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

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

and Community Development Service (RHCDS), a successor agency to the

Farmers Home Administration (FmHA), proposes to streamline and

reengineer its regulations and to utilize private sector processes and

techniques in the administration of its direct Single Family Housing

(SFH) portfolio. This action is taken to reduce regulations, improve

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

efficiency, flexibility, and effectiveness in managing its SFH

portfolio. The agency is centralizing the servicing of its SFH

portfolio loans to provide more timely and consistent supervised

credit. The effect of this action is to provide better service and

reduce the Code of Federal Regulations (CFR) coverage of the SFH

program by an estimated 90 percent.

DATES: Comments must be received on or before June 7, 1996.

ADDRESSES: Submit written comments in duplicate to the Director,

Regulations and Paperwork Management Division, Rural Housing Service,

U.S. Department of Agriculture, Room 6348, South Agriculture Building,

Washington, DC 20250. All written 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: Jean Leavitt, Senior Loan Specialist,

Single Family Housing Servicing and Property Management Division, RHS,

room 5307, South Agriculture Building, Washington, DC, 20250, telephone

(202) 720-1452.

SUPPLEMENTARY INFORMATION:

Classification

This proposed 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.

Executive Order 12778

This proposed rule has been reviewed under Executive Order 12778,

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

otherwise specifically provided 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 except as specifically

prescribed in the rule; and (3) administrative proceedings of the

National Appeals (7 CFR Part 11) must be exhausted before bringing

suit.

Unfunded Mandate Reform Act

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public

Law 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,

federal agencies generally must prepare a written statement, including

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 16 separate regulations

totaling 290 pages in the CFR.

Earlier this year, RHS 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 16 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

16 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%.

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.

[[Page 15396]]

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.

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 Loans and Grants (Section 504 Rural Housing Loans and Grants).

Intergovernmental Consultation

These programs are not subject to the provision of Executive Order

12372 which requires intergovernmental consultation with state and

local officials. See 7 CFR part 3015, subpart V (48 FR 29112, June 24,

1983) and FmHA Instruction 1940-J, ``Intergovernmental Review of

Farmers Home Administration Programs and Activities.''

Background Information

An Overview

The RHS is taking the next steps in the reengineering and

reinvention of the manner in which direct Section 502 and Section 504

loans and grants 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 proposed 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.

The RHS has over 725,000 direct Section 502 and 504 loans with

approximately 625,000 customers in its portfolio. With our Fiscal Year

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

anticipates making 35,000 new direct SFH loans this year. The

accounting system established by FmHA to maintain its vast farm,

housing, community and business loan programs is severely outdated and

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 services 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. The Agency intends to begin

implementing this system on October 1, 1996 with two pilot states.

Other states will be phased into the DLOS system through FY 1996 with

full implementation anticipated by September 30, 1997. Further

information on the implementation of the system follows.

The centralized servicing unit will be 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 will be

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 borrowers 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 undertaken a major redevelopment and consolidation of FmHA

regulations affecting the direct Section 502 and 504 programs. At the

current time, direct SFH customers are affected, in part, by the

following regulations:

7 CFR Part 1910, Subpart A--Receiving and Processing

Applications.

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 B--Collections.

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.

[[Page 15397]]

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 is consolidating 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 Federal Register. This streamlining makes the regulation more

concise and much easier to read and understand. The Agency is

developing a separate handbook with administrative matters such as what

forms must be filed and where to submit loan requests and the agency's

internal processing procedures. This handbook 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 will be implemented over a

one year period. Two pilot states will start the process and other

states will be added to DLOS over the next 12 months. The 12 month

implementation period is critical to ensure for the orderly transfer of

account information on 725,000 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. When RHS publishes this Proposed

Rule in final, it intends to remove from the CFR the following

regulations:

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 Account.

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.

These regulations deal 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 will be

amended at the time of our final rulemaking action to clearly indicate

that they no longer apply to the direct SFH programs:

7 CFR Part 1910, Subpart A--Receiving and Processing

Applications.

7 CFR Part 1951, Subpart B--Collections.

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.

