Year

(FY) 1996 direct section 502 and 504 loan appropriation, the Agency

expects to make approximately 35,000 new direct SFH loans during this

FY. The accounting system established by FmHA in the 1970's to maintain

its vast farm, housing, community and business loan programs is

severely outdated and is not capable of expansion to keep pace with an

ever increasingly automated society. FmHA was not able to provide the

same level of customer service provided by commercial lenders such as

the escrow of real estate taxes and insurance for its customers and

toll free telephone numbers to contact a servicing representative.

These features are critical for RHS to provide prudent supervised

credit to its very-low and low income customers and assist these

families in becoming successful homeowners.

Additionally, RHS is aggressively meeting the Administration's goal

of reducing staff through reorganization and streamlining of processes.

National and field staffs are being reduced and many offices will be

consolidated. This, coupled with our outdated accounting system, made

the accomplishment of our Agency goals more challenging.

In May 1995, the RHS awarded a contract to Fiserv, Inc. and its

subsidiary, Data-Link systems for the purchase of a commercial-off-the-

shelf Dedicated Loan Origination and Servicing System (DLOS) which

includes escrow capability. This system will replace the Agency's

current Program Loan Accounting System (PLAS) and the Management

Records System (MRS) and will provide agency personnel with the tools

to deliver high quality customer service to its customers. RHS has

adopted processes and techniques currently utilized by the private

sector including centralized servicing and automation of many forms and

processes. The system has been customized to provide the additional

features and servicing benefits available to RHS customers to assist

them in becoming successful homeowners. The Agency implemented this

system on October 1, 1996 in two pilot states. Other states will be

phased into the DLOS system through FY 1997 with full implementation

anticipated by September 30, 1997. Further information on the

implementation of the system follows.

[[Page 59764]]

The centralized servicing unit is located in St. Louis, Missouri,

and will assume primary responsibility for the functions associated

with servicing and managing the loan portfolio such as collection of

loan payments, day to day loan servicing, escrowing, and accounting in

a focused effort to monitor and reduce loan defaults thereby achieving

our goal of having successful homeowners that can eventually refinance

to commercial credit. The centralized unit is staffed with many

existing RHS employees.

The objectives of DLOS are to:

Establish an escrow system for real estate taxes and

insurance

Facilitate the centralization of RHS SFH loan servicing

Reduce the foreclosure rate through early and consistent

intervention with customers having trouble making payments

Reduce costs by reducing delinquency rates, loan losses

and operating costs

Account for direct SFH loans on a amortized rather than

simple interest rate

Improve efficiency and service to our customers

Develop clear, concise and easy to read regulations and

handbooks

Reduce burden on our customers

This initiative has been highlighted in the NPR and will streamline

and improve the delivery of program assistance to customers. There are

anticipated savings to the Government of $250 million over a five year

period.

The Regulations

RHS has completed a major redevelopment and consolidation of FmHA

regulations affecting the direct Section 502 and 504 programs. Prior to

this rule becoming effective, direct SFH customers were affected, in

part, by the following regulations:

7 CFR part 1806, subpart A--Real Property Insurance

7 CFR part 1910, subpart A--Receiving and Processing

Applications

7 CFR part 1922, subpart C--Appraisal of Single Family

Residential Property

7 CFR part 1944, subpart A--Section 502 Rural Housing Loan

Policies, Procedures, and Authorizations

7 CFR part 1944, subpart J--Section 504 Rural Housing

Loans and Grants

7 CFR part 1951, subpart C--Offsets of Federal Payments to

FmHA or its successor agency under Public Law 103-354 Borrowers

7 CFR part 1951, subpart D--Final Payment on Loans

7 CFR part 1951, subpart F--Analyzing Credit Needs and

Graduation of Borrowers

7 CFR part 1951, subpart G--Borrower Supervision,

Servicing and Collection of Single Family Housing Loan Accounts

7 CFR part 1951, subpart I--Recapture of Section 502 Rural

Housing Subsidy

7 CFR part 1951, subpart J--Management and Collection of

Nonprogram (NP) Loans

7 CFR part 1951, subpart M--Servicing Cases Where

Unauthorized Loan or Other Financial Assistance Was Received--Single

Family Housing

7 CFR part 1955, subpart A--Liquidation of Loans Secured

by Real Estate and Acquisition of Real and Chattel Property

7 CFR part 1955, subpart B--Management of Property

7 CFR part 1955, subpart C--Disposal of Inventory Property

7 CFR part 1956, subpart B--Debt Settlement--Farmer

Programs and Housing

7 CFR part 1965, subpart C--Security Servicing for Single

Family Rural Housing Loans

Some of the above mentioned regulations involve only SFH loans,

while others are combined with regulatory provisions of other programs

of the former FmHA such as farm loans, business and industrial loans,

community facilities and multi- family housing. RHS has consolidated

all regulatory actions in the above mentioned regulations which affect

direct SFH loans into one new regulation--7 CFR part 3550. This

consolidated regulation will make it easier for RHS field staff, and

most importantly, our customers, to understand how to obtain program

benefits.

Additionally, RHS has removed all administrative processes from the

regulations, leaving only regulatory actions which impact the public in

the CFR. This streamlining makes the regulation more concise and much

easier to read and understand. The Agency has developed two Handbooks

which cover administrative matters such as what forms must be filed and

where to submit loan requests and the agency's internal processing

procedures. The first Handbook will be used in Rural Development field

offices and deals primarily with loan originations and property

management. The second Handbook will be used in the Centralized

Servicing Center in St. Louis, MO., and deals primarily with loan

servicing, liquidation and debt settlement. These Handbooks will not be

published in the Federal Register but will be available upon request to

the public at no cost.

Implementation Proposal

As previously mentioned, the DLOS system is being implemented over

a one year period. Two pilot states started the process and other

states will be added to DLOS over the next 12 months. In addition,

field offices within a state may be phased onto the DLOS system over a

several week period. The 12 month phased implementation period is

critical to ensure for the orderly transfer of account information on

700,000 loans to the new DLOS system. This implementation period

presents administrative challenges to the Agency as states will be

operating under different computer systems with significantly different

capabilities. As discussed in our Proposed Rule, RHS is removing the

following regulations from the CFR:

7 CFR part 1922, subpart C--Appraisal of Single Family

Housing Residential Property

7 CFR part 1944, subpart A--Section 502 Rural Housing Loan

Policies, Procedures, and Authorizations.

7 CFR part 1944, subpart J--Section 504 Rural Housing

Loans and Grants.

7 CFR part 1951, subpart G--Borrower Supervision,

Servicing and Collection of Single Family Housing Loan Accounts.

7 CFR part 1951, subpart I--Recapture of Section 502 Rural

Housing Subsidy.

7 CFR part 1951, subpart M--Servicing Cases Where

Unauthorized Loan or Other Financial Assistance Was Received--Single

Family Housing.

7 CFR part 1965, subpart C--Security Servicing for Single

Family Rural Housing Loans.

7 CFR part 1922, subpart C was not mentioned in the

Proposed Rule; however, it is included in this Interim Final Rule as it

contains administrative guidance on appraising SFH properties. The

above mentioned regulations dealt strictly with the direct SFH programs

of the RHS. The following regulations will remain in the CFR as they

contain provisions relating to other program areas. These regulations

are being amended as part of this final rule to clearly indicate that

they no longer apply to the direct SFH loans and grants:

7 CFR part 1806, subpart A--Real Property Insurance.

7 CFR part 1910, subpart A--Receiving and Processing

Applications.

[[Page 59765]]

7 CFR part 1944, subpart D--Farm Labor Housing Loan and

Grant Policies, Procedures and Authorizations.

7 CFR part 1951, subpart C--Offsets of Federal Payments to

FmHA or its successor agency under Public Law 103-354 Borrowers.

7 CFR part 1951, subpart D--Final Payment on Loans.

7 CFR part 1951, subpart F--Analyzing Credit Needs and

Graduation of Borrowers.

7 CFR part 1951, subpart J--Management and Collection of

Nonprogram (NP) Loans.

7 CFR part 1955, subpart A--Liquidation of Loans Secured

by Real Estate and Acquisition of Real and Chattel Property.

7 CFR part 1955, subpart B--Management of Property.

7 CFR part 1955, subpart C--Disposal of Inventory

Property.

7 CFR part 1956, subpart B--Debt Settlement--Farmer

Programs and Housing.

7 CFR part 1944, subpart D was added to the above list since our

Proposed Rule. In making amendments to 7 CFR part 1910, subpart A to

exclude the direct SFH program, it was noted that the only Rural

Development program that would remain in 7 CFR part 1910, subpart A

would be the Farm Labor Housing Programs. To make it clearer for USDA

field staff and the public, RHS took the administrative guidance

contained in 7 CFR part 1910, subpart A which related to Farm Labor

Housing loans and added it to the Farm Labor Housing regulations--7 CFR

part 1944, subpart D. Through this effort, 7 CFR part 1944, subpart D

is more complete, and 7 CFR part 1910, subpart A only impacts the Farm

Credit Programs of the FSA. 7 CFR part 1910, subpart A has been amended

to reflect this change.

After the effective date of this rule, the direct SFH program will

be guided by 7 CFR part 3550 and the accompanying Handbooks. This

method will ensure that all customers have access to the same program

benefits. However, some changes contained in 7 CFR part 3550, which

cannot be implemented under the PLAS computer system, will be

applicable to customers only in states under the DLOS computer system.

For example, the regulation imposes a late fee on payments which are

more than 15 days delinquent. The DLOS computer system can handle such

a charge, whereas the current PLAS computer system cannot. Therefore,

customers in states under DLOS will be subject to a late fee. Customers

in states under the PLAS system will not be subject to a late fee until

they are put under the DLOS system. Another example is the ability to

escrow for taxes and insurance. Existing customers in states under DLOS

may escrow; however, customers in states not under DLOS cannot escrow

because the PLAS system does not have escrow capability. These

differences are unavoidable due to the shortcomings of the current PLAS

computer system and the massive effort the Agency will be undertaking

to convert all 700,000 loans to the new system.

Discussion of Comments

The proposed rule was published in the Federal Register on April 8,

1996 (61 FR 15395), with a 60-day comment period that ended June 7,

1996 Thirty-five comments were received from Rural Development

personnel, housing advocacy groups, developers, builders, attorneys,

housing authorities, private lenders, housing organizations, a member

of congress, and others with an interest in our housing programs.

Many of the comments focused on areas currently published in the

Code of Federal Regulations (CFR) which were not a part of the proposed

rule. As discussed, part of the intent behind the reengineering and

reinvention of these regulations was to remove much of the

administrative guidance from the CFR and include this administrative

material in handbooks which would not be published in the CFR. The

handbooks provide more flexibility for RHS and its customers. For

example, RHS did not publish the actual amount of the downpayment

required for Nonprogram (NP) purchasers of real estate owned (REO) by

the government or RHS financed property. This is an administrative

determination and included in the handbooks. In this manner, RHS can

adjust the amount of the downpayment to more quickly react to changes

in the marketplace.

In our responses to many of the comments, we have indicated that

the guidance requested by a commentor is administrative and contained

in the applicable handbooks. RHS sincerely appreciates the time and

effort of all the commentors. Comments, by section number from the

proposed rule are discussed below:

Section 3550.4(b). Non-appealable decisions. One comment was

received on this section which expressed concern that language

contained in 7 CFR part 1900, subpart B, which provided that program

administrative decisions based upon such clear and objective statutory

or regulatory requirements were not appealable was omitted. The

commentor felt that this language was critical to ensure that all

parties understand appealable decisions and to avoid unnecessary work

on the part of appellants, U.S. Department of Agriculture National

Appeals Division (NAD), and RHS. NAD determines if an Agency decision

is appealable; therefore, we cannot adopt this comment. We have also

made other amendments to this section consistent with the statutes

governing appeals and reviews.

Section 3550.6. State law or state supplement. Two comments were

received which recommended that this title be broadened to include

local and Indian tribal laws. RHS agrees and has adopted this comment.

Section 3550.8. Exception authority. Two comments were received on

this section. The commentors recommended that RHS customers be provided

the authority to initiate requests for exceptions rather than just the

State Director. RHS considered these comments; however, RHS believes

that the rules and regulations are necessary to ensure fairness and

consistency to all customers. Providing anyone with the opportunity to

request an exception creates an administrative burden on RHS and

undermines the need for regulations. We continue to support our policy

that only State Directors may request an exception to the regulations.

Exceptions are rare and only used in individual cases. We believe the

regulatory process, which provides for public comment, provides ample

opportunity for public input and our regulations provide sufficient

flexibility to provide assistance to our clients. Customers are also

provided review and appeal rights, and are not prohibited from

contacting or writing USDA officials with regard to concerns over

regulatory issues.

Section 3550.9. Conflict of interest. Two comments were received on

this section which recommended that the language be expanded to include

Rural Development employees instead of just Rural Housing Service

employees. RHS agrees and has added a definition of ``RHS employee,''

to include Rural Development employees involved with the direct SFH

programs. RHS also amended the section with regard to ``loan closing

agents.'' This section prohibited loan closing agents from purchasing

property which was security for an RHS loan. This prohibition was

included in the regulations when the Agency ``designated'' attorneys

and required that an applicant select a designated attorney to perform

loan closing functions. Since RHS no longer designates attorneys, only

loan closing agents who performed legal work on a particular security

property should be prohibited to purchase said property

[[Page 59766]]

due to the potential for a conflict of interest.

Section 3550.10. Definitions--Cost appraisals. Two commentors

recommended a definition of cost appraisals for properties located in

remote areas or on tribal lands. RHS agrees that additional guidance on

such appraisals is necessary and will include these in the Handbooks.

Deferred mortgage payments. One commentor requested that we clarify

that deferred amounts are subject to recapture on sale. RHS agrees and

has amended the definition to provide that deferred amounts are due on

sale or nonoccupancy.

Deficient housing. One commentor recommended we expand the

definition to include housing that is uninhabitable, unsafe, or poses a

health or environmental threat to the occupant or others. RHS agrees

and has made this change.

Existing dwelling or unit. Several commentors noted that the

definition included an inadvertent ``not'' with regard to dwellings

covered by an approved 10-year warranty plan and that the definition of

``New dwelling,'' was missing the term ``not.'' RHS appreciates these

comments and has rewritten both definitions for clarity.

False information. One commentor recommended that the definition be

expanded to include information deliberately omitted for the purpose of

receiving or continuing to receive assistance for which they were not

eligible to receive. We agree and have clarified and expanded the

definition accordingly.

