Processing Requests for Section 515 Rural Rental Housing (RRH) Loans

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

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

Farmers Home Administration (FmHA), proposes to amend its regulations

for processing loan requests for Rural Rental Housing (RRH) assistance.

This action is taken to strengthen the priority point system and

improve loan processing procedures to better accomplish the program's

purpose of providing rental housing to rural areas of greatest need.

DATES: Written comments on this Proposed Rule must be received on or

before March 8, 1996.

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

Chief, Regulation Analysis and Control Branch, Rural Housing Service,

U.S. Department of Agriculture, Ag Box 0743, 14th Street and

Independence Avenue, S.W., Washington, D.C. 20250. All written comments

will be available for public inspection at the above address during

normal working hours.

FOR FURTHER INFORMATION CONTACT: Linda Armour, Loan Specialist, Multi-

Family Housing Processing Division, Rural Housing Service, USDA, Room

5349--South Building, Ag Box 0781, Washington, D.C. 20250, telephone

(202) 720-1608.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be not-significant for purposes of

Executive Order 12886 and therefore has not been reviewed by the Office

of Management and Budget.

Paperwork Reduction Act

The information collection requirements contained in this

regulation have been previously 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 0575-0047, in accordance with the

Paperwork Reduction Act of 1995. This proposed rule does not impose any

new information collection requirements from those approved by OMB.

Civil Justice Reform

This proposed rule has been reviewed under Executive Order 12778,

Civil Justice Reform. If this proposed rule is adopted: (1) All state

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

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

(3) administrative proceedings in accordance with Sub-title H of Title

II of Pub. L. 103-354 must be exhausted before bringing suit in court

challenging action taken under this rule.

Unfunded Mandate Reform Act

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

104-4, establishes requirements for 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,

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 program to eliminate unnecessary regulations and

improve those that remain in force.

Programs Affected

The affected program is listed in the Catalog of Federal Domestic

Assistance under Number 10.415, Rural Rental Housing Loans.

Intergovernmental Consultation

For the reasons set forth in the Final Rule related Notice(s) to 7

CFR part 3015, subpart V, this program is 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 the proposed action does not constitute a major Federal action

significantly affecting the quality of the human environment and in

accordance with the National Environmental Policy Act of 1969, Public

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

Regulatory Flexibility Act

This proposed 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/Discussion

RHS utilizes a point-score system to prioritize rural areas

according to their potential need for RRH assistance, based on

statutory requirements and preferences. Priority points ranging from

[[Page 1154]]

0 to 40 are assigned to rural counties and places based on their rural

median household income compared to the state's rural median income;

priority points ranging from 0 to 40 are similarly assigned based on

the county's or place's percentage of substandard housing compared to

the state's percentage. In addition, points are used to accomplish two

preferences required by statute: (1) Section 515(z) of the Housing Act

of 1949 (7 U.S.C. 1485(z)) requires the Secretary to give preference to

any project that will serve the needs of a rural community located 20

or more miles from an urban area. Twenty-five points are given for this

purpose. (2) Section 515(j) of the Housing Act of 1949 (7 U.S.C.

1485(j)) requires that, ``For the purpose of achieving the lowest cost

in providing units in newly constructed projects assisted under this

section, the Secretary shall give a preference in entering into

contracts under this section for projects which are to be located on

specific tracts of land provided by states, units of local government,

or others if the Secretary determines that the tract of land is

suitable for such housing, and that affording such preference will be

cost effective.'' Five points are given to accomplish this preference.

Recent findings indicate that the priority point system is not

always effective in directing RRH funds to rural areas with the

greatest need for affordable housing. One reason cited for this is

that, by awarding 25 points for proposals located 20 or more miles from

an urban area, other eligible rural communities with equal or higher

scores for income and substandard housing, and with comparable or

greater demand, have been excluded from successfully competing for

funds. The large number of points given for the mileage preference has

also led, in some cases, to the development of units in remote areas

with insufficient demand, resulting in slow rent-up and/or vacancy

problems. Another concern is the overdevelopment of these high-pointed

areas because of the competition to submit preapplications with the

highest point score.

Recent regulatory revisions have addressed the latter concern.

Effective October 1, 1993, (58 FR 44255) the Agency implemented its

``build and fill'' policy which prohibits the authorization of RRH

units in communities where similar-type units are already approved,

under construction, or have not achieved their projected occupancy

level; or where similar-type units are experiencing vacancy problems or

have a Servicing Market Rate Rent (SMR) pending or in effect. This

policy has been effective in deterring overdevelopment of high-pointed

areas and will continue to be followed by the Agency.

To address concerns that the large number of points awarded to

proposals located 20 or more miles from urban areas has excluded other

eligible rural areas, we propose to reduce the number of points for

this factor. This will enable more areas to compete on the basis of

income and substandard housing.

The Agency will continue to award 5 points for proposals with

donated land. However, we propose to modify this section to award 5

points for proposals with donated land or proposals that provide grants

for at least 10 percent of the total development cost.

A recent legislative amendment contained in H.R. 3838 and S. 2049

in FY 95 which would have allowed the Secretary to discontinue the

priority point system and, instead, select rural areas for RRH

assistance based on objective criteria, failed to be enacted. The

Agency supports and continues to seek this statutory authority, which

would give RHS more flexibility in directing Section 515 funds to rural

areas of greatest need. The regulatory revisions in this proposed rule

partially address concerns raised over the priority point system. To

fully address these concerns, statutory changes are needed. The

proposed revisions represent an improved system based upon significant

input from the public and RHS field employees.

In addition to the revisions to the priority point system, we are

proposing modifications to the market analysis requirements and the

market review process. The changes are intended to improve the Agency's

ability to evaluate market demand and reduce the risk of developing

units in areas with insufficient demand.