After the effective date of the final rule, the direct SFH program

will be guided by 7 CFR Part 3550. The proposed handbook will provide

RHS field personnel and its customers with administrative guidance in

states under the DLOS system. In states not yet under the DLOS system,

RHS field personnel and its customers will be guided by current FmHA

Instructions. These current FmHA Instructions will serve as the

handbook for states not under the DLOS system. Where current FmHA

Instructions may differ from 7 CFR Part 3550, RHS will make changes to

the current FmHA Instructions to reflect such changes concurrently with

publication of the Final Rule.

For example, the proposed regulations provide for a different

manner in which interest credit recapture is calculated. Currently,

guidance for calculating interest credit recapture is published in 7

CFR Part 1951, Subpart I. The formula for determining recapture is very

complex requiring the calculation of the average interest rate and

number of months the borrower has lived in the property. In addition,

the borrower is not given credit for improvements made to the security

property. The proposed rule, in brief, provides credit for improvements

and limits recapture to 50% of value appreciation regardless of average

interest rate and the length of time the borrower has lived in the

property.

When the proposed rule is published in final, RHS intends to remove

7 CFR Part 1951, Subpart I from the CFR. Part 3550 will contain the

guidance on calculation of interest credit recapture, and the proposed

handbook will provide administrative guidance on handling recapture

under the new DLOS computer system. This process will work in states

with access to the DLOS computer system. However, in states without

access to DLOS, they will be unable to use the proposed handbook. These

states will continue to be guided by FmHA Instruction 1951-I which is a

duplicate of 7 CFR Part 1951, Subpart I. Although RHS will remove 7 CFR

Part 1951, Subpart I from the CFR, the FmHA Instruction will continue

to be used in states not under the DLOS computer system until DLOS is

fully implemented. RHS will amend FmHA Instruction 1951-I to include

the new guidance on calculation of interest credit recapture. In this

manner, RHS can ensure that its customers receive equal access to

program benefits. Everyone will be guided by 7 CFR Part 3550, and in

the aforementioned situation, states under DLOS will look to the

proposed handbook for administrative guidance, and states not under

DLOS will look to FmHA Instruction 1951-I for administrative guidance.

After full implementation of DLOS, all states will operate under the

proposed handbook and applicable FmHA Instructions will be removed from

field use.

This proposed method will ensure that all borrowers have access to

the same program benefits. However, some changes proposed 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

[[Page 15398]]

example, the proposed 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, borrowers in states under DLOS will be subject to a late

fee. Borrowers in states under the PLAS system will not be subject to a

late fee until they are put under the DLOS system. 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 725,000 loans to the new system. Where 7 CFR 3550 provides a

customer with any additional program benefits, RHS will ensure that all

customers are provided access to these benefits regardless of whether

their state is under DLOS.

Technical enhancements to improve program delivery:

(a) Section 502 Loan Origination

Funding Priorities

RHS has clarified the funding priorities for applications needing

immediate assistance. Previously, there were four categories which all

were eligible for priority funding. These categories for priority

funding were hardship applications, self-help housing applications,

participation loan applications, and applications for servicing type

loans. However, the agency recognizes the need for more explicit

guidance in selection of competing applications for limited resources.

In the interest of better serving our active borrowers, the agency

proposes to provide first priority to active borrowers needing

subsequent loans to correct health and safety hazards. The agency is

compelled to provide decent, safe and sanitary housing to active

borrowers and protect the government's security interest. Second

priority is a consolidated grouping giving preference to an application

for a hardship loan, Real Estate Owned (REO), a loan related to the

transfer of an existing RHS property, a self-help loan and a leveraging

loan made in conjunction with funding from the other sources.

Maximum Loan Amount

In order to minimize the impact of instituting escrow accounts for

borrowers, the maximum loan amount can include the cost of the charge

to establish an escrow account. The amount of the loan can exceed the

appraised value by the cost of an appraisal and the cost to establish

the escrow account. The agency considered this a fair practice for the

very low- and low-income customers we serve.

Deferred Mortgage Payments

A technical clarification was made which states that the amount

deferred will be up to 25 percent of the payment due at one percent

when a borrower qualifies for a deferred mortgage.