Legal alien. One commentor did not feel the definition provided

sufficient information. RHS believes this definition is sufficient; and

will provide additional information on how to verify alien status in

the handbooks.

Market value. One commentor recommended that the definition be

expanded to include a ``Broker Price Opinion,'' (BPO) where authorized.

A BPO is a quick and inexpensive tool which helps determine the value

of a house based upon recent sales in the area. RHS agrees that a BPO

would be beneficial for certain servicing, but not loan origination

purposes. In addition, it is less costly to the government and RHS

customers. As such, we have adopted this comment.

Moderate income. Two comments were received indicating the

definition of moderate income for direct SFH assistance (for which RHS

had proposed no change) is different than the definition of moderate

income for the guaranteed SFH program. RHS recognizes that the

definitions are different. The direct SFH programs are aimed at

assisting lower income families, that even with a potential loan

guarantee, could not obtain financing for housing. The guarantee

program is aimed at assisting higher income families who could not

obtain housing without a guarantee. The moderate income level is set

higher in the guarantee program to assist a wider spectrum of low and

moderate income families to obtain housing.

Modest housing. Two commentors felt that our definition of modest

housing, which relies upon the section 203 (b) limits established by

the National Housing Act, often times resulted in the Agency financing

homes which were not actually modest in rural areas, especially in

terms of size. RHS shares these concerns.

For this reason, as discussed elsewhere in this rule, we are

reopening the comment period regarding this issue.

One commentor felt that RHS should not prohibit the financing of

houses with in-ground swimming pools. The commentor stated that RHS has

financed homes where an in-ground pool existed but was removed so the

property could be financed by RHS. RHS agrees that physically removing

an in-ground swimming pool so that RHS will finance a property is

impractical; however, RHS is providing subsidized credit to families

with limited incomes. In-ground pools are expensive to own and operate

and are viewed as an above-modest feature. It does not serve the best

interests of the overall program by financing homes with in-ground

pools. Further, the cost of maintaining such a feature is generally

beyond the financial capability of our clientele.

Modular home. One commentor noted we had included a definition of

``manufactured home,'' but did not include a definition of modular

home. We regret the oversight and have included a definition.

New dwelling. See comments under ``Existing dwelling.''

Person with disability. One commentor thought the definition was

cumbersome, and noted that Social Security no longer considers drug

addiction and alcoholism a disability. RHS agrees that the definition

was long and has streamlined it. With regard to the Social Security

Administration (SSA) no longer considering drug addiction or alcoholism

a disability, this is a determination made by SSA for their program

eligibility. RHS does not consider an applicant's disability, in

itself, for determining eligibility for housing assistance. Disability

of an applicant is used in determining adjusted income.

Recapture amount. One commentor recommended an expansion of the

definition to cover exceptional cases such as nonoccupancy beyond the

customers control or when in the best interests of the government. RHS

believes the definition is sufficient, and such exceptional cases

handled on a case-by-case basis under the exception authority. It

should be noted that section 521(a)(1)(D)(i) of the Housing Act of

1949, as amended, requires the Secretary to provide for recapture upon

the disposition or nonoccupancy of the property by the borrower.

Repayment income. Two commentors did not like this term and felt

``gross income'' was more appropriate. Gross income is the basis for

calculating adjusted income and is not the same income from which a

customer could ``repay'' their loan. RHS believes the term ``repayment

income'' is more appropriate in describing the use of this income.

Rural area. One commentor felt that the reference to ``rural in

character'' was misplaced in the definition. This portion of definition

came directly from section 520 of the Housing Act of 1949, as amended,

and is correct.

Scheduled payment. One commentor recommended that the definition be

expanded to include protective advances. We agree and have included

this language in the definition.

Total Debt Ratio. One commentor recommended that this definition

include a clarification on whether baby-sitting expenses are included

in total debts. We disagree. This is a brief definition and does not

include guidance on all the aspects of what is included or not included

in total debt ratio. Baby-sitting expenses are not considered a debt

and this guidance is contained in the handbooks.

Value appreciation. One commentor felt the definition did not give

the homeowner credit for home improvements and for principal paid. RHS

agrees and has clarified the definition.

Other amendments to ``Definitions.'' RHS has added definitions of

Household, Nonprogram (NP) interest rate, Principal reduction

attributed to subsidy (PRAS), Recipient, RHS employee, Subsidy, U.S.

citizen, and USDA and provided to make it easier for our customers and

staff to understand these terms used throughout 7 CFR part 3550. RHS

has also clarified the definitions of Interest credit, Net family

assets, and Payment assistance, and provided legal citations for the

Housing Act of 1949. The definition of Veterans

[[Page 59767]]

preference was also expanded to include the Persian Gulf War.

Section 3550.51. Program objectives. Several comments were received

regarding RHS's encouragement of applicants to seek other sources of

funding in conjunction with their single family housing loan. Several

commentors recommended that due to limited funding and the tremendous

need for affordable housing, that RHS should require leveraging, where

feasible, to ensure that limited resources serve the maximum number of

families. RHS agrees and has adopted this recommendation. One commentor

suggested the proposed reference to ``if possible'' be replaced with

``where the income required for eligibility is not greater than that

for a loan funded by Section 502 alone.'' RHS disagrees. The language

in this paragraph only requires an applicant to seek other funds, where

feasible. Since most lenders do not use income limits, but rather debt

ratios to determine an applicant eligibility, the second comment is not

applicable. In addition, we do not believe that participation loans

result in our program serving higher income families since many of the

participation funds come from other loan and grant programs aimed at

assisting very-low income families. We believe the language, as

modified, is appropriate.

Section 3550.52. Loan purposes. One commentor recommended that

conditional commitment fees and credit report fees be included as an

eligible cost for loan making purposes. A conditional commitment fee is

paid by a builder to RHS as partial reimbursement to RHS for the

administrative costs of appraising and inspecting a property. This is a

builder's cost of doing business and not an eligible loan purpose for

an applicant. In most cases, this is generally included in the

commitment price, so as a practical matter, the conditional commitment

fee is included in the amount financed. Credit report fees are small

and should be paid by the applicant.

Another commentor felt that RHS should allow packaging fees in

connection with the sale of Real Estate Owned (REO) by RHS. REO

properties are generally sold by real estate brokers under an exclusive

or open-listing arrangement with RHS. RHS pays a typical brokers

commission and expects that the selling agent, to facilitate the sale

of the REO, will package the loan application if the purchaser is

applying for a loan from RHS. Authorizing a packaging fee would

increase costs to the government.

Section 3550.52(b). Refinancing non-RHS debts. Two commentors felt

that RHS inadvertently forgot to include its ability to refinance debts

incurred for necessary repair and rehabilitation work. The regulation

provides that funds for refinancing can cover costs for ``eligible loan

purposes.'' Since necessary repairs and rehabilitation is an eligible

loan purpose, this section is correct.

Section 3550.53(a). Income eligibility. One commentor suggested

that we include a reference to moderate income families for renewal of

payment subsidies. Since this section deals with an applicant's

eligibility for a loan, and not a borrower's eligibility for continued

subsidy, the comment is not applicable.

Section 3550.53(g). Repayment ability. Seventeen comments were

received on this section, most recommending that the debt ratios for

principal, interest, taxes and insurance (PITI), and maximum debt

limits should be consistent for very-low and low income applicants, and

consistent with our guaranteed SFH program. Currently, the PITI ratio

is 29% for very-low income applicants and 33% for low income

applicants; and the maximum debt limit is 38% for all applicants. Most

argued convincingly that the PITI ratios for very-low and low income

applicants should be the same. Some felt the ratios were prudent loan

underwriting and should remain as is. Some argued that the ratios

should remain the same with the State Director having a broader

exception authority. Some argued for higher ratios, but still with a

difference between very-low and low income applicants. RHS believes

that the different ratios for applicant types and programs is confusing

to both Rural Development staff and the public. RHS also agrees that

the maximum debt limit should be increased. RHS has retained the limits

of 29% for PITI for very-low and 33% for PITI for low income

applicants, and modified the total debt ratio to 41%. RHS is still

fully analyzing all comments regarding this section and has reopened

the comment period on this section to solicit further public input.

Section 3550.53(h). Credit qualifications. Thirteen comments were

received on this section, most expressing concern that certain

conditions which indicated an acceptable or unacceptable credit history

were missing from the proposed rule that are currently contained in 7

CFR part 1944, subpart A.

RHS intent in developing this rule was to remove administrative

decisions from the CFR and include these in the Handbooks which will

accompany the regulations. The sections which were left out of the

proposed rule dealt strictly with administrative waivers or other

conditions which the Agency may consider in determining the

creditworthiness of applicants. As these are administrative decisions,

these areas are included in the Handbooks and in much greater detail.

One commentor felt RHS should waive instances of poor credit if the

applicant was unaware of a collection account. RHS disagrees. It would

be difficult to document whether an applicant was unaware of the

collection. Further, an applicant must demonstrate that they have a

credit history which demonstrates a reasonable ability and willingness

to meet debt obligations. Being unaware of a debt and a resulting

collection account does not demonstrate a reasonable credit history.

One commentor felt RHS was too liberal in its credit policy by

allowing 2 late payments in the past 12 months and by not including a

requirement that rent payments over the previous 24 months had to be

paid on a timely basis. Low income families are impacted to a greater

degree than higher income families with unforeseen changes in their

financial situation. A car repair or medical bill could cause a low

income family to miss a due date for a short timeframe. These instances

of late payments do not necessarily reflect an unwillingness or

inability to meet future obligations. We believe this recommendation is

too rigid for very-low and low income families.

One commentor felt that RHS was confusing credit history with

repayment ability. The commentor felt that someone delinquent on rent

payments did not demonstrate a favorable credit history. The concern

expressed was over the provision that permits such unfavorable credit

to be waived if the proposed PITI under the loan is less than the

present rent payment. The commentor felt that comparing rent to PITI

was a repayment ability consideration. Credit history and repayment

ability are linked in that lessening a family's shelter costs would

likely enhance their ability to meet the obligation when due.

Therefore, we believe the provision for considering extenuating

circumstances, such as this example, is appropriate. The commentor also

felt that RHS made an error in explaining the difference between

evaluating the rental history of applicants. The proposed regulation

could be read to imply that an applicant could be two or more payments

late on their rent if their other credit history was satisfactory. We

have clarified this to provide that if an applicant's other

[[Page 59768]]

credit history is satisfactory, only one year of rental history will be

evaluated.

Another commentor recommended that where an applicant had a non-RHS

write-off, and subsequently paid off the debt at least 12 months ago,

we not count this negative credit reference against the applicant. RHS

agrees and has modified the regulation accordingly.

RHS has also clarified that a delinquency on a federal debt and

foreclosure in the past 36 months are indicators of unacceptable

credit.

One commentor felt that a lack of credit history should not

automatically be considered acceptable credit. They explained

convincingly that the first credit experience for a family should not

be their largest financial obligation. A recent study by Chase

Manhattan indicated that the highest delinquency rate in the first year

of RHS homeownership was attributed to customers who had no credit

history prior to obtaining their RHS loan. This was particularly

evident in customers who had resided with family and had no credit

experience on their own. This policy has been in effect for many years

and was established, in part, to recognize the lack of credit in rural

areas. However, as the commentor indicated, non-real estate related

credit in one form or another is now readily available even in rural

areas, and it is not possible for a prudent loan underwriter to

document that someone who has never had any financial obligations

demonstrates a reasonable ability and willingness to meet debt

obligations. RHS agrees and has removed this criteria from the

regulation. Additional guidance in evaluating applications where the

applicant may lack a credit history is provided in the Handbooks.

Section 3550.54 Calculation of income and assets. Several comments

were received regarding this section asking that RHS further simplify

and clarify how to calculate the various types of income and assets.

RHS agrees that this section was cumbersome. As such, RHS has clarified

this entire section to make it easier to understand repayment, annual

and adjusted incomes, and net family assets.

Section 3550.54(a) Annual income. Three comments were received. One

commentor recommended that the paragraph be revised because annual

income and repayment income are sometimes different. Annual income and

repayment income are different. As mentioned in this section, annual

income is the base from which repayment income is calculated.

One commentor recommended that the regulation provide guidance on

verifying alimony or child support for separated or divorced persons

who cannot afford legal costs, or the action has not proceeded far

enough for executed papers to confirm payment amounts. Verifying income

is an administrative function and guidance on such cases is provided in

the handbooks.

One commentor recommended that the Equivalent Interest Rate be

based upon the applicant's income only and not the total family income.

The commentor felt the extra income that may be included in the total

family income may not be readily available in the future and may

jeopardize the customer's repayment ability. RHS understands the

comment; however, the income of all persons living in the household

must be used to determine monthly payments. Should the income of the

household change, the customer may qualify for increased payment

assistance or other servicing options.

Section 3550.54(b) Adjusted income. One commentor mentioned that

the regulation does not include the actual dollar amount for allowable

deductions. These deductions are set by law (see section 501 (b)(5) of

the Housing Act, as amended) and need not be repeated in the

regulation. They are included in the Handbooks.

One commentor recommended all medical expenses of a disabled family

member should be deductible. Section 501(b) of the Housing Act of 1949,

as amended, requires that the definition of income and adjusted income

for RHS programs have the meanings given section 3(b)(5) of the Housing

Act of 1937. The current regulation is not the appropriate forum for

the suggested change to be made, but the changes will be considered in

a revision of the definition of income under section 3(b)(4) which must

be jointly made with the Secretary of HUD.

One commentor was unclear as to whether eligible deductions for an

elderly family includes all expenses or just those expenses in excess

of three percent of income. RHS has clarified the regulation to be

clear that it is only expenses in excess of three percent.

One commentor recommended that long-term debts that will be paid in

full within 12 months should not be considered in the total debt ratio

for self-help applicants because the time between application,

construction, and first payment is generally one year. RHS agrees that

the time between application and closing for a self-help applicant is

generally longer, however, RHS believes that all applicants must be

treated consistently. To provide self-help applicants with this

flexibility would not be consistent with our treatment of other

applicants. Generally, RHS does not know the length of time between

application and closing when it receives an application. This is

influenced by many factors including the availability of funding, the

applicant's decision to build or purchase an existing home, the time it

takes for the applicant to execute the necessary documents to purchase

or build a home, and other influences outside the control of RHS or the

applicant. While the comment has merit, the inconsistent manner in

which applicants would obtain our services outweighs its advantages.

Section 3550.54(d). Income exclusions. Two comments were received

stating that RHS may have inadvertently omitted a list of income that

is included in repayment income. This paragraph deals with income

exclusions. The information mentioned is correctly included in

3550.54(c), Repayment income.