In recent years Section 515 funding levels have been severely

reduced while the need and demand for affordable rental units in rural

areas continues to grow. To develop as many RRH units as possible, it

has become increasingly important to develop partnerships with state

and local communities and other parties with an interest in developing

low-income housing. The proposed rule includes guidance on loan

proposals in which the Agency is participating with other funding

sources.

1. The following revisions are proposed to the priority point

system:

a. The Agency plans to award 10 points for proposals that will

serve rural communities 20 or more miles from an urban area. Ten points

gives preference to truly rural areas but is not so great that it

excludes other rural communities from competing.

b. The Agency is proposing to award priority points for loan

requests in areas with the highest share or percentage of rural renter

households at or below 60 percent of the county median income who are

paying in excess of 30 percent of their household income for rent.

Along with income and substandard housing, this is a statistically

measurable indicator of potential need for affordable housing. A

further consideration, however, is whether the need is for additional

units or for additional subsidies to make existing units more

affordable. The Agency's build and fill policy prohibits development of

new units if the need is for rent subsidies and not for additional

units. If this option is implemented, points will be calculated in a

manner consistent with the method used for income and substandard

housing.

2. The Agency is inviting comments on the following additional

factors which are being considered for inclusion in the priority point

system. These changes are not included in the proposed rule text;

however, the Agency is interested in comments, for and against the

proposed changes, and may include some form of the changes in the final

rule.

a. To maximize program funds, encourage partnerships with states

and local communities, and provide service to areas and/or households

that are underserved, we are considering awarding points for proposals

that are partially funded from other sources. Proposals would be

subject to specific conditions: (1) The total debt service would need

to be comparable to that of a RHS loan; (2) For limited profit

borrowers, the profit base for determining return to owner would be

made in accordance with Sec. 1944.215(n). The borrower contribution

would be based on the total development cost or security value and

could not exceed the 3 or 5 percent borrower contribution required by

Sec. 1944.213 (b), except as permitted by Sec. 1944.215 (n); (3) The

total of all loans and grants could not exceed the amount needed to

make the project affordable; and (4) Construction would be subject to

the cost containment provisions of Sec. 1944.215(a).

b. To ensure that underserved areas receive consideration, the

Agency is considering awarding points to projects located in

underserved counties identified by the Secretary using specific,

objective criteria. Points awarded under this provision would be

retained even if the preapplication is not authorized in the fiscal

year the area was designated underserved. This factor

[[Page 1155]]

would not be implemented if the set aside for targeted areas is

included in the program reauthorization in the future.

c. We are soliciting comments on the merits of modifying the

present method of awarding points for income and substandard housing.

The Agency presently awards points for income based on the county's or

area's rural median income compared to the State's rural median income.

The method under consideration awards points for income based on the

place's or county's share of rural households with incomes at or below

60 percent of the county rural median income. The place's or county's

share would be based on one of three different approaches, which

produce different results in point scores. The first approach

calculates the percentage of rural households at or below the county

rural median income as a percentage of the place's or county's total

rural households. For example, in County 1, Place A has 1,600

households, of which 450 are at or below 60 percent of the county rural

median income. Place A has a percentage of 28 for income (450/1,600).

Place B, with 9,000 households and 450 households at or below 60

percent of the county rural median income, has a percentage of 5 for

income (450/9,000). Using this approach, although both places have the

same number of households at or below 60 percent of county rural

median, Place A would receive the higher number of priority points for

income. The second approach calculates the place's percentage of rural

households at or below 60 percent of the county rural median income as

a percentage of the county's total rural households at or below 60

percent of the county rural median income. Using the same two places as

an example, if County 1 has a total of 1,200 rural households that are

at or below 60 percent of the county rural median income, both Place A

and Place B would have a percentage for income of 37.5 (450/1,200) and

would score the same number of priority points for income. The county's

percentage would be calculated as a percentage of the State's total.

The third approach calculates the percentage of the place's or county's

rural households at or below 60 percent of the county rural median

income as a percentage of the State's total rural households at or

below 60 percent of the county rural median income. Continuing with the

same example, if the State has a total of 200,000 households that are

at or below 60 percent of the county rural median income, Place A and

Place B would again have the same percentage of the total (450/200,000)

and score the same number of priority points. However, Place C in

County 2, with a population of 8,000 and 800 households at or below 60

percent of the county rural median income, has a higher percentage of

the State's total than Places A and B and scores a higher number of

priority points. The Agency would like comments on the merits of

considering the place's or county's share of households at or below 60

percent of the county rural median income and, if implemented, which of

the three approaches should be used as the basis for calculating the

place's and county's percentage. The third approach, which calculates

the place's or county's percentage as a percentage of the State's

total, has the potential of directing points to larger rural

communities or counties but would reach the largest numbers of

households that are at or below 60 percent of the county rural median

income. Based on the comments received, the Agency will decide if the

proposed method should be implemented and, if so, which of the three

approaches for calculating points should be used. The method and

approach that is used to award points for income will also be used to

award points for substandard housing and for rent overburden if the

rent-overburden option is implemented. Again, the three approaches for

calculating percentages for income, substandard housing, and rent-

overburden are: (1) as a percentage of the place's or county's total

households; (2) as a percentage of, respectively, the county's total

rural households at or below 60 percent of the county rural median

income, the county's total rural households in substandard housing, or

the county's total rural households at or below 60 percent of income

paying in excess of 30 percent of their income for rent; and (3) as a

percentage of, respectively, the State's total rural households at or

below 60 percent of county rural median income, the State's total rural

households in substandard housing, or the State's total rural

households at or below 60 percent of county rural median income who are

paying in excess of 30 percent of their income for rent.