(b) Section 504 Originations

Net Family Assets

A technical clarification has been made to define net family assets

the same as in Section 502. This change will provide consistency in the

treatment of assets between the 502 and the 504 program.

Loan and Grant Purposes

Loan and grant funds may be used to refinance a debt incurred for

the installation as well as the assessment of utilities, prior to the

date of application.

Eligibility of Mobile and Manufactured Homes

The requirement that a mobile or manufactured home must need

repairs to remove health and safety hazards as a condition for 504

assistance has been removed. This revision is consistent with meeting

program objectives.

(c) Tax Service and the Escrow of Taxes and Insurance

Section 501(e) of the Housing Act of 1949 (42 U.S.C. Sec. 1471(e))

mandates the Agency to establish procedures under which SFH borrowers

are required to escrow for the payment of real estate taxes,

assessments and insurance.

RHS currently does not maintain escrow accounts for payment of real

estate taxes for any of its SFH borrowers. With few exceptions (such as

the borrower's name and mailing address) the current loan servicing

system (PLAS) has minimal on-line data concerning the borrower and

property. Information essential to the escrow process is not maintained

on-line in the current system. This loan data is instead, currently

maintained in the hard copy files retained in each county office. The

primary responsibility for verifying that borrowers have complied with

the terms of their mortgage and made the appropriate real estate tax

payments resides with the county offices. Methods used to insure that

taxes have been paid vary from office to office. These methods include

(1) sending listings to tax collectors for tax verification (2)

reviewing local newspapers for tax sales and (3) requesting borrowers

to provide proof of tax payment. Previously, once taxes have been found

to be delinquent, the county office staff informed the borrower of the

default and requested the taxes to be paid. In the event of the

borrower's unwillingness or inability to pay the delinquent taxes, RHS

at its option advanced funds for this purpose and charged the advance

to the borrower's account. This decentralized method of monitoring and

processing delinquent taxes has not been successful in assisting

borrowers before they default on the payment of their taxes. With the

escrowing of taxes and insurance the agency does not have to advance

funds to pay delinquent taxes and borrowers are not put in a position

of having a large tax or insurance payment due without adequate funds

to pay it.

The agency intends to utilize a nationwide tax service to obtain

annual tax information on the RHS loan portfolio, and to obtain tax

bills for loans that are escrowed loans. It is common industry practice

to use a tax service and to require all borrowers to pay a one-time

cost of the service. Other major government housing lenders such as

Federal Housing Administration and Department of Veteran Affairs

utilize a tax service.

The process of converting existing loans to a tax service will be

phased-in as states are included in the DLOS system. A small, tax

service fee which is estimated to be approximately $20 will be charged

to each borrower to establish the escrow account. Each existing SFH

borrower agreed, as one of the terms of the security instruments they

executed (mortgage or deed of trust), to pay fees and charges

established by the agency in its regulations. Existing borrowers will

be given the option to either pay the fee or add the fee to the

principal balance of their loan. Borrowers who receive loans after the

effective date of this regulation will be charged a tax service fee

which is estimated to be approximately $60 to be paid at loan closing.

To minimize the impact on our very-low and low income customers, this

fee can be included as part of the loan. These tax service fees are

consistent with industry standards.

The tax service will be responsible for: (1) conducting a search

for delinquent taxes on all existing loans that are converted to the

new loan servicing system; (2) reporting delinquent taxes to the agency

during the life of the loan and (3) assuming responsibility for any

forfeiture that results from properties being sold at a tax sale if the

tax servicer does not inform RHS of delinquent taxes on the properties

so sold. The tax servicer will also be responsible for procuring the

tax bills on all escrowed loans and paying

[[Page 15399]]

the taxes from the borrower's escrow account. The tax service is

responsible for any penalty, loss of discount or incorrect disbursement

should they fail to provide accurate and timely information.

Escrow accounts will be established for all new direct 502 loans

approved after October 27, 1995, except for participation loans where

another lender will be establishing an escrow account. Borrowers whose

loans were approved after October 27, 1995, agreed to the escrow of

taxes and insurance when they received their loan. Section 504 loan

recipients may be required to escrow if their current lender does not

escrow. As existing loans are converted to escrow, the accounting

system used by the agency to credit borrower payments will change from

Daily Simple Interest to a Preamortized Schedule payment. There are two

conditions under which escrow accounts for existing loans will be

established:

(1) The borrower requests that an escrow account be established.