Section 3550.54(e). Net family assets. Two comments were received.

One commentor recommended that the cash value of life insurance not be

considered an asset from which an imputed income is calculated since

the applicant cannot obtain access to its value. RHS must be consistent

with the manner in which HUD handles net family assets. HUD considers

the cash value of life insurance an asset from which imputed income is

calculated, and therefore RHS, through this rulemaking document, cannot

adopt this comment.

Another commentor recommended that for self-employed applicants,

RHS allow depreciation reported to the Internal Revenue Service (IRS)

to be added to income for repayment income and then deducted from

income for determining loan payments. RHS disagrees. The Agency has

always utilized the net income of such applicants, and used such income

consistently throughout the underwriting process. We believe this is

more reflective of the income from which self-employed applicants can

reasonably depend upon to afford the costs of homeownership.

Section 3550.55(b). Agency processing of applications. One

commentor felt that returning incomplete applications is burdensome on

both the applicant and RHS. It is policy to return incomplete

applications to ensure consistent handling; however, the Handbooks

contain administrative provisions for handling minor omissions in the

package which would not require returning the complete package to the

applicant.

Two commentors felt that RHS should include a specific timeframe

for an

[[Page 59769]]

applicant to respond to RHS's inquiry as to their continued interest in

the program. RHS believes this is an administrative function, and as

such, is included in the Handbooks.

Section 3550.55(c). Funding priorities. Seven comments were

received. One commentor fully supported the priorities as proposed. The

other commentors felt that the priorities should be rearranged

consistent with the statute which requires that priority to be given to

applicants with the greatest need. Unfortunately, what each commentor

felt was the greatest need differed depending upon their own

perspective and interests. RHS developed the list taking into

consideration the intent of the authorizing statute and prior comments

from Rural Development field staff and the public. As evidenced by the

comments, ``need'' is subjective. RHS continues its policy that

existing RHS customers with the need for a repair loan to correct

health and safety hazards will have the greatest priority. These loans

are generally of a smaller amount (compared to an initial loan) and RHS

can assist many needy families through this priority. Second priority

is for the sale of Real Estate Owned (REO) and for the transfer of

existing RHS loans. These priorities ensure that RHS' existing

portfolio is adequately managed, and these currently held resources

assist as many families as possible. RHS agrees with the majority of

other commentors that hardship circumstances should be considered a

higher priority than participation loans and self-help housing loans,

and has made hardships third priority. The aforementioned areas are

considered equally as fourth priority, and all other loans are fifth

priority.

In addition, RHS retitled this section to ``Selection for

Processing,'' to better reflect the intent of the paragraph. Loans are

selected for processing in the order outlined in this section. After

selection for processing, loans are funded on first come, first served

basis.

Section 3550.56(b). Site standards. Four comments were received.

Three favored our proposed removal of the one-acre lot restriction

provided the lot could not be subdivided into more than one parcel. One

commentor stated that there is no zoning in many rural areas and

therefore no documentation could be obtained that the lot could not be

subdivided. This and another commentor recommended that the value of

the lot should not exceed 30% of the total market value of the

proposal. RHS agrees and has modified the language accordingly.

One commentor recommended that RHS provide additional guidance on

how to review sites. This information is included in the handbooks.

Section 3550.57(a). Modest dwelling. Five comments were received.

The majority supported RHS's current policy that the property must not

exceed the limits established under 203(b) of the National Housing Act.

However, several questioned what is considered ``modest'' and several

thought the 203(b) limits provided above modest housing in many rural

communities. RHS agrees that the housing must be modest, and is aware

of cases where the 203(b) limits allow for the financing of homes which

are excessive in size and cost. The government should not be providing

subsidized credit to anyone to purchase above modest housing. RHS will

continue with the 203(b) limits being the maximum loan amount and is

reopening the comment period on this section to solicit comments on how

the Agency can best address the concerns raised in this area.

Section 3550.57(c). Existing dwellings. One commentor felt RHS

should provide more administrative guidance, or a checklist in the

regulation on how to determine if a house is structurally sound,

functionally adequate, in good repair or to be placed in good repair.

RHS disagrees that such guidance is necessary in the regulation, and

has included this administrative guidance in the Handbooks.

Section 3550.58(b). Secure leasehold interest. Two commentors

recommended that the term of an acceptable lease be increased from 15

to 25 years. RHS agrees and has adopted this comment.

Section 3550.59. Security requirements. Five comments were

received. Two commentors recommended that RHS accept a junior lien

position if the senior lien is an affordable mortgage and the RHS loan

is for necessary repairs. RHS agrees and has adopted this

recommendation. Two commentors recommended that when RHS accepts a

junior lien position, the total secured debt must be less than or equal

to market value. The commentors recommended expansion to include the

words ``equal to.'' RHS again agrees and has adopted this comment. One

commentor recommended that we allow junior liens to RHS to exceed the

market value when the purpose of the junior lien is to secure other

financing for a downpayment or closing costs. RHS disagrees, especially

since RHS does not require a downpayment, and closing costs may be

included in the RHS loan.

Section 3550.60. Escrow account. Eight comments were received on

this section, and all supported the escrow of taxes and insurance to

assist our customers in becoming successful homeowners. One commentor

felt the language requiring ``customers to deposit funds sufficient to

pay taxes and insurance premiums applicable to the mortgage for the

period since the last payments were made'' to be too restrictive. The

commentor suggested that RHS consider requiring funds for only the

initial year of escrow. We intended this language to cover existing

customers who may be delinquent in taxes at the time they go on escrow.

Since RHS will consider paying the customer's delinquent taxes,

charging them to the customer's account, and then reamortizing the

loan, the proposed language would not be too restrictive. It is RHS's

intent to assist existing customers to every extent possible to

establish an escrow account.

One commentor questioned the timing for escrow accounts. All new

loans which are originated or closed under DLOS will have an escrow

account automatically established. All customers who received loans

since October 27, 1995, have been specifically advised that RHS was in

the process of implementing an escrow system and they would be required

to escrow when the system became operational. RHS may require these

customers to convert to escrow shortly after their state comes under

the DLOS system. All other customers will be asked to voluntarily

convert to escrow when their state comes under DLOS.

One commentor questioned payments to escrow if a customer is on a

moratorium. If a borrower cannot pay their escrow payments during a

moratorium, a negative balance may occur in their escrow account. In

these cases, RHS will pay the customer's taxes as if the escrow

payments had been made. The negative balance, or delinquency created in

the escrow account, will be handled at the conclusion of the moratorium

period either through repayment or reamortization.

One commentor recommended that the cost of the tax service fee

should not be paid entirely by the customer, but shared between RHS and

its customer since the benefits of the escrow are shared. RHS

understands the comment, but does not agree that the fee to obtain tax

service should be split. The small one-time fee is the cost for the

customer to ensure that taxes and assessments are paid when due. These

are services which directly benefit the customer, and should be paid

for by the customer. As previously mentioned, this fee can be included

in the loan. For existing

[[Page 59770]]

customers, the fee may be charged to their account.

Section 3550.61. Insurance. Two comments were received. One

commentor recommended that RHS secure the services of a vendor and have

the ability to ``force-place'' insurance. This was always RHS's intent,

and is being administratively secured. This guidance is contained in

the Handbooks.

Another commentor recommended that RHS require a ``loss payable

clause,'' in all insurance policies to ensure enforceability. The

Handbooks contain such language, however, we agree that it should be

specifically mentioned in the regulation. The commentor further

recommended that insurance be based on the unpaid loan balance and not

the depreciated replacement value. This is because the depreciated

replacement value is costly to determine, and for existing dwellings,

generally more expensive for the client. RHS agrees and has modified

the insurance sections to require insurance to cover the entire secured

debt. RHS also amended this section to allow excess insurance proceeds,

following a loss, to be released to the borrower provided the RHS debt

is adequately secured. The previous language required that the borrower

had to have at least 20 percent equity in the property before excess

proceeds would be released.

Section 3550.62. Appraisals. Two commentors recommended that RHS

include a provision that when a participating lender, in a leveraging

situation, secures an appraisal acceptable to RHS, that no appraisal

fee be charged. RHS agrees and has revised this section accordingly.

Two commentors recommended that a new paragraph be added to this

section to provide guidance on appraisals on Indian Trust lands. RHS

agrees that guidance is needed, however, this is an administrative

matter which will be included in the Handbooks.

One commentor recommended the language for additional security be

removed because it is not often used and is confusing. RHS agrees that

additional security is rarely taken; however, in those cases where it

is taken, we believe the guidance is necessary. Since this passage is

not used often, we moved the language to the end of the paragraph.

Section 3550.63. Maximum loan amount. Five comments were received.

One commentor felt the limits were too low in rural areas of their

state, because many low-end existing property sales brought the median

sales price below the average new construction house. Some felt the

limits were too high. As mentioned, RHS shares these concerns and is

reopening the comment period on this section.

Section 3550.64. Down payment. One commentor recommended that RHS

authorize an exception to allow applicants not to liquidate assets

which could be difficult or expensive to liquidate. RHS provides

subsidized credit to facilitate the purchase of a home by very-low and

low income families. If this family has assets by which to reduce the

amount of the loan, they should liquidate those assets. The overall

interests of the program are not served when the Government provides

subsidized credit to persons with assets that can be liquidated to

reduce their loan amounts.

Section 3550.65. Loan to value ratio. In reviewing comments to

Secs. 3550.63 and 3550.65, RHS recognized that the two sections were

interrelated. For clarity, RHS has combined this guidance into one

consolidated section--Sec. 3550.63. The comments discussed below

correspond to the numbering in the Proposed Rule.

Section 3550.65(b). Loans limited to 90% of Market Value. Five

comments were received. The commentors recommended that we expand our

list of allowable inspection sources. RHS agrees and has modified the

regulations to provide for other approved inspection sources. The

Handbooks will contain a list of such sources.

Section 3550.65(c). Loans in excess of market value. One commentor

recommended that we allow junior liens to exceed the market value when

the purpose of the junior lien is to secure other financing for

downpayments or closing costs. RHS disagrees, especially since RHS does

not require a downpayment, and closing costs may be included in the

loan.

Section 3550.67. Repayment period. RHS amended this section for

clarity and included guidance on manufactured homes.

Section 3550.68. Payment subsidies. The comments under this section

were essentially identical to those found in Secs. 3550.53(g),

3550.57(a), and 3550.63. As discussed elsewhere in this rule, RHS is

reopening the comment period on this section. See the aforementioned

section numbers for a summary of the comments and the section in this

rule called ``Reopening of Comment Period For Selected Issues.''

Section 3550.68(b). Conversion from interest credit to payment

assistance. Two comments were received. One commentor thought that RHS

should provide interest credit on any subsequent loan made to a

customer that has an existing loan under interest credit. This section

provides for such authority. RHS customers who are currently on

interest credit will continue to receive interest credit for as long as

they remain eligible for this assistance. A subsequent loan or

reamortization of the account has no impact on this policy.

One commentor felt that RHS administering two types of subsidies

was confusing and administratively burdensome upon the Agency. RHS

agrees that administering the two programs is administratively

burdensome; however, feels that existing customers should be allowed to

stay on interest credit until they no longer qualify for this

assistance. The two programs are different. Existing customers who have

had their loans serviced by the Agency for many years understand the

interest credit program and how changes in income impact their

payments. In brief, they handle their finances accordingly. Converting

to payment assistance, in most cases, increases a customer's payments.

And in some cases, some newer customers may not have been able to

qualify for their loans if interest credit assistance were not

available. RHS believes that it would not serve the public interest by

jeopardizing the repayment ability of these existing customers.

One commentor felt that we should continue to extend interest

credit to a customer who had once received it, later became ineligible

for it, and subsequently needed it again. RHS disagrees. Most

typically, a customer becomes ineligible for interest credit when their

income increases to the above-moderate level. These customers are

making payments at the full note rate and have established their

finances accordingly. If they suffer a reduction in income, payment

assistance can reduce their payments. In addition, the Agency can

consider a moratorium or other servicing tool to assist them. We

believe that customers on interest credit should continue to receive it

as long as they so qualify; however, if they need a new payment

subsidy, they should be treated consistently with new customers

requesting a payment subsidy.

For clarity, RHS retitled this section to ``Determining type of

payment subsidy.''

Section 3550.69. Deferred mortgage payments. Four comments were

received. One commentor recommended removal of this section from the

regulation since the program is not funded; although the regulation

should continue to include administrative guidance of how to calculate

and collect deferred payments. Administrative guidance is contained in

the

[[Page 59771]]

Handbooks. Another commentor recommended that although the program is

not funded, it remain in the regulations in case the program is ever

again funded. Additionally, the commentor recommended the debt ratio be

increased from 29% to a higher level. RHS will leave the provisions in

the regulation since the program may again be funded. The debt ratio

will remain as is for consistency throughout the program.

Two commentors recommended that if a customer who received a

deferred mortgage no longer qualifies for the deferral, and at a later

date, would benefit from this assistance, the Agency should again defer

the loan. The deferred mortgage program is a loan underwriting tool.

This is evidenced by the fact that appropriations are necessary to make

a deferred loan. A deferral of payments is not a servicing option. In

cases where a customer may suffer a reduction in income, they may

qualify for an increased payment subsidy or a payment moratorium.

Section 3550.70. Conditional commitments. Three comments were

received. One commentor felt that the builder should not have to own

the site in order for RHS to provide a commitment and recommended a

long term option be acceptable. The premise behind a conditional

commitment is to allow a builder to construct a house knowing that RHS

will inspect the property and will finance it to a qualified applicant.

RHS does not feel it would be prudent for a builder to construct a

house on land which it does not own and does not want to encourage such

a practice.

One comment was received concerning packaged loans on presold

houses. The existing regulation and proposed rule provided that RHS

will not approve a conditional commitment until the loan has been

approved. In these cases, the property is presold. We believe it

prudent practice to ensure that the person holding a valid contract to

purchase the property have an approvable loan before the commitment is

approved.

Another commentor felt that we should refund the conditional

commitment price if RHS does not finance the property. RHS disagrees.

RHS incurred the expense of appraising and inspecting the property and

is entitled to these fees for the services provided.

Section 3550.71. Special requirements for condominiums. Three

comments were received. One felt the revised language would allow RHS

to finance more condominiums. RHS agrees. Two commentors felt that RHS

should relax its requirements that at least 70 percent of the units had

to be sold before it will consider financing units in the complex. We

believe this a prudent underwriting practice and protects the best

interests of our customers and the government.