3. The Agency is considering implementing a preliminary

preapplication stage and/or preliminary market analysis process. The

objective is to require sufficient information to enable the Agency to

make a preliminary determination of eligibility and feasibility, while

reducing the cost to the applicant for proposals that lack sufficient

priority for funding, as well as reducing Agency review time. Proposals

that appear to be eligible and feasible, and have sufficient priority

to be potentially funded within 24 months, would be invited to submit a

full preapplication and/or market study. No further preapplications

would be considered for the market area pending receipt of the complete

preapplication and/or market study within a specified timeframe.

Further processing would be based on a full eligibility and feasibility

review.

We are considering: (1) A simplified preliminary preapplication

stage, including a simplified preliminary market analysis, or (2) A

full preapplication with a simplified market analysis. If the second

option is implemented, a full market analysis will be required for the

eligibility and feasibility determination.

Information required at the preliminary preapplication stage would

include:

a. A description of the proposed project: type; number and bedroom

size of units; related facilities, if any; loan amount; number of RA

units requested; and number of units that will be targeted for Low-

Income Housing Tax Credits (LIHTC).

b. Site information: site plan; evidence of site control; evidence

that the site is, or will be, appropriately zoned; evidence of

existing, or soon to be available, utilities; and location map showing

relationship to facilities and services.

c. Preliminary budget and construction cost figures.

d. Preliminary applicant eligibility information: draft

organizational papers and financial statements for each principal.

e. Preliminary plans and specifications.

f. Preliminary market information:

(1) A description of the community (population growth or decline,

current economic conditions, types of employment, services and

facilities).

(2) The number of households by tenure (owner or renter) and

income.

(3) A survey of existing rental units including rent structure,

vacancies, and, when possible, rent-up history and extent of waiting

lists. The survey must include all RHS and similar assisted multifamily

units and a representative sampling of conventionally financed

multifamily units.

4. The Agency intends to establish a minimum priority point score

of 30 for retaining preapplications. The State Director will have the

authority to establish a higher or lower threshold by state, county, or

other division, which must be published in a State Instruction.

[[Page 1156]]

5. Section 1944.211 (a)(15) is added to include specific

eligibility requirements for existing or former RHS borrowers.

6. Section 1944.213 (f)(3) is revised to clarify that the

provisions of this section apply to both preapplications and

applications.

7. Section 1944.231 (c)(5) is revised to permit states to use a

computerized tracking system to supplement or replace Form FmHA 1905-

11, ``Application and Processing Card - Association'', provided

tracking requirements are met.

8. Section 1944.231 (i) is revised to clarify that the next

preapplication selected for further processing is the highest ranked

preapplication as of the date that processing levels permitted (i.e.,

as of the date that one or more loans were obligated, making sufficient

funds available within authorized funding limits).

9. Section 1944.233, ``Participation with other funding sources'',

is added to provide guidance on RRH loans that are funded jointly by

RHS and other partners with interests in developing low-income housing.

With reduced program levels, joint funding allows the Agency to develop

the maximum possible number of units.

10. Section 1944.234, ``Actions prior to loan approval'', is added

to clarify that eligibility and feasibility requirements must be

reviewed prior to loan approval.

11. Exhibit A-7 is modified to:

a. Require documentation regarding the availability of other credit

at the servicing official's discretion.

b. Allow the State Director to authorize use of a market survey for

small projects of 12 or fewer units.

c. Specify that the market analysis must address need and demand

for both family and elderly households. The proposed complex type

(family or elderly) will be determined by the greater need of the

market.

12. Revisions are proposed to Exhibit A-8, ``Outline of a

Professional Market Study'', to: (1) Modify the demand forecast; (2)

place more emphasis on the recommended unit mix based on an analysis of

household sizes and the unit mix of existing units; (3) allow current

year estimates from reliable sources, which must be identified by the

analyst; and (4) require the analyst to include analytical text with

the demographic data.

Summary of Proposed Changes for Comments

Following is a summary of the major changes in this rule for which

comments are invited:

1. A reduction in priority points from 25 points to 10 for

proposals that will be located 20 or more miles from an ineligible

area.

2. A proposal to award priority points based on the area's share of

the state's or county's total income-eligible households who are paying

in excess of 30 percent of their household income for rent.

3. While not included in the text of the proposed rule, the Agency

is inviting comments on the merits of:

a. Changing the method of awarding priority points for income from

the current method of comparing the place's or county's rural median

income to the state's rural median income to a method that takes into

consideration the place's or county's share of households below 60

percent of the county rural median income. Three approaches are being

considered for calculating the place's or county's share: as a

percentage of the place's or county's total households; as a percentage

of the county's total rural households below 60 percent of the county

rural median income; or as a percentage of the state's total rural

households below 60 percent of the county rural median income. If the

revised method is implemented, the same approach selected for

calculating the place's or county's percentage will be implemented for

substandard housing and for rent-overburden if, based on comments

received, the Agency determines that rent-overburden will be added to

the priority point score system.

b. Awarding points for proposals that will be partially funded from

other sources.

c. Awarding points for proposals that will be located in

underserved areas identified by the Secretary.

4. Implementation of a preliminary preapplication and/or market

analysis process.

5. A revision to the market analysis requirements that will permit

the State Director to authorize the use of a market survey for small

proposals of 12 or less units under certain conditions.

6. A requirement that the market analysis address both family and

elderly need and demand, which will be used in determining the type of

project that is proposed.