Existing borrowers will be allowed to voluntarily establish an escrow

account once their loan has been converted to the DLOS system.

(2) RHS requires that an escrow account be established. RHS will

require that an escrow account be established for a given loan if

either of the following conditions exists:

(i) A borrower defaults on the responsibility to pay either the

real estate taxes or hazard insurance premiums in a timely manner; or

(ii) A borrower defaults on regular monthly payments and requests

RHS assistance to cure the default.

In both cases (1) and (2) above, the borrower may add the cost of

the tax service fee, and initial escrow to their loan and have the

account reamortized. This will minimize costs to our customers. The tax

service will enhance the agency's ability to provide supervised credit

in rural America and assist more customers in becoming successful

homeowners.

(d) Regular Servicing

(1) Application of payments. If less than the full scheduled

payment is received the payment will be held in suspense and not

applied. For borrowers who remain under daily simple interest, interest

will continue to accrue until the full payment is received. For

borrowers under a predetermined amortized schedule, no additional

interest will accrue against the scheduled payment that is due,

however, the borrower may be charged a late fee. Full scheduled

payments will be applied as follows:

(i) Protective advances due.

(ii) Accrued interest due.

(iii) Principal due.

(iv) Escrow for taxes and insurance.

(v) Fees or charges applied to the account.

(2) Payment Subsidies. RHS currently provides two types of payment

subsidies to borrowers. Interest credit assistance was provided to

borrowers whose loans were approved prior to FY 1996. The interest rate

on these loans could be reduced as low as 1% to allow borrowers to pay

20% of their income for payments, taxes and insurance. Payment

assistance has been provided to borrowers whose loans were approved

after October 1, 1995. Under payment assistance, borrowers must pay 22,

24, or 26% of their income towards payments, taxes and insurance. The

percentage is determined by the borrower's income. Interest credit

assistance and payment assistance are herein referred to as payment

subsidies.

Payment subsidy guidelines are being modified to provide that if a

borrower's income should increase or decrease, a new 12-month agreement

may be prepared, if the amount of assistance changes by at least $10

per month. Currently, there is no dollar threshold which has created an

administrative burden on the agency and its customers.

To assist borrowers who are currently receiving interest credit,

the agency will allow them to continue to stay under the interest

credit program provided they continuously remain eligible. A borrower

who has stopped receiving interest credit and at a later date qualifies

for a payment subsidy will be converted to payment assistance.

Currently, a borrower who is receiving interest credit assistance is

required to convert to payment assistance if they obtain a subsequent

loan or the account is reamortized. This has caused a hardship for

several borrowers whose payments significantly increase because of the

conversion.

(3) Late Fees. A late charge fee will be assessed if the scheduled

payment is not received by the 15th day after the due date. Initially,

the agency intends to set the late charge fee at 4% of the borrower's

scheduled payment. This is an industry standard incentive to encourage

borrowers to pay on time, thereby reducing delinquencies and helping

borrowers to maintain a good credit history.

(4) Returned Check Fee. A returned check charge will be assessed

for any check that is returned for nonsufficient funds. This is

consistent with industry standards. Initially, the agency intends to

set the returned check fee at $15. This fee is less than industry

standards; however, a typical RHS borrower's mortgage payment is

significantly lower than that of a typical industry standard mortgage

payment. RHS feels the lower proposed returned check fee is more

consistent with the borrower's ability to pay.

(5) Final Payment. The RHS will provide a written statement

indicating the amount required to pay the account in full. A fee may be

charged for payoff statements if more than two statements are requested

on the same account in any 30 day period. Initially, the agency intends

to set the fee at $25 per statement which is consistent with industry

standards.

(6) Subsidy recapture. The RHS may now subordinate its lien to

include funds obtained from the other lender to improve or make repairs

to the dwelling if it is in the best interest of the government.