RHS recently became aware that this section was preventing us from

financing units in several states because our regulations were not

consistent with state laws regarding homeowners association dues. For

instance, current regulations provide that if RHS acquires title to a

condominium, the Agency would not be liable for more than 3 months of

the unit's unpaid regularly budgeted dues or charges accrued before

acquisition and the liens priority may not include costs of collecting

unpaid dues. However, in Massachusetts, for example, state law provides

that the lien of a homeowners association will have priority over a

first mortgage for the six month period prior to filing action and such

lien may include costs. Other lenders have modified their underwriting

standards to be consistent with state laws. RHS has included these

changes in the final rule.

Section 3550.72. Community land trusts. Two commentors objected to

RHS's requirement that land trust restrictions must be able to be

terminated should RHS acquire title to the property. RHS believes this

is a prudent loan underwriting practice. Further, without this

provision, the market value of the property at loan origination may be

significantly lower because of the restrictions which may preclude the

Agency from financing the property.

Section 3550.73. Manufactured homes. Four comments were received.

One commentor pointed out a potential conflict between paragraphs

3550.73(a)(4) which authorizes a loan for repairs and 3550.73(b)(4)

which excludes repairs after the initial loan is made. RHS has

corrected the conflict to provide that the purchase loan may not

include funds for alteration or remodeling. RHS has also amended this

section for clarity.

One commentor felt that RHS should not have to approve dealer-

contractors of manufactured homes. RHS disagrees. The Agency and its

customer need reasonable assurances, which are provided through the

approval process, that our best interests are protected.

Two commentors felt that the Agency should not require a Release of

Claimants from all persons furnishing labor or materials. RHS

disagrees. Again, these documents help ensure the Agency's, and its

customers', interests are protected by verifying that all labor and

materials are paid for and there is no potential for mechanics liens.

Section 3550.74. Nonprogram (NP) loans. One commentor mentioned a

conflict between the opening sentence which states that NP credit is

available for the assumption of existing RHS loans and

Sec. 3550.74(a)(1) which states NP credit can be extended on Real

Estate Owned (REO). We have clarified the opening sentence.

Two commentors expressed concern that RHS did not include the

amount of the required downpayment in the regulation. NP credit is

offered for RHS's convenience as a lender and when in the government's

best financial interests. Since it is not a customer entitlement, but

rather an administrative function, the downpayment amounts are

contained in the Handbooks. The required downpayments are currently 2%

for owner-occupants and 5% for investors.

Sections 3550.103 thru 3550.114 Section 504 Origination. These

sections have to be reorganized and expanded to be consistent with the

sections dealing with section 502 origination. This was done to ensure

consistency, where appropriate, between the programs. The comments

discussed below refer to the section number as provided in the Proposed

Rule.

Section 3550.102. Grant and loan purposes. Two comments were

received which requested a definition of ``modest'' housing for section

504 purposes. The definition of modest housing contained in

Sec. 3550.10 applies to both section 502 and 504 loans.

Section 3550.105(b). Age (grant applicants). One commentor

recommended that we expand the definition of age for 504 grants to

include persons with a disability of any age, especially for

handicapped accessibility. Previous appropriations language has

prevented RHS from making 504 grants available to persons who were not

62 years young. While we agree that some type of grant should be

available for this purpose, the demand for section 504 grant funds far

outweighs the available resources. Expanding the base for eligibility

would only further delay approving these grants which are used to

address critical health and safety needs for those 62 years of age or

older. Therefore, we are not adopting this recommendation.

Section 3550.105(f). Credit qualifications. Four comments were

received. One requested we clarify that the credit standards do not

apply to 504 grants. This clarification has been made.

The other three commentors all strongly opposed the proposed change

to the credit qualification standards.

[[Page 59772]]

RHS had proposed imposing the same standards on 504 recipients as 502

recipients. The commentors argued convincingly that the standards may

be too rigid for such applicants who are generally of extremely low

incomes with no alternatives to make necessary repairs and improvements

to their homes. RHS agrees and has relaxed the standards for 504

participants; however, similar to the section 502 program, RHS has

clarified that a delinquency on a federal debt or foreclosure within

the past 36 months are indicators of unacceptable credit.

Section 3550.107(b). Secure leasehold interest. Two commentors

recommended that a leasehold for mutual help housing financed by HUD,

with no minimum lease term, constitute acceptable ownership for section

504 assistance. RHS agrees and has modified this section accordingly.

Section 3550.108. Loan rates and terms. One commentor recommended

that when a combination loan and grant is made, that the loan term not

be set at 20 years if the applicant can repay the loan sooner. RHS

partially agrees, however grant funds are extremely limited and only

provided when the applicant cannot afford repayment ability on a loan.

If the loan period were shortened, the grant portion of the proposal

may increase to ensure affordability. We believe the language is

appropriate. Of course, a recipient of a combined loan and grant can

prepay the loan prior to the 20 year term or may request an accelerated

repayment schedule at any time he or she experiences an increase in

repayment ability.

Section 3550.109. Security requirements (loans only). Two comments

were received. One recommended the threshold for a loan which is

required to be secured be increased from $2,500 to $4,000 to recognize

the increase in costs since the regulations were developed. This amount

is statutory and no change was made.

One commentor pointed out the different thresholds for security

purposes. Loans over $2,500 must have a mortgage, loans over $7,500

must also have title clearance, and loans over $15,000 must also have

an appraisal. The commentor recommended more consistency. RHS needs to

carefully balance the imposition of costs to a customer against

protection of the government's best financial interest. While the

aforementioned thresholds are different, we believe they are balanced

consistent with the program's objectives and available resources.

Section 3550.110. Appraisals. One commentor recommended that we

clarify that an appraisal is required if the total secured debt exceeds

$15,000 or just the section 504 debt exceeds $15,000. An appraisal is

required whenever the secured debts exceeds $15,000. We have revised

the regulations accordingly.

Another commentor recommended that RHS include guidance on

appraisals on Indian Trust lands. As previously mentioned, this

guidance will be provided in the Handbooks.

Section 3550.111. Escrow account. Four comments were received

concerning RHS's proposal to escrow for section 504 customers. RHS

agrees that not all section 504 loan recipients should be required to

escrow, particularly when a senior lienholder may require an escrow.

Section 504 customers have very low incomes and do not often have the

resources to establish an escrow account. Based upon comments, any 504

loan recipient with an outstanding 504 indebtedness exceeding $2,500

may voluntarily request to escrow. RHS will require an escrow on 504

loans where the total secured debt exceeds $15,000 and there is no

junior lienholder requiring an escrow, and in cases where the customer

defaults on the terms of the promissory note and escrow is necessary to

protect the best interests of the government.

Section 3550.112. Insurance (loans only). Again, comments were

received opposing the requirement that all section 504 customers escrow

for insurance of their property. These customers have extremely low

incomes and in some cases, the home may be uninsurable. RHS will not

require proof of insurance to obtain a section 504 loan of less than

$15,000. In all cases where the total secured indebtedness on the

property exceeds $15,000, the customer voluntarily elects to escrow, or

when necessary to protect the government's financial interest,

insurance will be required.

In accordance with the National Flood Insurance Reform Act of 1994

(Public Law 103-325), flood insurance is required on all section 504

loans when the security property is located in a Special Flood Hazard

Area (SFHA) and 504 grants in excess of $5,000 where the property being

repaired is located in a SFHA. RHS has included the ability to include

the cost of flood insurance in a loan or grant if necessary to provide

section 504 assistance to the customer.

Section 3550.113. Repayment agreement (grants only). Two comments

were received. One commentor recommended the elimination of the

repayment agreement since it is not enforceable. RHS disagrees. The

agreement is enforceable, plus it provides a written verification to

the grantee that the grant must be repaid if the property is sold.

Another commentor recommended that the term ``grant closing'' be

removed since there is no real closing of a ``grant similar'' to a

closing on an initial SFH loan. RHS agrees.

Section 3550.152(a). Payment terms. Two commentors strongly opposed

RHS's requirement that a cash payment must be accompanied by an amount

sufficient to cover the cost of a money order, stating that such a

proposal was unfair to very low and low income families. This is not a

change in policy; RHS has been collecting a money order fee with cash

payment since March 25, 1991. RHS provides supervised credit. We

encourage, like all lenders, customers to send payments by check, money

order or bank draft. Cash payments in the local office are discouraged.

Since RHS must obtain a money order in order to transmit the payment,

the customer should pay that fee.

Section 3550.152(b). Application of Payments. Eight comments were

received. Two commentors recommended that RHS should have all loan

payments due on the first of each month because it would be easier for

clients to remember and make loan servicing easier. RHS has long

considered this policy, however, RHS believes its policy of staggering

due dates is more customer-oriented. The due date is generally

established by the loan closing date. In this manner, an applicant can

select a closing date which corresponds to the date when they have

funds available to make their mortgage payment. For example, a customer

on a fixed income who receives a check at the beginning of each month

would benefit from closing on their loan in the middle of the month so

they have received their monthly check in time to make their mortgage

payment. Having a due date consistent with the loan closing date also

eliminates the need for the loan recipient from having to pay prepaid

interest at the time of loan closing until the last day of the month.

With regard to remembering a due date, we believe our clients do

remember their due date. In addition, RHS will provide customers a

monthly billing statement. From RHS's perspective, the staggered due-

dates provide better customer service in that RHS work-flow is spread-

out over the month rather than concentrated at the beginning of each

month.

[[Page 59773]]

Two commentors also recommended that RHS permit electronic transfer

of funds and biweekly loan payments. As mentioned in the proposed rule,

RHS will now be encouraging its customers to establish automatic

payments with their local banking institution. With regard to biweekly

loan payments, RHS customers may contact the Centralized Servicing

Center to make arrangement to make biweekly payment should they so

desire.

Six commentors objected to RHS holding less than a full payment in

suspense. RHS believes this section may have been misinterpreted. A

customer with an active account will always be given credit for a

partial payment. The distinction, however, is that the accounting

system will reflect that the scheduled installment is not paid (is in

suspense) until the full installment is made. For example, assume a

customer's next scheduled payment of $300 is due on October 5th. On

October 5th, RHS receives a check for $100, and on November 5th RHS

receives a check for $512. RHS records will indicate that this customer

paid $100 on October 5th. The customer will receive a past due notice

and be charged a late fee of $12 on October 20th. The system will

credit the customer with the $100 payment on October 5th, but will

reflect that the October 5th installment has not been paid until the

full installment has been received. The October 5th installment is ``in

suspense'' until fully paid. When RHS receives the check of $512 on

November 5th, the October installment will no longer be in ``suspense''

because it has been fully paid.

It should be noted that RHS chose not to follow many mortgage

lenders' practice with regard to partial payment. Many lenders return

partial payments to the customer. RHS feels its policy is more

advantageous to both the customer and Agency.

One commentor questioned the hierarchy of how payments are applied.

This commentor, a large mortgage lender and servicer, stated that RHS's

proposed method of applying principal and interest payments, prior to

escrow, was not consistent with the private sector. RHS researched

payment hierarchy with many private industry lenders. Our research

indicated that most lenders apply payments in the manner RHS proposed.

The accounting system which RHS recently purchased is a standard

industry package used by many other lenders. All lenders using this

system apply payments first to principal and interest and then to

escrow. This payment hierarchy also benefits our customers by ensuring

that something actually due is paid on time, as opposed to an escrow

which is accumulating funds to pay something that is due at a later

time. We believe our proposal is more equitable to our clients.

Section 3550.152(d). Application of excess payment. Five comments

were received on this section, all recommending that RHS allow its

customers to make an extra payment that would relieve them of making

the next scheduled payment rather than being applied as an extra

payment. RHS agrees and has revised this section accordingly.

Section 3550.153. Fees. Five comments were received on this

section. Several thought the tax service fee should be the same for

existing customers as new customers. These fees, which are

administrative and not included in the regulation, are estimated to be

$28 for existing clients and $95 for new clients. The fees are set

differently because the length of the service will be different for a

new client who is just receiving a loan, and an existing client who has

had the loan for many years.

Several commentors opposed RHS's proposal to charge late fees. RHS

gave this proposal much thought before it was included in the proposed

rule, and then again upon analyzing the comments. The negative comments

centered around the fact that RHS's customers are very-low and low

income families. RHS recognizes that fact; however, also recognizes its

mission to provide supervised credit. Additionally, our credit is

intended to be temporary with our customers required to refinance their

RHS loan when they are capable. We believe a late fee will encourage

our clients to make payments on a more timely basis. This not only

improves their credit history, but furthers our objectives of making

our clients successful homeowners. To minimize any negative impact on

the repayment ability of our customers, the late fee is a percentage of

the loan payments, therefore a lower income client will pay less than a

higher income client with the same loan amount. Further, since RHS is

converting customers on escrow to an amortized loan schedule rather

than a daily simple interest loan in many cases, a late fee will

actually be less costly to the customer. Under the daily simple

interest method, the customer accrues additional interest for each day

they are late with their payment. The late fee included in this rule

will generally be less costly, and is more apparent to the borrower, if

they become delinquent on payments. We believe this private sector

standard, which many of our clients already pay if they are delinquent

on car payments or other private sector debt, will further our

objectives in making our clients successful and able to refinance with

private credit in the future.

Section 3550.157(a). Borrowers currently receiving payment subsidy.

Four comments were received. One commentor supported our proposal to

modify a payment subsidy only when there was a $10 change in payments.

Two commentors agreed that there needs to be a threshold, but

recommended that the payment must change by 10% before the agreement is

modified which will ensure clients are treated consistently whether

their payments are $60 or $600 per month. RHS agrees that a percentage

threshold better ensures consistency in the treatment of customers and

has adopted this comment.

Comments were also received regarding the requirement that clients

must notify RHS if they change or obtain employment. There was no

indication that a customer must notify RHS if non employment income

increases. RHS has clarified Secs. 3550.68(e) and 3550.157(a)(3) to

reflect that if nonemployment income increases by at least 10 percent,

the borrower must notify RHS. RHS has also provided guidance on

cancellation of payment subsidies.

Section 3550.158. Active military duty. One commentor recommended

we expand the language which provides that participation in a military

reserve or the National Guard does not entitle a customer to a 6

percent interest rate as provided under the Soldiers and Sailors Relief

Act, unless they are called to active military duty. RHS has clarified

this language.