Implementation Proposal

The subject rule proposes changes to the manner in which

preapplications are processed, including the priority point system. The

Agency intends to implement the revised priority point system on

October 1, 1996. As of that date, all preapplications on hand, where an

AD-622 inviting a formal application has not been issued, will be

subject to the revised system. All preapplications will be rerated and

reranked based upon the priority point system in the final rule without

regard to previous priority processing score or ranking. We do not

intend to ``grandfather'' existing preapplications or have a ``phase-

in'' period. RHS recognizes the impact of this action on

preapplications which are in process. Potential applicants should be

aware of the proposed changes when they are developing a proposal. RHS

loan officials are encouraged to include information on the proposed

changes to potential applicants. All other provisions of the final rule

will become effective 30 days after publication of the final rule.

List of Subjects in 7 CFR Part 1944

Administrative practice and procedure, Aged, Handicapped, Loan

programs--Housing and community development, Low and moderate income

housing--Rental, Mortgages, Nonprofit organizations, Rent subsidies,

Rural housing.

Therefore, as proposed, part 1944, chapter XVIII, title 7, Code of

Federal Regulations is amended as follows:

PART 1944--HOUSING

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

follows:

Authority: 42 U.S.C. 1489.

Subpart E--Rural Rental and Rural Cooperative Housing Loan

Policies, Procedures, and Authorizations

2. Section 1944.211 is amended by revising the introductory text of

paragraph (a)(2) and adding paragraph (a)(15) to read as follows:

Sec. 1944.211 Eligibility requirements.

(a) * * *

(2) Be unable to obtain the necessary credit from private or

cooperative sources on terms and conditions that allow establishment of

rent or occupancy charges within the payment ability of eligible

tenants or members.

* * * * *

(15) The applicant, including the principals, must be in compliance

with the requirements of existing RHS debts and must provide regular

financial and other required reports.

(i) In unusual circumstances, an applicant or principal with an

approved workout plan in effect to correct deficiencies in an existing

RHS debt may be considered for eligibility if the applicant or

principal has been in compliance with the provisions of the workout

plan for a period of time consistent with the extent of the

[[Page 1157]]

deficiencies; however, in no case will the period of compliance be less

than 6 months. The State Director may request a waiver to this

requirement for borrowers who have acted in good faith but are in non-

compliance through circumstances beyond their control. The State

Director will submit a request for exception to the Deputy

Administrator, Multi-Family Housing, with clear documentation to

support the request.

(ii) Applicants or principals, including former borrowers or

principals, with serious violations such as fraud, embezzlement, or

consistent fair housing violations will not meet eligibility

requirements regardless of compliance with existing workout plans. Fair

housing violations include, but are not limited to: racial or other

discrimination or segregation in tenant selection, project location,

maintenance of units, amenities, handicap accessibility, recreational

facilities, or management services; failure to maintain units in a safe

and sanitary condition; failure to maintain and utilize a current and

meaningful Affirmative Fair Housing Marketing Plan; unacceptable

Compliance Reviews.

* * * * *

3. Section 1944.213 is amended by revising paragraph (f)(3) to read

as follows:

Sec. 1944.213 Limitations.

* * * * *

(f) * * *

(3) Status. When a loan proposal or project exists in the market

area which meets any of the criteria established in paragraph (f)(2) of

this section, loan requests in the same market area will be processed

in accordance with this paragraph (f)(3) and Sec. 1944.231 of this

subpart. This does not affect the processing of loan requests in other

market areas. Deferred loan requests will be kept on file subject to

the same time restrictions contained in Sec. 1944.231 (c) of this

subpart.

(i) For preapplications, a preliminary eligibility and feasibility

determination will be made if the priority point score warrants. If the

proposal does not appear eligible and/or feasible, the preapplication

will be rejected. If the proposal appears eligible and feasible but the

market meets any of the conditions of paragraph (f)(2) of this section,

the applicant will be informed that the preapplication appears eligible

and feasible but further processing is deferred until the conditions of

paragraph (f)(2) of this section no longer apply.

(ii) For applications to finance new units, if the market meets any

of the conditions of paragraph (f)(2) of this section, further

processing of the application will be deferred until the conditions of

paragraph (f)(2) of this section no longer apply.

* * * * *

4. Section 1944.215 is amended by revising paragraphs (n)(1) and

(n)(2) to read as follows:

Sec. 1944.215 Special conditions.

* * * * *

(n) * * *

(1) Cash contributions made by the applicant, which, when added to

the loan and grant amounts from all sources, does not exceed the

security value of the project.

(2) The value of the building site or essential related facilities

contributed by the applicant up to the amount which, when added to the

loan and grant amounts from all sources, is not in excess of the

security value of the project. An appraisal will be done by an RHS

employee authorized to make appraisals or an RHS authorized

representative in accordance with applicable RHS regulations. Value of

the applicant's contribution will be determined on an ``as is'' basis

less any amount owed on the property.

* * * * *

5. Section 1944.221 is amended by revising the introductory text of

paragraph (a) to read as follows:

Sec. 1944.221 Security.

(a) Mortgage. Each loan will be secured in a manner that adequately

protects the financial interest of the Government. A first mortgage

will be taken on the property purchased or improved with the loan,

except as indicated in paragraphs (a)(1) and (a)(3) of this section

and, for projects that are funded jointly by RHS and other sources, as

indicated in Sec. 1944.233 (b) of this subpart.

* * * * *

6. Section 1944.231 is amended by revising the heading and the

introductory text, the introductory text of paragraph (c)(5),

paragraphs (d)(3), (d)(4), (e)(1), (i)(1)(i), (i)(2)(i), (i)(3)(i),

(i)(4)(i), and (k)(5); and by adding a new paragraph (d)(5), to read as

follows:

Sec. 1944.231 Processing loan requests.