Currently, RHS will only allow a subordination to include the unpaid

principal and interest plus reasonable closing costs. If a borrower

desired to obtain additional funds for improvements or repair, the

lender had to agree to a third lien position which in many cases

prevented the borrower from refinancing.

Further subordination (as in a case where recapture has previously

been subordinated) of a lien securing a recapture receivable will now

be allowed if the borrower is refinancing with no increase in the

amount of the debt to which RHS has subordinated (except reasonable

closing costs).

The recapture formula has been changed to (1) provide a value added

credit for capital improvements (2) cease accrual or additional

principal reduction attributed to subsidy (PRAS) and (3) limit

recapture to 50 percent of value appreciation. This change eliminates

the major complaint concerning recaputure--nonconsideration of

improvements made subsequent to loan closing. It also partially

eliminates another major complaint--PRAS. PRAS is the accelerated

principal write-down that occurred when subsidy was applied to the

account by reducing the effective interest rate under the interest

credit program. RHS intends to ``freeze'' PRAS on the same date for all

borrowers who are subject to PRAS. At this time, we estimate such date

to be October 1, 1996.

By ``freezing'' PRAS, only the amount of accumulated PRAS (as of

the date of the ``freeze'') will be subject to recapture. Freezing PRAS

is to the borrower's financial advantage because PRAS, as it presently

operates,

[[Page 15400]]

continues to accrue even after a borrower no longer qualifies for

subsidy. PRAS continues to accrue until approximately the 20th year in

the life of the loan at which time it gradually decreases until the

loan reaches maturity. To ensure that no borrower is adversely affected

by this change, RHS will reduce the ``frozen'' PRAS starting in the

loan's 15th year by an equal amount each year so the PRAS will be zero

at loan maturity. For example, on an existing 33-year loan, PRAS was

frozen on October 1, 1996 at $5,000. In year 15 of this loan, 18 years

would be remaining. PRAS would be reduced in year 15 by $278 ($5,000

divided by 18), and by an additional $278 each year thereafter. If the

borrower paid off the loan in year 19, there would be $3,610 of PRAS

subject to recapture [$5,000-$1390 ($278 times 5 years).

These proposed changes will allow a borrower to better estimate

their equity position and eliminate this often confusing aspect of the

program. These proposed revisions to subsidy recapture will apply to

all new and existing borrowers.

Borrowers who cease to occupy their dwelling will now have the

amount of recapture due determined and given a choice of either paying

the recapture amount or having it included in the unpaid balance and

reamortized. Existing regulations were unclear when recapture was

calculated and repaid.

Borrowers will also be given a discount on the recapture amount due

if the recapture is repaid within 30 days of refinancing or payment of

the last loan installment and the borrower continues to occupy the

property.

(7) Transfer of security and assumption of indebtedness. The

regulation has been clarified to provide that, unless it is in the

government's best financial interests, RHS will not approve the

assumption of a secured loan if the seller fails to repay any unsecured

loans with USDA.

(e) Special Servicing Actions

(1) Delinquency workout agreements. All past due balances under

workout agreements will be required to be repaid within 2 years or the

remaining term of the loan whichever is shorter. Currently, Agency

regulations encourage but do not require a 2-year payback. With more

timely and consistent servicing, the Agency anticipates the amount of

delinquencies will decrease and the two year timeframe is sufficient.

Borrowers will become current on the account in a shorter period of

time and restore their good credit history.

(2) Moratorium. Moratoriums will be granted for the borrower's full

scheduled payment to include principal, interest, taxes and insurance

or for the borrower's scheduled payment for principal and interest,

based on the borrower's repayment ability. Moratoriums will continue to

be granted for a maximum of 2 years but will be reviewed semiannually.

This will benefit borrowers that no longer meet moratorium conditions

by reinstating scheduled payments at an earlier date thus reducing the

arrearage that must be repaid at the end of the moratorium period.

Borrowers not on escrow will be assisted by establishing an escrow

account and convert to a preamortized schedule prior to reamortization

at the end of the moratorium period.