One commentor appeared to be confused with this section with regard

to payment subsidies and the 6% interest rate. If a customer enters

active military duty, they are entitled to the 6% interest rate. If

they also qualify for a payment subsidy, the payment subsidy would

cover the difference in payment between the 6% and the amount of

assistance for which the customer qualifies. This reduces the amount of

subsidy and potential recapture this client would repay. For example,

if a customer who entered active military duty had a note rate of 10

percent, and they now qualified for a payment subsidy which reduced

their interest rate to 2%, they would receive the 6% rate and then an

additional 4% subsidy. This is opposed to a non-active military

customer with a note rate of 10%, who qualifies for a payment subsidy

which reduces their payment to 2% who would be receiving an 8% subsidy.

In the first case, the difference

[[Page 59774]]

between the 10 and 6 percent interest rates is not a subsidy which is

subject to recapture.

Section 3550.159(a). Mineral leases. One commentor suggested that

we change references from ``value of the security property'' to ``value

as a residence'' in determining whether we should allow a customer to

lease mineral rights. Since the value of the security property includes

the ``residence'' we believe the proposed terminology is correct.

Section 3550.159(d). Lease of security property. One commentor

recommended we remove the requirement that customers must notify RHS if

they lease their property, and that the Agency may liquidate the

account if the term of the lease is more than 3 years or includes an

option to purchase. RHS disagrees. The purpose of the RHS loan program

is to provide long term residence for our borrowers. If they no longer

need the dwelling for a long term residence they should pay off the

loan. RHS will consider the borrower for refinancing with other credit.

In addition, the Agency may consider liquidation of the loan.

Section 3550.160(b). Criteria for refinancing with private credit.

Two comments were received. One supported our proposed change of

terminology from ``graduation'' to ``refinancing with private credit.''

One commentor questioned the language which requires that the customer

must refinance when RHS determines they have such ability. The

commentor felt that RHS may be held accountable if the customer

refinanced and then defaulted on their new loan. RHS determines, based

upon objective criteria, whether a customer can refinance with private

credit. If RHS determines the customer has the potential to secure

other credit, they must seek refinancing. RHS does not make the

underwriting decision for the other lender, nor is a private lender

required to refinance the RHS debt. If the customer is unable to

refinance for legitimate reasons, RHS will withdraw the refinancing

request. If the customer does meet another lenders criteria, they are

expected to refinance. However, as noted, that underwriting decision

was made by the other lender. We appreciate the comment but feel that

this policy does not impose any accountability concerns.

Section 3550.161(c). Written statements. Two commentors felt that

the Agency should provide two written payoff statements within a 30 day

period without charge. The proposed language already provides that RHS

may charge a fee if more than 2 written payoff statements are

requested. Therefore, the recommendation was already included.

Section 3550.162. Recapture. Eight comments were received and all

overwhelmingly supported our proposals to streamline and clarify

subsidy recapture. One commentor summed it up best by replying, ``I

applaud recognition of the difficulties of the subsidy recapture

program and encourage efforts to make this provision more

understandable to applicants and customers and lessen its impact as a

penalty to customers upon sale or refinancing of their properties.''

One commentor recommended that principal reduction attributed to

subsidy (PRAS) be included on annual statements to the customer. RHS

agrees that some type of notice should be provided, however, disagrees

that it should necessarily be done on an annual basis. RHS will notify

all customers when PRAS is frozen and how it will be repaid. This

commentor also recommended that PRAS be explained on Form RHS 3550-12,

``Subsidy Repayment Agreement.'' Since there is no PRAS on loans

originated after 1990, there is no need for mention of it on a form

that only new customers execute.

One commentor felt that repayment of PRAS plus the lesser of

subsidy received or 50% of value appreciation was a double hit to

customers. As discussed in the proposed rule, PRAS is not subsidy. It

was the accelerated principal reduction which a customer received

because their loan was subsidized and repaid at a significantly lower

interest rate. PRAS, as proposed, must be repaid. In addition, the

customer must pay all or part of the subsidy they received back to the

government. This is either the full subsidy or 50% of the value

appreciation.

One commentor requested clarification on the opening sentence which

provides that customers with loans approved on or after October 1,

1979, are subject to recapture. His comment was whether a loan which

was approved before October 1, 1979, but assumed after that date is

subject to recapture. Consistent with past policy, such a loan is

subject to recapture. RHS has clarified this point.

Two commentors did not feel there was sufficient guidance to

calculate recapture. We believe the regulation provides adequate policy

guidance. The Handbooks contain the detailed administrative guidance on

how to calculate recapture.

One commentor felt that we should forgive PRAS if the customer

refinances and retains title to the property 10 years after

refinancing. The commentor felt this would be an incentive to a

customer to retain ownership after refinancing. At the time of

refinancing, a customer is given the opportunity to receive a discount

if they repay recapture at that time. In addition, the government does

not charge interest on the amount owed. We believe sufficient incentive

is provided to the customer to repay recapture without forgiving the

debt.

Section 3550.163. Transfer of security and assumption of

indebtedness. Two comments were received. One commentor felt this

section was confusing and needed more guidance. The Handbooks contain

more administrative guidance on transfers. The commentor also objected

to RHS's policy that if a customer transfers title to the property

without RHS consent, RHS can liquidate the loan if the loan cannot be

transferred. This policy is to ensure that program objectives are met

and the government's financial interest is not adversely affected.

The other comment dealt with liquidating excess property to reduce

the loan amount. As the commentor mentioned, this rarely occurs since

RHS should not have initially financed excess land. However, if there

is excess land, we believe it prudent policy to liquidate such excess

property to reduce the amount of the subsidized credit provided to the

new customer.

Section 3550.202. Past due accounts. Six comments were received on

this section, and all centered on RHS charging a late fee. Comments

were mixed with the commentors either strongly supporting or opposing

the imposition of a late fee. As discussed under the comment to

Sec. 3550.153, RHS carefully weighed all comments and believes charging

a late fee is in the government's and customer's best interests. RHS

has also expanded this section to provide guidance on accounts with

annual payments.

Section 3550.207. Payment moratorium. Two comments were received.

One commentor recommended that the review period more accurately

reflect the need of the customer, and not an arbitrary two-year period.

In developing the regulation, RHS proposed that reviews would be done

``periodically'' rather than the current two year cycle. The proposed

language accomplishes this objective while still leaving flexibility

for periodic reviews.

One commentor had two concerns. One concern centered around one of

the three criteria to qualify for a moratorium. Namely, for a

moratorium to be based on a reduction of income, there must be at least

a 20% reduction in income. RHS proposed no change to

[[Page 59775]]

this policy which has been in effect for many years. It is based upon

the premise that for the Agency to completely stop requiring all

payments from a customer for up to two years, a substantial reduction

in income must have occurred. While it is true that our customers have

very-low, low and moderate incomes, a homeowner should be able to

adjust to small adjustments in income. Additionally, RHS can provide

customers with additional payment subsidies, work-out agreements, etc.,

in an effort to assist them in working through difficult periods. We

believe the 20% reduction is reasonable.

The other comment centered around the inability of a customer to

qualify for a moratorium if their account has been accelerated. After

an account is accelerated, all loan servicing ceases. RHS makes every

effort possible to assist a customer before acceleration of the

account. The customer is informed several times throughout the loan

origination and servicing process of the moratorium program. Prior to

acceleration all of the agency's servicing tools will be used to assist

a customer, including the use of a moratorium for a customer who is

having temporary financial difficulties for reasons beyond his or her

control to keep their home. A loan will be accelerated for a customer

in financial distress only if all the servicing authorities have been

tried and cannot assist the borrower in retaining the house, possibly

because the financial difficulties are not temporary or the borrower

has been unresponsive or has failed to work with RHS. Once RHS has

exhausted its servicing tools (and any appeals in conjunction with

these tools) and accelerates the account, there can be no subsequent

financial setback to the borrower which is relevant to the basis for

the acceleration.

Section 3550.211. Liquidation. One commentor recommended adding

guidance on how to service accounts where the customer has filed for

bankruptcy. RHS, like all lenders, must follow bankruptcy laws on

servicing such accounts and is providing such guidance in the

Handbooks.

Section 3550.251. Property management and disposition. Two comments

were received recommending that for-profit entities be provided the

same incentives to lease or purchase Real Estate Owned (REO) property

for transitional housing as nonprofit organizations. The preference for

nonprofit organizations and public bodies is statutory. Section 1414 of

the Housing and Community Development Act of 1992, Public Law 102-550,

which amended the Stewart B. McKinney Homeless Assistance Act, Public

Law 100-77, provides the preference for nonprofit and public bodies.

For-profit organizations can lease or purchase REO property, when

available, for transitional housing; however, the incentives are not

available for such organizations.

Section 3550.251(c)(2). Decent, safe, and sanitary. One comment was

received recommending that RHS remove the energy efficiency

requirements to the decent, safe and sanitary restrictions that apply

to the sale of REO property not meeting RHS standards. DSS standards,

including energy efficient standards, are statutory.

Section 3550.252. Debt settlement policies. Two comments were

received. Both questioned guidance on charge-offs and cancellations. A

customer can request a compromise or adjustment to their debt and as

such, guidance is contained in the regulation. Charge-offs and

cancellations are administrative actions and not a customer entitlement

and are therefore only referenced in the Handbooks. Detailed guidance

on all four options is contained in the Handbooks.

Other Comments

One comment was received regarding RHS's proposal to freeze PRAS

for all existing customers and then reduce the ``frozen'' PRAS in years

15-33 by an equal amount. The commentor felt that RHS should not reduce

PRAS. As previously mentioned, PRAS is the accelerated principal write-

down certain customers received during the first half of their loan

term due to subsidy. In approximately the 20th year, the trend towards

accelerated principal writedown reverses itself to the point where

subsidized customers pay less principal because of the subsidy. The

result is that two customers, one with subsidy and one without would

owe the same principal balance in their final year of payments. To not

begin reducing PRAS in the second half of the loan term would penalize

those customers who received subsidy.

Several comments were received recommending that RHS consider

offering a one-time interest rate reduction for customers who received

loans at high interest rates and are unable to refinance to other

credit. In cases where the customer is receiving subsidy, it was felt

that the Agency would save funds because they would provide less

subsidy to these customers. In other cases, where the customer is not

receiving subsidy, but has a high interest rate, the customer may not

be able to refinance to other credit because their RHS loan payments

are so high they may be overextended on other debts or not have

sufficient cash required by most other lenders for refinancing. RHS

agrees that these comments have merit; however, must weigh the cost of

refinancing its own loans. RHS will explore the feasibility and cost of

refinancing these debts. If it appears feasible, RHS will propose a

separate rule to consider public opinion on this subject.

Positive comments were received on our efforts to streamline forms

and use industry standard forms wherever possible. As mentioned in the

Proposed Rule, RHS was to publish a Notice in the Federal Register in

July to propose our information collection docket on the Handbooks to

part 3550. RHS published this Notice on July 18, 1996 (61 FR 37440) and

proposed an overall 10% reduction in burden hours and 20% reduction in

burden costs. This reduction falls on the heels of a 20% reduction in

burden hours published in October 1995, despite the broadening of what

is considered public burden in the Paperwork Reduction Act of 1995. RHS

is still exploring ways to automate and streamline forms even further.

Several comments were received regarding child care expenses and

how these costs figure into loan underwriting. There was confusion as

to whether these expenses are considered a debt which must be included

in the debt ratios to qualify for assistance. This is an administrative

function, and not contained in the rule. For the commentor's

information, RHS clarified through this subject recently through an

Administrative Notice (AN) which clarified that child care expenses are

not considered in total debt. This guidance is included in the

Handbooks.

Several commentors expressed concern over RHS's decision to

centralize loan servicing. They were concerned that in our efforts to

save costs, RHS would be depersonalizing service to its customers and

increase the risk of defaults and potential liquidations. RHS is

mindful of these issues and has made every effort in its design of the

Centralized Servicing Center to ensure a greater and more consistent

level of customer service. Our current field structure required staff

to specialize in all levels of customer service from outreach and loan

origination to portfolio management. As the Agency has been required to

reduce staffing levels, we have found that only through consolidation

and centralization can we provide the same if not enhanced level of

customer service. Experience has also shown that specialization

provides for greater consistency and efficiency. The

[[Page 59776]]

Centralized Servicing Center will be staffed with talented individuals

that will concentrate on one aspect of the program--making our

customers successful homeowners. Through specialization, we believe

there will be more consistency and timely servicing actions. And

through this increased service, default rates will decline and more

customers will be successful. The transition will not be easy for

either our field staff or our customers. However, in the long run, we

believe service to rural America will be enhanced. Field staff can

concentrate on outreach and loan origination providing the local level

presence that is needed to assist with the prudent development of rural

America.

Reopening of Comment Period for Selected Issues

RHS is reopening the comment period on sections 3550.53(g),

3550.57(a), 3550.63 and 3550.68. These section numbers remain unchanged

from our proposed rule of April 8, 1996 (61 FR 15395) and are adopted

on an interim final basis. All other provisions of part 3550 are

adopted as a final rule.

As previously discussed in this rule, these sections generated the

vast majority of comments during the comment period. Many commentors

supplied RHS with lengthy and well documented cases where these areas

may not be serving the best interests of the program. Some of the

commentors recommended:

Returning to our former interest credit program, whereby

the interest rate was reduced on the loan to as low as one percent, and

modest housing was determined by square footage and amenities. RHS

reduced the cost of the program by approximately 30% by implementing

the changes in the aforementioned sections. This allows the Agency to

provide more homeownership opportunities in rural America while

demonstrating that program costs can be substantially reduced. As such,

RHS is not further considering this option.

Modifying the floor payments from 22, 24 and 26% to either

a flat 25% or a more incremental scale of 22, 23, 24, 25 and 26%. RHS

is analyzing these comments further and will consider them provided

they have no negative impact on the overall cost of the program.

Changing the PITI ratios from 29% for very-low income

families and 33% for low-income families to 29% for both, 33% for both,

or other percentages. RHS is again considering these options.

Reimplementing a square footage requirement to ensure that

the housing is modest. Prior to FY 96, RHS considered square footage

and amenities in determining modest housing, and changed to the HUD

203(b) limits to provide customers with more choices in selecting a

home appropriate to their income and needs. RHS does not want to

dictate the type and size of housing to customers, and is not further

considering this option.

Increasing the maximum debt ratio to 41% for very-low and

low income families. As mentioned in our discussion of comments, RHS

has implemented this change since the impact is minimal on the cost of

the program and allows more families an opportunity for homeownership.

Limiting the maximum loan to a percentage of the HUD

203(b) limits. For example, the State Director could set the percentage

by county, and have the authority to increase the percentage on an

individual case basis provided the proposed housing is typical of other

houses that families with similar incomes and family sizes are

purchasing. RHS is further considering this option.