Loan requests will be processed in accordance with this section to

assure that program intent is achieved and loan funds are utilized

expeditiously and prudently. A 2-stage application process is used. A

preapplication is used to determine the applicant's eligibility,

project feasibility, and potential priority for loan funds, thereby

eliminating proposals which have little to no chance of success or

funding. Selected preapplications will be invited to submit a formal

application in accordance with this section. The State Director is

responsible to coordinate efforts with HUD in accordance with Exhibit K

(available in any RHS office) to determine if HUD is considering a

similar request for funding or has funded a similar proposal. The State

Director will provide the state agency responsible for administering

LIHTC with information on projects that are allocated LIHTC, in

accordance with Exhibit A-10 of this subpart. Paragraphs (a), (c)(5),

(c)(6), (c)(7), (d), and (e) of this section do not apply to RCH loan

requests.

* * * * *

(c) * * *

(5) The servicing official will rate the complete preapplication in

accordance with the priority point system contained in paragraph (d) of

this section. The priority point score, and any annotation, will be

utilized for ranking purposes. In the event multiple preapplications of

the same priority point score are received on the same day, they will

be considered to be received at the same time. The order of receipt

will be determined by the type of applicant and by random drawing if

necessary, as follows:

* * * * *

(d) * * *

(3) Projects which will serve the needs of rural communities

located at least 20 miles from the RHS eligibility line around urban

areas (regardless of state boundaries) considered ineligible for RHS

housing loans as determined by Sec. 1944.10 of subpart A of part 1944

of this chapter. Ten points will be granted for complexes which are at

least 20 miles from an ineligible area line over normally traveled

roads. Mileage will not be rounded up or down to the nearest whole

mile. In cases where the preapplication covers development of units on

sites in different locations, points will be awarded based upon the

location of the site in which the majority of the units will be

developed. In cases of equal number of units in different locations,

the distances will be averaged:

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

Miles Points

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

20.0 or more.................................................... 10

Less than 20.0.................................................. 0

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

(4) Projects in which a specific tract of land will be donated in

accordance with Sec. 1944.215 (r)(4) of this subpart or projects that

include grants equal to at least 10 percent of the total

[[Page 1158]]

development cost (TDC). Five points will be distributed as follows:

Complexes with donated land or grants of 5 points.

at least 10 percent of TDC.

Complexes without donated land or grants 0 points.

of at least 10 percent of TDC.

(5) Projects in areas with the highest percentage of households at

or below 60 percent of the county rural median income who are paying in

excess of 30 percent of their household income for rent. For this

purpose, each state will use place or county data based upon the latest

published census obtained from the National Office. If no place data is

available, county data will be used. The State Director may request

authority from the National Office to utilize other state-wide data

when it is available, reliable, and determined to be in the best

interest of the Agency. Up to 25 points will be awarded for households

at or below 60 percent of the county rural median income paying in

excess of 30 percent of the household's income for rent as follows:

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

Percentage of households Points

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

25 and above.............................. 25

20-24.9................................... 20

15-19.9................................... 15

10-14.9................................... 10

5-9.9..................................... 5

Less than................................. 5 0

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

(e) * * *

(1) The feasibility determination will include a review of feedback

on the market area from:

(i) HUD (and similar lenders, if applicable), in accordance with

exhibit K (available in any RHS office) and Sec. 1944.213 (f) of this

subpart.

(ii) Local RHS office(s) closest to the market area.

* * * * *

(i) * * *

(1) * * *

(i) Rated preapplications which have been reviewed for eligibility

and feasibility will be ranked numerically from highest to lowest based

upon points received in the priority processing system. When processing

levels permit, the servicing official will review the list and select

the highest ranking preapplication, as of the date processing levels

permit, i.e., as of the date one or more proposals were obligated, for

continued processing.

* * * * *

(2) * * *

(i) Rated preapplications which have been reviewed for eligibility

and feasibility will be ranked numerically from highest to lowest based

upon points received in the priority processing system. When processing

levels permit, the servicing official will review the list and select

the highest ranking preapplication, as of the date processing levels

permit, i.e., as of the date one or more proposals are obligated, for

continued processing.

* * * * *

(3) * * *

(i) The state will maintain ranking lists by district. Rated

preapplications which have been reviewed for eligibility and

feasibility will be ranked numerically from highest to lowest based

upon points received in the priority processing system. When processing

levels permit, the servicing official will review the list and select

the highest ranking preapplication, as of the date processing levels

permit, i.e., as of the date one or more proposals are obligated, for

continued processing.

* * * * *

(4) * * *

(i) Rated preapplications which have been reviewed for eligibility

and feasibility will be ranked numerically from highest to lowest based

upon points received in the priority processing system. When processing

levels permit, the servicing official will review the list and select

the highest ranking preapplication, as of the date processing levels

permit, i.e., as of the date one or more proposals are obligated, for

continued processing.

* * * * *

(k) * * *

(5) A current copy of Form FmHA 1905-11 or State-approved automated

processing or tracking card.

* * * * *

7. Section 1944.233 is added to read as follows:

Sec. 1944.233 Participation with other funding sources.

In order to develop the maximum number of affordable housing units

and promote partnerships with states, local communities, and other

partners with similar housing goals, participation loans are

encouraged. Apartment complexes developed with participation loans may

serve lower income households exclusively or may be marketed to

households with mixed incomes. The following will apply:

(a) Amount of RHS loan participation. RHS loan participation may

not be less than 25 percent of the total development costs.

(b) Amount of RHS RA participation. RHS RA can be provided on any

unit where the debt service does not exceed what the debt service would

have been on that unit if RHS had provided full financing. The number

of RHS RA units available for participation loans is limited and

established annually through FmHA Instruction 1940-L (available in any

RHS office).