(3) Unauthorized assistance. Unauthorized payment assistance can

occur through RHS error, or incorrect or false information provided by

the borrower. Borrowers who received unauthorized payment assistance by

providing false information will not be allowed to reamortize their

account to remove the delinquency that occurred when account

adjustments were made and may be recommended for suspension or

debarment. This will eliminate the inequity that currently exists

between borrowers who received unauthorized payment assistance through

no fault of their own and borrowers who provided false information.

(4) Graduation of SFH loans. The term ``graduation'' is being

replaced with ``refinancing'' to other credit.

(5) Debt Settlement. These regulations are revised to encourage the

use of offsets (Administrative, Salary and Internal Revenue) to affect

collection.

(6) Disposition of inventory property. Consistent with industry

standards, the term ``inventory property'' is being replaced with

``REO.''

Program property will now be made available to program applicants

for 60 days instead of 45 days. This sale period is effective from the

date of the notice of sale, and for any reduction in price or any other

change in credit terms or other sale terms. This will allow program

properties to be marketed for a greater period of time to those

individuals most in need of housing.

When a nonprofit organization or public body notifies RHS in

writing of its intent to buy property, RHS will withdraw the property

from the market for up to 30 days to provide the entity with the

opportunity to execute a sale contract. For program properties, the

listed price will now be discounted after the 60 day reservation period

for program applicants has elapsed. Nonprogram properties will continue

to be discounted from the listed price at any time. Initially, the

Agency intends to set the discount at its current rate of 10%.

For properties listed with a real estate broker, offers will now be

held for 3 business days after the date the property is offered for

sale. Offers received during the holding period are considered received

on the 4th business day and evaluated with any other offers received

that day. This action is taken to provide all real estate brokers with

a reasonable timeframe to receive the notice of listing and sell the

property. Problems had occurred in areas with a high housing demand

whereby sale information was obtained by real estate brokers at

different times due to the difference in mailing periods.

(7) Escrow of taxes and insurance. Any remaining funds held in

escrow or unapplied funds will be applied against the debt. Escrow

disbursement will stop immediately upon debt settlement or release of

security or at anytime RHS does not intend to take title.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995, the RHS

announces its intention to seek Office of Management and Budget (OMB)

approval of new reporting and recordkeeping requirements.

The RHS offers a supervised credit program to extend financial

assistance to construct, improve, alter, repair, replace or

rehabilitate dwellings, which will provide modest, decent, safe, and

sanitary housing to eligible individuals living in rural areas. To

assist individuals in obtaining affordable housing, a borrower's house

payment may be subsidized to an interest rate as low as 1% and under

the deferred mortgage program the subsidy can be reduced further. The

amount of subsidy is based on the borrower's household income. The

information requested by RHS is vital to be able to process

applications for RHS assistance and make prudent credit and program

decisions. It includes borrower financial information such as household

income, assets and liabilities and monthly expenses. Without this

information the Agency is unable to determine if a borrower would

qualify for any services or if assistance has been granted that the

borrower may not have been eligible for. In addition, proper

liquidation and debt settlement decisions are made.

Another integral part of Agency lending requires borrowers to

refinance to other credit when they are able to do so. If a borrower is

unable to find other credit available at reasonable rates and terms,

the Agency will continue to review the borrower for possible

[[Page 15401]]

refinancing at periodic intervals. If it is determined that all loan

servicing efforts have failed to produce a successful outcome the

account will be liquidated through voluntary liquidation or

foreclosure. The agency may also accept a deed in lieu of foreclosure

if it is in the best interest of the Government.

As mentioned in the ``Implementation Proposal,'' RHS field staff in

states under the DLOS system will be utilizing the proposed Handbook

for administrative operations of the program. RHS field staff in states

not under the DLOS system will be utilizing existing FmHA Instructions

for administrative operations, until they come under DLOS at which time

they will use the proposed Handbook. The information collection

requirements for existing FmHA Instructions has been previously

approved by OMB. Therefore, public burden for the direct SFH programs

will be contained in Part 3550, the proposed Handbook and existing FmHA

Instructions. RHS intends to establish a new consolidated information

collection docket for Part 3550, which will contain all burden related

to the direct SFH programs.