Modifying the equivalent interest rates from one-half

percent increments to one-quarter percent increments and decreasing the

income ranges from 10 to 5 percent. RHS is considering this option.

Returning to the old interest credit formula, increasing

the borrower contribution from 20 to 30 percent, but include utilities

and maintenance in the total family expenses. Again, because of the

substantial cost of the interest credit program, RHS is not considering

this option.

Eliminating utilization of both equivalent interest rates

and floor payments to simplify the calculations. RHS may consider this

option provided it does not increase program costs.

Utilizing a state non-metropolitan average income or area

median income, whichever is greater, to determine eligibility for

assistance. Currently, RHS is utilizing an area (county) income to

determine eligibility and the maximum loan amount. This has resulted in

some customers qualifying for a loan in one county, but not qualifying

for a loan in an adjoining county because of differences in county

incomes. RHS is further exploring the use of state non-metropolitan

incomes to determine its impact on program costs and our customers.

RHS is seeking further comments on the above mentioned

recommendations and any further comments or recommendations on

Secs. 3550.53(g), 3550.57, 3550.63 and 3550.68. The Agency's goal is to

have a more simplified and consistent approach to addressing these

issues; while not negatively impacting the cost of the program.

Discussion of Interim Final Rule

RHS is issuing this regulation as an Interim Final Rule, with an

effective date 30 days after publication in the Federal Register, as it

is necessary to implement DLOS and improve our level of service to

customers. Further delay would not be in the best interest of the

direct SFH program or its recipients. As previously mentioned, all

provisions of this regulations except sections 3550.53(g), 3550.57(a),

3550.63 and 3550.68 are adopted as final. Sections 3550.53(g),

3550.57(a), 3550.63 and 3550.68 are adopted on an interim final basis,

and are subject to a 30-day comment period. RHS intends to publish a

final rule on the aforementioned sections by April 1, 1997.

List of Subjects

7 CFR Part 1806

Insurance, Loan programs--Agriculture, Real property insurance,

Rural areas.

7 CFR Part 1910

Applications, Credit, Loan programs--Agriculture, Loan programs--

Housing and community development, Low and moderate income housing,

Marital status discrimination, Sex discrimination.

7 CFR Part 1922

Loan programs--housing and community development, Low and Moderate

income housing, Rural areas.

7 CFR Part 1944

Aged, Farm labor housing, Grant programs--Housing and community

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

development, Low and moderate income housing--Rental, Migrant labor,

Mobile homes, Mortgages, Nonprofit organizations, Public housing, Rent

subsidies, Rural housing, Subsidies.

7 CFR Part 1951

Accounting, Accounting servicing, Credit, Debt restructuring,

Foreclosure, Government acquired property, Interest credit, Loan

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

development, Low and moderate income housing loans--Servicing,

Mortgages, Recapture of subsidy, Rent subsidies, Rural areas, Sale of

government acquired property, Surplus government property.

[[Page 59777]]

7 CFR Part 1955

Foreclosure, Government acquired property, Government property

management, Sale of government acquired property, Surplus government

property.

7 CFR Part 1956

Accounting, Loan programs--Agriculture, Rural areas.

7 CFR Part 1965

Administrative practice and procedure, Loan programs--Housing and

community development.

7 CFR Part 3550

Accounting, Administrative practice and procedure, Conflict of

interests, Environmental impact statements, Equal credit opportunity,

Fair housing, Grant programs--Housing and community development,

Housing, Loan programs--Housing and community development, Low and

moderate income housing, Manufactured homes, Reporting and

recordkeeping requirements, Rural areas, Subsidies.

Therefore, title 7 of the Code of Federal Regulations is amended as

follows:

CHAPTER XVIII--[AMENDED]

PART 1806--INSURANCE

1. The authority citation for part 1806 is revised to read as

follows:

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

Subpart A--Real Property Insurance

2. Section 1806.1(a) is revised to read as follows:

Sec. 1806.1 General.

(a) Authority. This subpart sets forth the policies and procedures

regarding insurance requirements on real property which serves as

security for a debt under the Farm Credit Programs of the Farm Service

Agency (FSA) or the Multi-Family Housing Programs of the Rural Housing

Service (RHS). Any references herein to the Farmers Home Administration

(FmHA) or its employees are intended to mean FSA or RHS, as applicable,

and their employees.

* * * * *

PART 1910--GENERAL

3. The authority citation for part 1910 is revised to read as

follows:

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

Subpart A--Receiving and Processing Applications

4. Section 1910.1 introductory text is revised to read as follows:

Sec. 1910.1. General.

This subpart prescribes the policies and procedures for informing

interested parties of the Farm Credit loan programs available through

the Farm Service Agency (FSA), and how such requests are processed.

Requests for Nonprogram (NP) assistance will be handled in accordance

with subpart J of part 1951 of this chapter. References contained

herein to the housing programs of the Rural Housing Service (RHS), or

its successor agency, are no longer applicable.

* * * * *

PART 1922--APPRAISAL

5. The authority citation for part 1922 is revised to read as

follows:

Authority: 7 U.S.C. 1989.

Subpart C--Appraisal of Single Family Residential Property

6. Subpart C (Secs. 1922.101-1922.150 and all exhibits) is removed

and reserved.

PART 1944--HOUSING

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

follows:

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

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

Authorizations

8. Subpart A (Secs. 1944.1-1944.50) is removed and reserved.

Subpart D--Farm Labor Housing Loan and Grant Policies, Procedures,

and Authorizations

9. Section 1944.156 is added to read as follows:

Sec. 1944.156 General loan/grant processing requirements.

(a) Timeliness. All applicants will be informed of a decision

regarding their request for assistance within a reasonable timeframe

established by RHS. If RHS cannot provide an eligibility determination

within a reasonable timeframe, the applicant will be notified when the

determination will be made. A request for assistance may be withdrawn

at any time by the applicant. RHS may return a request for assistance

for failure of the applicant to provide the necessary underwriting

information within a reasonable time period established by RHS.

(b) Unlawful determination. The federal Equal Credit Opportunity

Act prohibits creditors from discriminating against credit applicants

based on race, color, religion, national origin, sex, marital status,

age (provided that the applicant has the capacity to enter into a

binding contract), or because all or part of the applicant's income

derives from any public assistance program. Department of Agriculture

regulations provide that no agency, officer, or employee of the United

States Department of Agriculture shall exclude from participation in,

deny the benefits of, or subject to discrimination any person based on

race, color, religion, sex, age, handicap, or national origin under any

program or activity administered by such agency, officer, or employee.

The Fair Housing Act prohibits discrimination in real estate-related

transactions, or in the terms and conditions of such a transaction,

because of race, color, religion, sex, handicap, familial status, or

national origin. If an applicant or borrower believes he or she has

been discriminated against for any of these reasons, that person can

write the Secretary of Agriculture, Washington, DC 20250. Applicants

also cannot be denied a loan because the applicant has in good faith

exercised his or her rights under the Consumer Credit Protection Act.

If an applicant believes he or she was denied a loan for this reason,

the applicant should contact the Federal Trade Commission, Washington,

DC 20580.

(c) Taxpayer identification. All applicants must provide their

taxpayer identification number. The taxpayer identification number for

individuals who are not businesses is their Social Security Number.

Subpart J--Section 504 Rural Housing Loans and Grants

10. Subpart J (Secs. 1944.451-1944.500 and all exhibits) is removed

and reserved.

PART 1951--SERVICING AND COLLECTIONS

11. The authority citation for part 1951 continues to read as

follows:

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

12. The heading of subpart C is revised to read as follows:

[[Page 59778]]

Subpart C--Offsets of Federal Payments to USDA Agency Borrowers

13. Section 1951.101 is revised to read as follows:

Sec. 1951.101 General.

The Federal Claims Collection Act of 1966 as amended by the Debt

Collection Act of 1982, the Deficit Reduction Act of 1984, and the Debt

Collection Amendments Act of 1996 provides for the use of

administrative, salary and Internal Revenue Service (IRS) offsets by

government agencies including the Farm Service Agency (FSA), Rural

Housing Service (RHS), Rural Utility Service (RUS) for its water and

waste programs, and Rural Business-Cooperative Service (RBS), herein

referred to as ``USDA Agency,'' to collect delinquent debts. Any money

that is or may become payable from the United States to a USDA Agency

borrower or other individual or entity indebted to a USDA Agency may be

subject to offset for collection of a debt. In addition, money may be

collected from the debtor's retirement payments for delinquent amounts

owed to the USDA Agency if the debtor is an employee or retiree of a

Federal agency, the U.S. Postal Service, the Postal Rate Commission, or

a member of the U.S. Armed Forces or the Reserve. Amounts collected

will be processed as regular payments and credited to the borrowers

account. USDA Agencies will process requests by other Federal agencies

for offset in accordance with Sec. 1951.102 of this subpart. This

subpart does not apply to direct single family housing customers of the

RHS.

Subpart D--Final Payment on Loans

14. Section 1951.151 is revised to read as follows:

Sec. 1951.151 Purpose.

This subpart prescribes authorizations, policies, and procedures of

the Farm Service Agency (FSA), Rural Housing Service (RHS), Rural

Utility Service (RUS) for its water and waste programs, and Rural

Business-Cooperative Service (RBS), herein referred to as ``Agency,''

for processing final payment on all loans. This subpart does not apply

to direct single family housing customers of the RHS.

Subpart F--Analyzing Credit Needs and Graduation of Borrowers

15. Section 1951.251 is amended by adding a sentence at the end to

read as follows:

Sec. 1951.251 Purpose.

* * * This subpart does not apply to RHS direct single family

housing (SFH) customers.

Subpart G--Borrower Supervision, Servicing and Collection of Single

Family Housing Loan Accounts

16. Subpart G (Secs. 1951.301--1951.350) is removed and reserved.

Subpart I--Recapture of Section 502 Rural Housing Subsidy

17. Subpart I (Secs. 1951.401-1951.413 and all exhibits) is removed

and reserved.

Subpart J--Management and Collection of Nonprogram (NP) Loans

18. Section 1951.451 is amended by revising the introductory text

to read as follows:

Sec. 1951.451 General.

This subpart contains policies and procedures of the Farm Service

Agency (FSA) for making, managing, collecting, liquidating, and

servicing loans on nonprogram (NP) terms. All references in this

subpart to farm real estate, farm property and farm chattels also

include nonfarm property that was security for a Farm Credit debt of

the FSA.

* * * * *

Subpart M--Servicing Cases Where Unauthorized Loan or Other

Financial Assistance Was Received--Single Family Housing

19. Subpart M (Secs. 1951.601-1951.650) is removed and reserved.

PART 1955--PROPERTY MANAGEMENT

20. The authority citation for part 1955 continues to read as

follows:

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

Subpart A--Liquidation of Loans Secured by Real Estate and

Acquisition of Real and Chattel Property

21. Section 1955.1 is revised to read as follows:

Sec. 1955.1 Purpose.

This subpart delegates authority and prescribes procedures for the

liquidation of loans to individuals and to organizations as identified

in Sec. 1955.3. It pertains to the Farm Credit programs of the Farm

Service Agency (FSA), Water and Waste programs of the Rural Utilities

Service (RUS), Multi-Family Housing (MFH) and Community Facility (CF)

programs of the Rural Housing Service (RHS), and direct programs of the

Rural Business-Cooperative Service (RBS). Guaranteed RBS loans are

liquidated upon direction from the Deputy Administrator, Business

Program, RBS. This subpart does not apply to RHS single family housing

loans, or to CF loans sold without insurance in the private sector.

These CF loans will be serviced in the private sector and future

revisions to this subpart no longer apply to such loans.

Subpart B--Management of Property

22. Section 1955.51 is revised to read as follows:

Sec. 1955.51 Purpose.

This subpart delegates authority and prescribes policies and

procedures for the Rural Housing Service (RHS), Rural Business-

Cooperative Service (RBS), the Water and Waste programs of the Rural

Utilities Service (RUS), and Farm Service Agency (FSA), herein referred

to as ``Agency,'' and references contained in this subpart to the

Farmers Home Administration (FmHA) are synonymous with ``Agency.'' This

subpart does not apply to RHS single family housing loans or community

program loans sold without insurance to the private sector. These

community program loans will be serviced by the private sector and

future revisions to this subpart no longer apply to such loans. This

subpart covers:

(a) Management of real property which has been taken into custody

by the respective Agency after abandonment by the borrower;

(b) Management of real and chattel property which is in Agency

inventory; and

(c) Management of real and chattel property which is security for a

guaranteed loan liquidated by an Agency (or which the Agency is in the

process of liquidating).

Subpart C--Disposal of Inventory Property

23. Section 1955.101 is amended by adding a new sentence to the end

to read as follows:

Sec. 1955.101 Purpose.

* * * This subpart does not apply to Single Family Housing (SFH)

inventory property.

PART 1956--DEBT SETTLEMENT

24. The authority citation for part 1956 is revised to read as

follows:

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

[[Page 59779]]

Subpart B--Debt Settlement--Farmer Programs and Housing

25. Section 1956.51 is revised to read as follows:

Sec. 1956.51 Purpose.

This subpart delegates authority and prescribes policy and

procedures for settlement of debts owed to the United States under the

Farm Credit loan programs of the Farm Service Agency (FSA) and the

Multi-Family Housing (MFH) program of the Rural Housing Service (RHS).

It also applies to Nonprogram (NP) loans secured by MFH property of the

RHS. Settlement of claims against recipients of grant funds for reasons

such as the use of funds for improper purposes is also covered by this

subpart. Settlement of claims against third party converters, and

Economic Opportunity (EO) loans is authorized under the Federal Claims

Collection Standards, 4 CFR parts 101-105. This subpart does not apply

to RHS direct Single Family Housing (SFH) loans or RHS NP loans secured

by SFH property.

PART 1965--REAL PROPERTY

26. The authority citation for part 1965 continues to read as

follows:

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

Subpart C--Security Servicing for Single Family Rural Housing Loans

27. Subpart C (Secs. 1965.101-1965.150) is removed and reserved.

28. A new chapter XXXV consisting of part 3550 is added to read as

follows:

CHAPTER XXXV--RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

PART 3550--DIRECT SINGLE FAMILY HOUSING LOANS AND GRANTS

Subpart A--General

Sec.