(c) General conditions:

(1) The total funds provided by all sources may not exceed what is

necessary to make the project feasible in accordance with Sec. 1944.213

(a) of this subpart.

(2) The total debt from all sources is limited to the State

Director's approval authority unless written authorization is obtained

from the National Office in accordance with Sec. 1944.213 (b) of this

subpart.

(3) Complexes that will serve only lower income households must

comply with the cost containment provisions of Sec. 1944.215 (a) of

this subpart. Proposals which will also serve higher income households

and include additional amenities to ensure marketability must contain a

portion of units that comply with RHS cost containment standards. The

number of units that comply with RHS cost standards will be determined

by dividing the RHS loan amount by the state's average new construction

cost per unit for units developed without participation funding. For

example, on a $1 million proposal where RHS is financing $400,000 and

the state's average per-unit cost on non-participation loans is

$40,000, a minimum of 10 units must meet RHS cost containment

standards.

(4) The minimum borrower contribution will be based on the RHS loan

amount and determined in accordance with Sec. 1944.213 (b) of this

subpart.

(5) For limited profit borrowers, the return on investment (ROI)

will be calculated in accordance with Sec. 1944.215 (n) of this subpart

on the amount actually contributed by the borrower (excluding loans and

grants from other sources), not to exceed the limits established in

Sec. 1944.213 (b) of this subpart, i.e., a maximum of 3 or 5 percent of

the total development cost or the security value, whichever is smaller.

(6) If Low Income Housing Tax Credits are anticipated on a

proportion of units higher than the percentage receiving RA or similar

tenant subsidy, the market study must clearly reflect a need and market

for units without deep subsidy. It is not the intent of RHS to provide

servicing RA in the future nor can RHS provide RA on units which have a

debt service higher than those if RHS had provided full financing.

(d) Security requirements:

[[Page 1159]]

(1) RHS will take a first or parity lien in all instances where the

Agency's participation is 50 percent or more.

(2) If RHS participation is less than 50 percent, every effort

should be made to obtain a parity lien position. If a parity lien

cannot be negotiated, RHS may consider securing its debt in second

position. The State Director will submit requests to accept a second

lien position to the Deputy Administrator, Multi-Family Housing with

comments and recommendations.

(3) All lienholders must agree in writing that foreclosure action

under their lien will not be initiated without first discussing with

RHS and providing a reasonable notice.

(4) Security for a second or parity lien may not include project

income or revenue.

8. Section 1944.234 is added to read as follows:

Sec. 1944.234 Actions prior to loan approval.

Prior to loan approval the application will be reviewed for

continued eligibility. The applicant may be required to submit updated

information at that time.

9. Exhibit A-7 of subpart E is amended by revising paragraph E of

section I and by revising section II to read as follows:

Exhibits to Subpart E

Exhibit A-7--Information to be Submitted with Preapplication for a

Rural Rental Housing (RRH) or a Rural Cooperative Housing (RCH) Loan

* * * * *

I. * * *

E. Evidence Concerning the Test for Other Credit--Applicants

must be unable to obtain other credit at rates and terms that will

allow a unit rent or occupancy charge within the payment ability of

the occupants. Based upon a review of the applicant's financial

condition, the servicing official may require the applicant to

provide documentation regarding the availability of other credit.

* * * * *

II. Need and demand.

A. Economic justification, the number of units, and the type of

facility (i.e., family, elderly, congregate, mixed, group home, or

cooperative) will be based on the housing need and demand of

eligible prospective tenants or members who are permanent residents

of the community and its surrounding trade area. Since the intent of

the program is to provide housing for the eligible permanent

residents of the community, temporary residents of a community (such

as college students in a college town, military personnel stationed

at a military installation within the trade area, or others not

claiming their current residence as their legal domicile) may not be

included in determining need and project size. Similarly, homeowners

may not be included in determining need and project size. The market

study must include a discussion of the current market for single

family houses and how sales, or the lack of sales, will affect the

demand for elderly rental units. The market study may discuss how

elderly homeowners may reinforce the need for rental housing, but

only as a secondary market and not as the primary market. The market

study must assess need and demand for both family and elderly renter

households. The type of complex (family, elderly, etc.) that is

proposed by the applicant must reflect the greater need and demand

of the community. The bedroom mix of the proposed units must reflect

the need in the market area based on renter household size. For

example, if the market study shows a need for one-bedroom, two-

bedroom, three-bedroom, and four-bedroom units, the preapplication

must contain a corresponding percentage of each size unit. Market

feasibility for the proposed units will be determined by RHS based

on the market information provided by the applicant, RHS' knowledge

of the market area and judgment concerning the need for new units,

RHS' experience with the housing market in the State and local area,

and the U.S. Department of Housing and Urban Development's (HUD's)

or similar lender's analysis of market feasibility for the proposed

units.

B. The applicant must provide a schedule of the proposed rental

or occupancy rates and, for congregate housing proposals, a separate

schedule listing the proposed cost of any nonshelter service to be

provided.

C. For proposals where the applicant is requesting Low-Income

Housing Tax Credits (LIHTC), the applicant must provide the number

of LIHTC units and the maximum LIHTC incomes and rents by unit size.

This information will determine the levels of incomes in the market

area which will support the basic rents while also qualifying the

borrower for tax credits.

D. For Rural Cooperative Housing (RCH) proposals, market

feasibility will be evidenced by the names and addresses of

prospective members who have definitely affirmed their intention of

becoming cooperative members in the proposed project. In the event

some persons cannot be accepted for membership for financial or

other reasons, the cooperative should obtain more names than the

number of proposed units in order to assure adequate feasibility

coverage. The Cooperative Housing Survey form found at Exhibit A-4

of this subpart and in ``A Guide to Cooperative Housing'' may be

used for this purpose.