Public Burden in the Handbook

RHS is currently developing the proposed Handbook while

aggressively analyzing all existing burden imposed upon the public to

obtain and retain SFH program assistance. A Task Force of RHS employees

at the local, state and national level has been established and is

working with the DLOS team to eliminate all unnecessary burden. This

significant effort includes input from the private sector manufacturers

of the DLOS system. The system which RHS has already purchased includes

many industry standard forms. Wherever possible, RHS intends to utilize

these industry standard forms, eliminate duplicative FmHA forms and

make full use of our new expanded automation capabilities. For example,

most forms which a current RHS borrower must complete can be system

generated and contain all relevant system information such as the

borrower's account number, address, property description, real estate

taxes, insurance, income data, etc., thereby reducing unnecessary

burden imposed on our customers. This will reduce the time it takes the

public to complete required information, reduce the need to stock forms

throughout Rural Economic and Community Development (RECD) offices, and

result in cost savings to the public. RHS is confident that existing

information collection dockets can be reduced.

The proposed Handbook will be available for public comment with

regard only to its information collection requirements on or about July

1, 1996. RHS will publish a Notice in the Federal Register, with a 60-

day comment period, when the Handbook is available and its specific

information collection requirements.

Public Burden in Part 3550

At this time, the Agency is requesting OMB clearance of the

following burden:

Form FmHA 1940-43, ``Notice of Right To Cancel'': Federal

law requires that all parties entering into a transaction which results

in a mortgage on their present home be notified of and given the right

to cancel the transaction. Form FmHA 1940-43 provides the means for

such a transaction to be canceled by the potential borrower. This form

has been used by FmHA for many years, but was inadvertently omitted

from previous paperwork burden packages. In order to meet our legal

responsibilities and ensure that all potential borrowers are properly

notified of their rights, this form has been included in this

regulation. This form will now be generated electronically through the

DLOS system.

Form RECD 3550-1, ``Borrower's Certification and

Authorization.'' This is an industry standard form on which an

applicant certifies that all information furnished in connection with

the loan transaction is true and correct, and provides authorization

from the applicant for the release and verification of any information

contained in the loan application. This form will prove to be a time-

saver for the applicant as well as the Agency, and will allow for the

elimination of several existing FmHA forms when DLOS is implemented

nationwide.

Form RECD 3550-2, ``Request for Verification of Gift/Gift

Letter.'' This will be an automated form which will assist the

applicant in providing required information should the applicant plan

to receive monetary gifts to cover costs in connection with the loan,

i.e. loan closing costs. Currently, the applicant must either provide

some type of documentation or use an informal statement prepared by the

RHS field office staff. The burden on the applicant to provide some

type of documentation will be alleviated because this form will be

system generated and require minimal work for the applicant.

Form RECD 3550-4, ``Employment Certification/Payment

Assistance. This form will serve as a supplement to Form RECD 1944-14,

``Payment Assistance/ Deferred Mortgage Assistance Agreement.'' In

conjunction with the execution of Form RECD 1944-14, borrowers will

sign this form verifying that they will notify RHS when they change or

obtain employment.

Form RECD 3550-6, ``Notice to Borrower of Special Flood

Hazard and Federal Disaster Assistance.'' This is an industry standard

form. When applicable, the system will automatically generate this form

which will notify the applicant that the property being financed is

located in a flood hazard area. The form will require the signature of

the applicant.

Form RECD 3550-7, ``Mortgage Loan Commitment.'' This is an

industry standard form, will be system generated and notifies the

applicant of loan approval and stipulates any special conditions of the

loan approval. The applicant signs the form agreeing to the terms set

forth in the commitment.

Form RECD 3550-9, ``Initial Escrow Account Disclosure

Statement.'' This is an industry standard form, is system generated and

provides an applicant/borrower with a breakdown of his or her escrow

payments.

Form RECD 3550-10, ``Condominium Rider,'' and Form RECD

3550-11, ``Planned Unit Development Rider,'' will be used only for the

few loans the Agency provides on condominiums or planned unit

developments (PUDs). These automated forms will be used as a supplement

to the mortgage or deed of trust to specifically define condominium and

PUD covenants. The borrower's signature will be required.