3550.1 Applicability.

3550.2 Purpose.

3550.3 Civil rights.

3550.4 Reviews and appeals.

3550.5 Environmental requirements.

3550.6 State law or state supplement.

3550.7 Demonstration programs.

3550.8 Exception authority.

3550.9 Conflict of interest.

3550.10 Definitions.

3550.11-3550.49 [Reserved]

3550.50 OMB control number.

Subpart B--Section 502 Origination

3550.51 Program objectives.

3550.52 Loan purposes.

3550.53 Eligibility requirements.

3550.54 Calculation of income and assets.

3550.55 Applications.

3550.56 Site requirements.

3550.57 Dwelling requirements.

3550.58 Ownership requirements.

3550.59 Security requirements.

3550.60 Escrow account.

3550.61 Insurance.

3550.62 Appraisals.

3550.63 Maximum loan amount.

3550.64 Down payment.

3550.65 [Reserved]

3550.66 Interest rate.

3550.67 Repayment period.

3550.68 Payment subsidies.

3550.69 Deferred mortgage payments.

3550.70 Conditional commitments.

3550.71 Special requirements for condominiums.

3550.72 Community land trusts.

3550.73 Manufactured homes.

3550.74 Nonprogram loans.

3550.75-3550.99 [Reserved]

3550.100 OMB control number.

Subpart C--Section 504 Origination

3550.101 Program objectives.

3550.102 Grant and loan purposes.

3550.103 Eligibility requirements.

3550.104 Applications.

3550.105 Site requirements.

3550.106 Dwelling requirements.

3550.107 Ownership requirements.

3550.108 Security requirements (loans only).

3550.109 Escrow account (loans only).

3550.110 Insurance (loans only).

3550.111 Appraisals (loans only).

3550.112 Maximum loan and grant.

3550.113 Rates and terms (loans only).

3550.114 Repayment agreement (grants only).

3550.115-3550.149 [Reserved]

3550.150 OMB control number.

Subpart D--Regular Servicing

3550.151 Servicing goals.

3550.152 Loan payments.

3550.153 Fees.

3550.154 Inspections.

3550.155 Escrow account.

3550.156 Borrower obligations.

3550.157 Payment subsidy.

3550.158 Active military duty.

3550.159 Borrower actions requiring RHS approval.

3550.160 Refinancing with private credit.

3550.161 Final payment.

3550.162 Recapture.

3550.163 Transfer of security and assumption of indebtedness.

3550.164 Unauthorized assistance.

3550.165-3550.199 [Reserved]

3550.200 OMB control number.

Subpart E--Special Servicing

3550.201 Purpose of special servicing actions.

3550.202 Past due accounts.

3550.203 General servicing actions.

3550.204 Payment assistance.

3550.205 Delinquency workout agreements.

3550.206 Protective advances.

3550.207 Payment moratorium.

3550.208 Reamortization using promissory note interest rate.

3550.209 [Reserved]

3550.210 Offsets.

3550.211 Liquidation.

3550.212-3550.249 [Reserved]

3550.250 OMB control number.

Subpart F--Post-Servicing Actions

3550.251 Property management and disposition.

3550.252 Debt settlement policies.

3550.253 Settlement of a debt by compromise or adjustment.

3550.254-3550.299 [Reserved]

3550.300 OMB control number.

Authority: 5 U.S.C. 301; 42 U.S.C. 1480.

Subpart A--General

Sec. 3550.1 Applicability.

This part sets forth policies for the direct single family housing

loan programs operated by the Rural Housing Service (RHS) of the U.S.

Department of Agriculture (USDA). It addresses the requirements of

sections 502 and 504 of the Housing Act of 1949, as amended, and

includes policies regarding both loan and grant origination and

servicing. Procedures for implementing these regulations can be found

in program handbooks, available in any Rural Development office. Any

provision on the expenditure of funds under this part is contingent

upon the availability of funds.

Sec. 3550.2 Purpose.

The purpose of the direct RHS single family housing loan programs

is to provide low- and very low-income people who will live in rural

areas with an opportunity to own adequate but modest, decent, safe, and

sanitary dwellings and related facilities. The section 502 program

offers persons who do not currently own adequate housing, and who

cannot obtain other credit, the opportunity to acquire, build,

rehabilitate, improve, or relocate dwellings in rural areas. The

section 504 program offers loans to very low-income homeowners who

cannot obtain other credit to repair or rehabilitate their properties.

The section 504 program also offers grants to homeowners age 62 or

older who cannot obtain a loan to correct health and safety hazards or

to make the unit accessible to household members with disabilities.

Sec. 3550.3 Civil rights.

RHS will administer its programs fairly, and in accordance with

both the letter and the spirit of all equal opportunity and fair

housing legislation and applicable executive orders. Loans, grants,

services, and benefits provided under this part shall not be denied to

any person based on race, color, national origin, sex, religion,

marital status, familial status, age, physical or mental disability,

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

in good faith, exercised

[[Page 59780]]

any right under the Consumer Credit Protection Act (15 U.S.C. 1601 et

seq.). All activities under this part shall be accomplished in

accordance with the Fair Housing Act (42 U.S.C. 3601-3620), Executive

Order 11246, and Executive Order 11063, as amended by Executive Order

12259, as applicable. The civil rights compliance requirements for RHS

are in 7 CFR part 1901, subpart E.

Sec. 3550.4 Reviews and appeals.

Whenever RHS makes a decision that is adverse to a participant, RHS

will provide the participant with written notice of such adverse

decision and the participant's rights to a USDA National Appeals

Division hearing in accordance with 7 CFR part 11. Any adverse

decision, whether appealable or non-appealable may be reviewed by the

next-level RHS supervisor.

Sec. 3550.5 Environmental requirements.

(a) Policy. RHS will consider environmental quality as equal with

economic, social, and other relevant factors in program development and

decision-making processes. RHS will take into account potential

environmental impacts of proposed projects by working with RHS

applicants, other federal agencies, Indian tribes, State and local

governments, and interested citizens and organizations in order to

formulate actions that advance the program's goals in a manner that

will protect, enhance, and restore environmental quality.

(b) Regulatory references. Processing and servicing actions under

this part will be done in accordance with the requirements provided in

7 CFR part 1940, subpart G which addresses environmental requirements

and 7 CFR part 1924, subpart A, which addresses lead-based paint.

Sec. 3550.6 State law or state supplement.

State and local laws and regulations, and the laws of federally

recognized Indian tribes, may affect RHS implementation of certain

provisions of this regulation, for example, with respect to the

treatment of liens, construction, or environmental policies.

Supplemental guidance may be issued in the case of any conflict or

significant differences.

Sec. 3550.7 Demonstration programs.

From time to time, RHS may authorize limited demonstration

programs. The purpose of these demonstration programs is to test new

approaches to offering housing under the statutory authority granted to

the Secretary. Therefore, such demonstration programs may not be

consistent with some of the provisions contained in this part. However,

any program requirements that are statutory will remain in effect.

Demonstration programs will be clearly identified as such.

Sec. 3550.8 Exception authority.

An RHS official may request, and the Administrator or designee may

make, an exception to any requirement or provision of this part or

address any omission of this part that is consistent with the

applicable statute if the Administrator determines that application of

the requirement or provision, or failure to take action in the case of

an omission, would adversely affect the Government's interest.

Sec. 3550.9 Conflict of interest.

Objective. It is the objective of RHS to maintain the highest

standards of honesty, integrity, and impartiality by employees. To

reduce the potential for employee conflict of interest, all processing,

approval, servicing, or review activity will be conducted in accordance

with 7 CFR part 1900, subpart D by RHS employees who:

(1) Are not themselves the applicant or borrower;

(2) Are not members of the family or close known relatives of the

applicant or borrower;

(3) Do not have an immediate working relationship with the

applicant or borrower, the employee related to the applicant or

borrower, or the employee who would normally conduct the activity; or

(4) Do not have a business or close personal association with the

applicant or borrower.

(b) Applicant or borrower responsibility. The applicant or borrower

must disclose any known relationship or association with an RHS

employee when such information is requested.

(c) RHS employee responsibility. An RHS employee must disclose any

known relationship or association with a recipient, regardless of

whether the relationship or association is known to others. RHS

employees or members of their families may not purchase a Real Estate

Owned (REO) property, security property from a borrower, or security

property at a foreclosure sale. Loan closing agents who have been

involved with a particular property, as well as members of their

families, are also precluded from purchasing such properties.

Sec. 3550.10 Definitions.

Acceleration. Demand for immediate repayment of the entire balance

of a debt if the security instruments are breached.

Adjusted income. Used to determine whether an applicant is income-

eligible. Adjusted income provides for deductions to account for

varying household circumstances and expenses. See 4 for a complete

description of adjusted income.

Adjustment. An agreement to release a debtor from liability

generally upon receipt of an initial lump sum representing the maximum

amount the debtor can afford to pay and periodic additional payments

over a period of up to 5 years.

Amortized payment. Equal monthly payments under a fully amortized

mortgage loan that provides for the scheduled payment of interest and

principal over the term of the loan.

Applicant. An adult member of the household who will be responsible

for repayment of the loan.

Assumption. The procedure whereby the transferee becomes liable for

all or part of the debt of the transferor.

Borrower. A recipient who is indebted under the section 502 or 504

programs.

Cancellation. A decision to cease collection activities and release

the debtor from personal liability for any remaining amounts owed.

Compromise. An agreement to release a debtor from liability upon

receipt of a specified lump sum that is less than the total amount due.

Conditional commitment. A determination that a proposed dwelling

will qualify as a program-eligible property. The conditional commitment

does not reserve funds, nor does it ensure that a program-eligible

applicant will be available to buy the dwelling.

Cosigner. An individual or an entity that joins in the execution of

a promissory note to compensate for any deficiency in the applicant's

repayment ability. The cosigner becomes jointly liable to comply with

the terms of the promissory note in the event of the borrower's

default, but is not entitled to any interest in the security or

borrower rights.

Cross-collateralized loan. A situation in which a single property

secures both RHS and Farm Service Agency loans.

Custodial property. Borrower-owned real property that serves as

security for a loan that has been taken into possession by the Agency

to protect the Government's interest.

Daily simple interest. A method of establishing borrower payments

based on daily interest charged on the outstanding principal balance of

the loan. Principal is reduced by the amount of payment in excess of

the accrued interest.

[[Page 59781]]

Dealer-contractor. A person, firm, partnership, or corporation in

the business of selling and servicing manufactured homes and developing

sites for manufactured homes. A person, firm, partnership, or

corporation not capable of providing the complete service is not

eligible to be a dealer-contractor.

Debt instrument. A collective term encompassing obligating

documents for a loan, including any applicable promissory note,

assumption agreement, or grant agreement.

Deferred mortgage payments. A subsidy available to eligible, very

low-income borrowers of up to 25 percent of their principal and

interest payments at 1 percent for up to 15 years. The deferred amounts

are subject to recapture on sale or nonoccupancy.

Deficient housing. A dwelling that lacks complete plumbing; lacks

adequate heating; is dilapidated or structurally unsound; has an

overcrowding situation that will be corrected with loan funds; or that

is otherwise uninhabitable, unsafe, or poses a health or environmental

threat to the occupant or others.

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 an

applicant or borrower;

(2) Two or more persons who are living together, at least 1 of whom

is age 62 or older, or disabled, and who is an applicant or borrower;

or

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

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

deceased family member, the 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, as

amended.

Escrow account. An account to which the borrower contributes

monthly payments to cover the anticipated costs of real estate taxes,

hazard and flood insurance premiums, and other related costs.

Existing dwelling or unit. A dwelling that is more than 1 year old,

or less than 1 year old and covered by an approved 10-year warranty

plan.

False information. Information that the recipient knew was

incorrect or should have known was incorrect that was provided or

omitted for the purposes of obtaining assistance for which the

recipient was not eligible.

Full-time student. A person who carries at least the minimum number

of credit hours considered to be full-time by college or vocational

school in which the person is enrolled.

Hazard. A condition of the property that jeopardizes the health or

safety of the occupants or members of the community, that does not make

it unfit for habitation. (See also the definition of major hazard in

this section.)

Household. All persons expected to be living in the dwelling,

except for live-in aids, foster children, and foster adults.

Housing Act of 1949, as amended. The Act which provides the

authority for the direct single family housing programs. It is codified

at 42 U.S.C. 1471 et seq.

HUD. The U.S. Department of Housing and Urban Development.

Inaccurate information. Incorrect information inadvertently

provided, used, or omitted without the intent to obtain benefits for

which the recipient was not eligible.

Indian reservation. All land located within the limits of any

Indian reservation under the jurisdiction of the United States

notwithstanding the issuance of any patent and including rights-of-way

running through the reservation; trust or restricted land located

within the boundaries of a former reservation of a federally recognized

Indian tribe in the State of Oklahoma; or all Indian allotments, the

titles to which have not been extinguished, if such allotments are

subject to the jurisdiction of a federally recognized Indian tribe.

Interest credit. A payment subsidy available to certain eligible

section 502 borrowers that reduces the effective interest rate of a

loan (see 3550.68(d)). Borrowers receiving interest credit will

continue to receive it on all current and future loans for as long as

they remain eligible for and continue to receive a subsidy. Borrowers

who cease to be eligible for interest credit can never receive interest

credit again, but may receive payment assistance if they again qualify

for a payment subsidy.

Junior lien. A security instrument or a judgment against the

security property to which the RHS debt instrument is superior. Legal

alien. For the purposes of this part, legal alien refers to any person

lawfully admitted to the country who meets the criteria in section 214

of the Housing and Community Development Act of 1980, 42 U.S.C. 1436a.

Leveraged loan. A loan or grant to an Agency borrower from a non-

RHS source for the same property, closed simultaneously with an RHS

loan.

Live-in aide. A person who lives with an elderly or disabled person

and is essential to that person's care and well-being, not obligated

for the person's support, and would not be living in the unit except to

provide the support services.

Low income. An adjusted income that is greater than the HUD

established very low-income limit, but that does not exceed the HUD

established low-income limit (generally 80 percent of median income

adjusted for household size) for the county or Metropolitan Statistical

Area where the property is or will be located.

Major hazard. A condition so severe that it makes the property

unfit for habitation. (See also the definition of hazard in this

section.)

Manufactured home. A structure that is built to Federally

Manufactured Home Construction and Safety Standard and RHS Thermal

Performance Standards. It is transportable in 1 or more sections, which

in the traveling mode is 10-body feet (3.048 meters) or more in width,

and when erected on site is 400 or more square feet (37.16 square

meters), and which is built on a permanent chassis and designed to be

used as a dwelling with or without a permanent foundation when

connected to the required utilities. It is designed and constructed for

permanent occupancy by a single family and contains permanent eating,

cooking, sleeping, and sanitary facilities. The plumbing, heating, and

electrical systems are contained in the structure. A permanent

foundation is required.