E. For Rural Rental Housing (RRH) proposals, except as permitted

by Section II. G. of this exhibit, a professional market study is

required. The qualifications of the person preparing the market

study should include some housing or demographic experience. The

following requirements apply:

(1) A table of contents, the analyst's statement of

qualifications, and a certification of the accuracy of the study

must be included.

(2) The market analyst must affirm that he/she will receive no

fees which are contingent upon approval of the project by RHS,

before or after the fact, and that he/she will have no interest in

the housing project. An analyst with an identity of interest with

the developer will need to fully disclose the nature of the

identity.

(3) The analyst must personally visit the market area and

project site and must certify to same in the market study. Failure

to do so may result in the denial of further participation by the

analyst in the Section 515 program.

(4) A detailed study based upon data obtained from census

reports, state or county data centers, individual employers,

industrial directories, and other sources of local economic and

housing information such as newspapers, Realtors, apartment owners

and managers, community groups, and chambers of commerce is

required. Exhibit A-8 of this subpart details the specific

information which professional market studies are required to

provide. The study must be presented in clear, understandable

language. Negative as well as positive market trends must be

disclosed and discussed. Statistical data must be accompanied by

analytical text which explains the data and its significance to the

proposed housing. Mathematical calculations must be expressed in

actual numbers and may be accompanied by percentages. Each table or

section must identify the source of the data. A brief statement of

the methodology used in the study should be included in the foreword

and in other sections where necessary for clarity. RHS personnel

will utilize the market study checklist found at Exhibit A-12

(available in any RHS office) as a means of measuring market study

credibility.

(5) The market study will include:

a. A complete description of the proposed site and its location

with respect to city boundary lines, residential developments,

employment centers, and transportation; the location and description

of available services and facilities and their distances from the

site; a discussion of the site's desirability and marketability

based on its location in the community, adjacent land uses, traffic

conditions, air or noise pollution, and the location of competitive

housing units; and a description of the site in terms of its size,

accessibility, and terrain.

b. Pertinent employment data, including the name and location of

each major employer within the community and market area, its

product or service, number of employees and salary range, commute

times and distances, and the year the employer was established at

the location. If income data cannot be obtained from individual

employers, salary information for the community can be obtained from

the state employment commission.

c. Population data required by Exhibit A-8, of this subpart,

including population figures by year, number and percentage of

increase or decrease, and population characteristics by age.

d. Household data required by Exhibit A-8, of this subpart,

including number of households by year, tenure (owner or renter),

age, income groups, and number of persons per household.

e. Building permits issued and demolitions by year by single

unit dwelling and multiple unit dwelling. In nonreporting

jurisdictions, this information may be substituted with the

[[Page 1160]]

number of requests for electric service connections, number of water or

sewer hookups, etc., obtained from local suppliers.

f. Housing stock by tenure and vacancy rates for total number of

units, one-unit buildings, two- or more-unit buildings, mobile

homes, and number lacking some or all plumbing facilities.

g. A survey of existing rental housing by name, location, year

built, number of units, amenities, bedroom mix, type (family,

elderly, etc.), rental rates, and rental subsidies if any.

h. A projection of housing need and demand and the analyst's

recommendation for the number, type, and size of units, based on the

number of RHS and LIHTC income-eligible renter households, the

existing comparable housing supply and vacancy rates, the absorption

rate of recently completed units, the number of comparable units

currently proposed or under construction, and current and projected

economic conditions.

F. For congregate housing proposals with central dining area or

housing involving a group living arrangement, a narrative statement

from local, state, or federal government agencies supporting the

current and long-range need for the facilities in the community and

its trade area is required.

G. For RRH proposals of 12 or fewer units, the State Director

may authorize the use of a market survey to establish market

feasibility on a case-by-case basis. This authority may be used when

there is evidence of strong market demand, for example, very low

vacancy rates and long waiting lists in existing assisted or

comparable rental units. The casefile must be documented

accordingly. Exhibits A-2, A-3, and A-5 of this subpart may be used

for the market survey.

* * * * *

10. Exhibit A-8 of subpart E is amended by revising the second,

third, and fourth paragraphs of the introductory text of the exhibit

and the introductory paragraph of section I; by adding an

introductory sentence to section III; by revising in section III

paragraphs B.3., B.7., C.2., and C.3.; and by revising section IV to

read as follows:

Exhibit A-8--Outline of Professional Market Study

* * * * *

This outline is to be used by analysts in the preparation of

market studies for the section 515 housing program. Need and demand

for both family and elderly households must be addressed in the

market study. The information will be used by the Rural Housing

Service (RHS) in evaluating the feasibility of the proposed housing.

The analyst must provide a statement of his/her experience and

qualifications for preparing a market analysis. All segments of this

outline must be addressed. Data sources and/or methodology must be

identified. Charts and tables must be accompanied by text which

analyzes the data and discusses its significance in relationship to

the proposed housing. The market study should include a summary of

the analyst's findings and recommendations, preferably at the

beginning of the study.

The outline provides for the demonstration of historical trends

and allows the analyst to use reliable current year estimates and

project 2 years into the future. Estimates and projections made by

the analyst must be supported by reliable data and methodology. The

analyst must include the most recent population and household

estimates and projections from the State data center, or similar

data source, when available. If State or other reliable estimates

are not available, the analyst must provide a statement to that

effect. RHS may require additional information if estimates or

projections depart from historical trends and are not supported by

data from reliable sources.

The estimate of need and demand will be made for both family and

elderly households in accordance with section IV of this exhibit.

The estimate is based on the number of renter households in the

appropriate age and/or income ranges, the existing comparable rental

supply, and current or planned construction of rental units. The

analyst's recommendation must take into consideration existing

vacancies, economic projections, and other factors that affect

demand. The analyst must discuss the number of renter households

that can afford and/or would be willing (based on rental rates in

the market) to pay the maximum tax credit rents without rental

assistance and the number of rental assistance income eligible

renter households. The analyst must also take into consideration the

sources of demand in determining the number of units that are

recommended, i.e., the number that can be expected to be absorbed

within the normal rent-up period. The absorption rate will be slower

if a large portion of the demand is expected to come from households

in substandard housing rather than from household growth.

Substandard housing is defined as: (1) Units lacking complete

plumbing; and (2) Overcrowded (1.01 or more per room).

In addition to recommending the total number of units, the

analyst must provide a recommendation for the unit mix, which must

be supported by appropriate documentation, e.g., statistics on the

growth rate of renter households by household size, information on

the absorption rate of recently completed rental units, vacancy

rates by unit size, etc.

* * * * *

I. * * *

The market area will be the community where the project will be

located and only those outlying rural areas which will be impacted

by the project (excluding all other established communities). The

market area must be realistic. The criteria should be described by

the analyst. When a difference of opinion exists in the market area

determined by RHS personnel and the market analyst, the market area

established by RHS will prevail. Except in specific cases of

congregate housing projects where an expanded market may be

justified, the market area will not include the entire county (or

parish, township, or other subdivision). Any deviation from this

definition must be coordinated with the servicing office. The

analyst will discuss the market area in terms of its economic base

and how it relates to surrounding communities, the county, and the

State. For example, describe whether the market area is a small

agricultural community, the county seat, a trade center, a seasonal

recreational area, and so forth. A map showing the market area is

required. The following is an example of a market area description:

* * * * *

III. * * *

The data presented in this section must be accompanied by

analytical text which discusses the significance of the data and its

relationship to the proposed housing.

* * * * *

B. * * *

3. Households. Provide a breakdown of households by town, market

area, and county for the last 2 census years, a current year

estimate, and a 2-year projection. Identify the source/method for

the current year estimate and the 2-year projection.

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

In group Persons per

Year Population quarters Households household

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

1980

1990

19____

PROJECTED: 19____ (2 years)

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

* * * * *

7. Households by size. Provide the number of households by

household size and tenure in the town and market area. This data

should be used in conjunction with the unit mix of existing

comparable units (Section III. C. of this exhibit) to determine the

appropriate unit mix for the proposed complex.

[[Page 1161]]

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

Total

Household size households Owner Renter

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

1 person

2 person

3 person

4 person

5 person

6 person

7 person

8 person

9 person

10 person

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

* * * * *

C. * * *

2. Housing stock. Provide, by tenure (owner/renter), the number

of units and the vacancy rates for single family homes, mobile

homes, multi-family units, and substandard units, from the 2 most

recent census years.

Example:

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

Single family Vacancy rate Mobile home Vacancy rate

Year -------------------------------------------- Multi- Vacancy -------------------------------------------

Own Rent Own Rent family rate Own Rent Own Rent

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

1980

1990

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

3. Existing rental housing. The analyst must determine where the

proposed project will fit into the present housing stock. To

accomplish this, the analyst will survey the existing units and

discuss if the units:

(a) Are generally comparable with the proposed units in rents

and amenities;

(b) Are less than desirable because of age or upkeep;

(c) Are inconveniently located;

(d) Do not provide the appropriate bedroom mix for the community

need, etc.

* * * * *

IV. Housing demand forecast.

The analyst must provide a projection of the rental housing

needs for a specified forecast period, which may not be longer than

2 years from the date the market analysis is completed or updated.

The source and method used in estimating the current number of

households and projecting the number of households for the forecast

period must be stated. The analyst must include a recommendation for

the number of units needed based on the low-income housing tax

credit (LIHTC) rents and income limits if the applicant is applying

for LIHTC; the number of units that can be supported with and

without rental assistance; and the recommended bedroom mix. The

recommendation for the number of units must take into consideration

the expected sources of demand (i.e., household growth, households

in substandard rental units), current and projected economic

conditions, the absorption rates of recently completed units, and

the vacancy rate of comparable units.

Calculation of Demand

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

Town Market area

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

a. Total renter households based on current

estimate plus 2-year projection (for

elderly proposals, total age-eligible

renter households)......................... ________ ________

b. RHS income eligible:

X ________%............................. ________ ________

LIHTC income eligible:

X ________%............................. ________ ________

RA income eligible:

X ________%............................. ________ ________

c. Plus vacancy rate of 5 percent of:

RHS income eligible renter households... ________ ________

LIHTC income eligible renter households. ________ ________

RA income eligible renter households.... ________ ________

d. Total demand (RHS)....................... ________ ________

Total demand (LIHTC).................. ________ ________

Total demand (RA)..................... ________ ________

e. Less number of comparable units.......... ________ ________

f. Less number of units under construction

or in the planning stage................... ________ ________

g. Net demand (RHS)......................... ________ ________

Net demand (LIHTC)...................... ________ ________

Net demand (RA)......................... ________ ________

h. Recommended number of units.............. ________ ________

i. Recommended number RA units.............. ________ ________

j. Recommended number of units by unit size

based on the size of income eligible renter

households and the existing supply of units

by bedroom size:...........................

[[Page 1162]]

1-Bedroom ________

2-Bedroom ________

3-Bedroom ________

4-Bedroom ________

5-Bedroom ________

The source and/or methodology for the estimated and projected number

of renter households: ________________

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

Dated: January 2, 1996.

Jill Long Thompson,

Under Secretary, Rural Economic and Community Development.

[FR Doc. 96-328 Filed 1-16-96; 8:45 am]

BILLING CODE 3410-07-P