Market value. The value of the property as determined by a current

appraisal, RHS may authorize the use of a Broker's Price Opinion or

similar instrument to determine market value in limited servicing

situations.

Mobile home. A manufactured unit often referred to as a

``trailer,'' designed to be used as a dwelling, but built prior to the

enactment of the Housing and Community Development Act of 1980 (Pub. L.

96-399) enacted October 8, 1980.

Moderate income. An adjusted income that is greater than the low-

income limit, but that does not exceed

[[Page 59782]]

the HUD established low-income limit by more than $5,500.

Modest housing. A property that is considered modest for the area,

with a cost that does not exceed the applicable limit established under

section 203(b) of the National Housing Act (12 U.S.C. 1709) (unless an

exception is approved by RHS). In addition, the property must not be

designed for income-producing activities nor have an in-ground swimming

pool.

Modular or panelized home. Housing, constructed of one or more

factory-built sections or panels, which, when completed, meets or

exceeds the requirements of the recognized development standards (model

building codes) for site built housing, and which is designed to be

permanently connected to a site-built foundation.

Moratorium. A period of up to 2 years during which scheduled

payments are not required, but are subject to repayment at a later

date.

Mortgage. A form of security instrument or consensual lien on real

property including a real estate mortgage or a deed of trust.

Net family assets. The value of assets available to a household

that could be used towards housing costs. Net family assets are

considered in the calculation of annual income and are used to

determine whether the household must make additional cash contributions

to improve or purchase the property.

Net recovery value. The market value of the security property minus

anticipated expenses of liquidation, acquisition, and sale as

determined by RHS.

New dwelling. A dwelling that is to be constructed, or an already-

existing dwelling that is less than 1 year old and is not covered by an

approved 10-year warranty plan.

Nonprogram (NP) interest rate. The interest rate offered by RHS for

loans made on NP terms.

NP property. Property that does not meet the program eligibility

requirements outlined in Secs. 3550.56 and 3550.57.

NP terms. Credit terms available from RHS when the applicant or

property is not program-eligible.

Offset. Deductions to pay a debt owed to RHS from a borrower's

retirement benefits, salary, income tax refund, or payments from other

federal agencies to the borrower. Deductions from retirement benefits

and salary generally apply only to current and former federal

employees.

Participant. For the purpose of reviews and appeals, a participant

is any individual or entity who has applied for, or whose right to

participate in or receive a payment, loan, or other benefit is affected

by an RHS decision.

Payment assistance. A payment subsidy available to eligible section

502 borrowers that reduces the effective interest rate of a loan (see

Sec. 3550.68(c)). Borrowers eligible for a payment subsidy receive

payment assistance unless they are currently eligible for and receive

interest credit.

Payment subsidy. A general term for subsidies which reduce the

borrower's scheduled payment. It refers to either payment assistance or

interest credit.

Person with disability. Any person who has a physical or mental

impairment that substantially limits one or more major life activities,

including functions such as caring for one's self, performing manual

tasks, walking, seeing, hearing, speaking, breathing, learning and

working, has a record of such an impairment, or is regarded as having

such an impairment.

PITI ratio. The amount paid by the borrower for principal,

interest, taxes, and insurance (PITI), divided by repayment income.

Principal reduction attributed to subsidy (PRAS). Accelerated

principal reduction that can occur when a borrower receives a reduced

interest rate through a payment subsidy.

Prior lien. A security instrument or a judgment against the

security property that is superior to the RHS debt instrument.

Program-eligible applicant. Any applicant meeting the eligibility

requirements described in Sec. 3550.53.

Program-eligible property. A property eligible to be financed under

this part, as determined by the criteria listed in Secs. 3550.56

through 3550.59.

Program terms. Credit terms that are available only to program-

eligible applicants for program-eligible properties.

Property. The land, dwelling, and related facilities for which the

applicant will use RHS assistance.

Protective advances. Costs incurred by the Agency to protect the

security interest of the Government that are charged to the borrower's

account.

Real estate taxes. Taxes and the annual portion of assessments

estimated to be due and payable on the property, reduced by any

available tax exemption.

Recapture amount. An amount of subsidy to be repaid by the borrower

upon disposition or nonoccupancy of the property.

Recipient. Any applicant, borrower, or grant recipient who applies

for or receives assistance under the section 502 or 504 programs.

REO. The acronym for ``Real Estate Owned.'' It refers to property

for which RHS holds title.

Repayment income. Used to determine whether an applicant has the

ability to make monthly loan payments. Repayment income includes

amounts excluded for the purpose of determining adjusted income. See

Sec. 3550.54 for a complete description.

RHS. The Rural Housing Service of the U.S. Department of

Agriculture, or its successor agency, formerly the Rural Housing and

Community Development Service (RHCDS), a successor agency to the

Farmers Home Administration (FmHA).

RHS employee. Any employee of RHS, or any employee of the Rural

Development mission area who carries out grant or loan origination or

servicing functions for the section 502 or 504 programs.

RHS interest rate. The unsubsidized interest rate offered by RHS

for loans made on program terms.

Rural area: 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 immediate

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, is not contained within a Metropolitan Statistical Area, and

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 a Metropolitan Statistical Area), 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.

Rural Development. A mission area within USDA which includes RHS,

Rural Utilities Service (RUS), and Rural Business-Cooperative Service

(RBS).

Scheduled payment. The monthly or annual installment on a

promissory note plus escrow (if required), as modified by any payment

subsidy agreement, delinquency workout agreement, other documented

agreements between RHS and the borrower, or protective advances.

Secured loan. A loan that is collateralized by property so that in

the

[[Page 59783]]

event of a default on the loan, the property may be sold to satisfy the

debt.

Security property. All the property that serves as collateral for

an RHS loan.

Subsidy. Interest credit, payment assistance, or deferred mortgage

assistance received by a borrower under the section 502 or 504

programs.

Total debt ratio. The amount paid by the borrower for PITI and any

recurring monthly debt, divided by repayment income.

Unauthorized assistance. Any loan, payment subsidy, deferred

mortgage payment, or grant for which there was no regulatory

authorization or for which the recipient was not eligible.

U.S. citizen. An individual who resides as a citizen in any of the

50 States, the District of Columbia, 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.

USDA. The United States Department of Agriculture.

Unsecured loan. A loan evidenced only by the borrower's promissory

note.

Value appreciation. The current market value of the property minus:

the balance due prior lienholders, the unpaid balance of the RHS debt,

unreimbursed closing costs (if any), principal reduction, the original

equity (if any) of the borrower, and the value added by capital

improvements.

Very low-income. An adjusted income that does not exceed the HUD-

established very low-income limit (generally 50 percent of median

income adjusted for household size) for the county or the Metropolitan

Statistical Area where the property is or will be located.

Veterans preference. A preference extended to any person applying

for a loan or grant under this part who served on active duty and has

been discharged or released from the active forces on conditions other

than dishonorable from the United States Army, Navy, Air Force, Marine

Corps, or Coast Guard. The preference applies to the serviceperson, or

the family of a deceased serviceperson who died in service before the

termination of such war or such period or era. The applicable

timeframes are:

(1) During the period of April 6, 1917, through March 31, 1921;

(2) During the period of December 7, 1941, through December 31,

1946;

(3) During the period of June 27, 1950, through January 31, 1955;

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

after January 31, 1955, but on or before May 7, 1975; or

(5) During the period beginning August 2, 1990, and ending the date

prescribed by Presidential Proclamation or law.

Secs. 3550.11-3550.49 [Reserved]

Sec. 3550.50 OMB control number.

The information collection requirements contained in this

regulation have been approved by the Office of Management and Budget

(OMB) and have been assigned OMB control number 0575-0166. Public

reporting burden for this collection of information is estimated to

vary from 5 minutes to 3 hours per response, with an average of 1\1/2\

hours per response, including time for reviewing instructions,

searching existing data sources, gathering and maintaining the data

needed, and completing and reviewing the collection of information.

Send comments regarding this burden estimate or any other aspect of

this collection of information, including suggestions for reducing this

burden to the Department of Agriculture, Clearance Officer, STOP 7602,

1400 Independence Ave, SW., Washington, DC 20250-7602. You are not

required to respond to this collection of information unless it

displays a currently valid OMB control number.

Subpart B--Section 502 Origination

Sec. 3550.51 Program objectives.

Section 502 of the Housing Act of 1949, as amended authorizes the

Rural Housing Service (RHS) to provide financing to help low- and very

low-income persons who cannot obtain credit from other sources obtain

adequate housing in rural areas. Resources for the section 502 program

are limited, and therefore, applicants are required to use section 502

funds in conjunction with funding or financing from other sources, if

feasible. Sections 3550.52 through 3550.73 set forth the requirements

for originating loans on program terms. Section 3550.74 describes the

differences for originating loans on nonprogram (NP) terms.

Sec. 3550.52 Loan purposes.

Section 502 funds may be used to buy, build, rehabilitate, improve,

or relocate an eligible dwelling and provide related facilities for use

by the borrower as a permanent residence. In limited circumstances

section 502 funds may be used to refinance existing debt.

(a) Purchases from existing RHS borrowers. To purchase a property

currently financed by an RHS loan, the new borrower must assume the

existing RHS indebtedness. Section 502 funds may be used to provide

additional financing or make repairs. Loan funds also may be used to

permit a remaining borrower to purchase the equity of a departing co-

borrower.

(b) Refinancing non-RHS loans. Debt from an existing non-RHS loan

may be refinanced if the existing debt is secured by a lien against the

property, RHS will have a first lien position on the security property

after refinancing, and:

(1) In the case of loans for existing dwellings, if:

(i) Due to circumstances beyond the applicant's control, the

applicant is in danger of losing the property; and

(ii) The debt is over $5,000 and was incurred for eligible program

purposes prior to loan application or was a protective advance made by

the mortgagee for items covered by the loan to be refinanced, including

accrued interest, insurance premiums, real estate tax advances, or

preliminary foreclosure costs.

(2) In the case of loans for a building site without a dwelling,

if:

(i) The debt to be refinanced was incurred for the sole purpose of

purchasing the site;

(ii) The applicant is unable to acquire adequate housing without

refinancing; and

(iii) The RHS loan will include funds to construct an appropriate

dwelling on the site for the applicant's use.

(3) Debts incurred after the date of RHS loan application but

before closing may be refinanced if the costs are incurred for eligible

loan purposes and any construction work conforms to the standards

specified in this part.

(c) Refinancing RHS debt. Under limited circumstances, an existing

RHS loan may be refinanced in accordance with Sec. 3550.204 to allow

the borrower to receive payment assistance.

(d) Eligible costs. Improvements financed with loan funds must be

on land which, after closing, is part of the security property. In

addition to acquisition, construction, repairs, or the cost of

relocating a dwelling, loan funds may be used to pay for:

(1) Reasonable expenses related to obtaining the loan, including

legal, architectural and engineering, technical, title clearance, and

loan closing fees; and appraisal, surveying, environmental, tax

monitoring, and other technical services; and personal liability

insurance fees for Mutual Self-Help borrowers.

(2) The cost of providing special design features or equipment when

necessary because of a physical disability of the applicant or a member

of the household.

[[Page 59784]]

(3) Reasonable connection fees, assessments, or the pro rata

installment costs for utilities such as water, sewer, electricity, and

gas for which the borrower is liable and which are not paid from other

funds.

(4) Reasonable and customary lender charges and fees if the RHS

loan is being made in combination with a leveraged loan.

(5) Real estate taxes that are due and payable on the property at

the time of closing and for the establishment of escrow accounts for

real estate taxes, hazard and flood insurance premiums, and related

costs.

(6) Fees to public and private nonprofit organizations that are tax

exempt under the Internal Revenue Code for the development and

packaging of loan applications, except for loans related to the

purchase of an RHS Real Estate Owned (REO) property.

(7) Purchasing and installing essential equipment in the dwelling,

including ranges, refrigerators, washers or dryers, if these items are

normally sold with dwellings in the area and if the purchase of these

items is not the primary purpose of the loans.

(8) Purchasing and installing approved energy savings measures and

approved furnaces and space heaters that use fuel that is commonly

used, economical, and dependably available.

(9) Providing site preparation, including grading, foundation

plantings, seeding or sodding, trees, walks, yard fences, and driveways

to a building site.

(e) Loan restrictions. Loan funds may not be used to:

(1) Purchase an existing manufactured home, or for any other

purposes prohibited in Sec. 3550.73(b).

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

used principally for income-producing purposes.

(3) Pay fees, commissions, or charges to for-profit entities

related to loan packaging or referral of prospective applicants to RHS.

Sec. 3550.53 Eligibility requirements.

(a) Income eligibility. At the time of loan approval, the

household's adjusted income must not exceed the applicable low-income

limit for the area, and at closing, must not exceed the applicable

moderate-income limit for the area (see Sec. 3550.544).

(b) Citizenship status. The applicant must be a United States

citizen or a noncitizen who qualifies as a legal alien as defined in

Sec. 3550.10.

(c) Primary residence. Applicants must agree to and have the

ability to occupy the dwelling on a permanent basis.

(1) Because of the probability of transfer, loans will not be

approved for military personnel on active duty unless the applicant

will be discharged within a reasonable period of time.

(2) Because of the probability of moves after graduation, loans

will not be approved for a full-time student unless 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.

(3) If the home is being constructed or renovated an adult member

of the household must be available to make inspections and authorize

progress payments as the dwelling is being constructed.

(d) Eligibility of current homeowners.

Current homeowners are not eligible for initial loans except as

follows:

(1) Current homeowners may receive RHS loan funds to:

(i) refinance an existing loan under the conditions outlined in

Sec. 3550.52(b);

(ii) purchase a new dwelling if the current dwelling is deficient

housing as defined in Sec. 3550.10; or

(iii) make necessary repairs to the property which is financed with

an affordable non- RHS loan.

(2) Current homeowners with an RHS loan may receive a subsequent

loan.

(e) Legal capacity. Applicants must have the 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.

(f) Suspension or debarment. Applications from applicants who have

been suspended or debarred from participation in federal programs will

be handled in accordance with 7 CFR part 3017.

(g) Repayment ability. Applicants must demonstrate adequate

repayment ability.

(1) A very low-income applicant is considered to have repayment

ability when the monthly amount required for payment of principal,

interest, taxes, and insurance (PITI) does not exceed 29 percent of the

applicant's repayment income, and the monthly amount required to pay

PITI

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