Form RECD 3550-12, ``Subsidy Repayment Agreement,'' is a

new form which replaces Exhibit A, ``Subsidy Repayment Agreement,'' to

7 CFR part 1951 subpart I. Borrowers are required to repay to the

Government any subsidy received in connection with section 502 of the

Housing Act upon disposition or nonoccupancy of the security property.

This form, which is being reduced in excess of 50%, informs the

borrower of this obligation to RHS.

Standard Form (SF) 5510, ``Authorization Agreement for

Preauthorized Payments,'' is added to provide borrowers with the

convenience of having their monthly mortgage payments automatically

deducted from their bank account. This is a Standard Form widely used

throughout the financial community.

Paragraph 3550.9(b). This paragraph requires that

applicants must disclose any known relationship or association with an

RHS employee. This provision ensures impartiality in program decisions

and reduces the potential for employee conflict of interest. This

disclosure is made on Form FmHA 410-

[[Page 15402]]

4 which is part of the information collection package.

Paragraph 3550.53(g). This paragraph requires that

applicants must provide financial data to demonstrate that they have

adequate repayment ability for the requested loan. An applicant must

provide a financial statement listing all recurring monthly debts. This

information is critical to ensure prudent loan underwriting and is an

industry standard. This financial statement is included on Form FmHA

410-4 which is part of the information collection package.

Paragraphs 3550.55 and 3550.106. These paragraphs require

that all persons applying for RHS loans must file a written application

in a format specified by RHS. RHS currently utilizes Form FmHA 410-4,

an industry standard application form for this purpose. The information

in the application is critical to ensure that the applicant qualifies

for the assistance requested. Form FmHA 410-4 is part of the

information collection package.

Paragraphs 3550.55(b)(3) and 3550.106(b)(4). These

paragraphs provide RHS with the ability to periodically request that an

applicant reconfirm their interest in obtaining assistance. The request

is generally made in writing, and the applicant may call or write RHS

to reconfirm their interest. In many RHS offices, a backlog exists of

applications due to loan requests exceeding available loan funds. To

ensure the most timely and efficient processing of active applications,

RHS must periodically update an applicant's continued interest in the

program.

Paragraph 3550.55(b)(4). This paragraph provides RHS with

the opportunity to request additional information to support an

applicants loan request when RHS receives information which may

indicate that the eligibility determination may have been in error.

This information is critical to ensure applicant's are eligible for

assistance which they may be granted.

Paragraphs 3550.61 and 3550.112. These paragraphs require

that borrowers must furnish and continually maintain hazard and flood

insurance on property securing RHS loans. This is an industry standard

and is necessary to protect the borrower's and government's best

financial interests in the property.

Paragraph 3550.68. This paragraph describes the two forms

of payment subsidies available to RHS direct Section 502 borrowers.

Payment subsidies reduce the borrower's payment to a level consistent

with their income.

Payment subsidies are subject to recapture and this paragraph

requires that borrowers execute Form RECD 3550-12, ``Subsidy Repayment

Agreement,'' acknowledging they understand that subsidy must be repaid.

The agreement also provides information on how and when the subsidy

must be repaid. This is necessary to ensure that borrowers are fully

aware of their financial obligations under the program. Form RECD 3550-

12 is part of the information collection package.

Paragraphs 3550.68(e), 3550.69(c) and 3550.157(a)(3).

These paragraphs require that a borrower inform RHS whenever an adult

member of the household changes or obtains employment so that RHS can

determine whether a review of the borrower's circumstances is required.

This provision, which is required throughout the direct SFH programs,

is critical to ensure that a borrower remains eligible for the

assistance they are receiving. If the borrower's income should change,

it may affect their eligibility for decreased or increased assistance.

This requirement is accomplished when an applicant or borrower executes

Form RECD 3550-4, which is part of the information collection package.

Paragraph 3550.73(f). This paragraph requires that a

manufactured home dealer-contractor must sign a construction contract

which will cover both the unit and site development work. This is an

industry standard and protects the government and borrower's best

interests. Form FmHA 1924-6, ``Construction Contract,'' is used for

this purpose and is part of the information collection package.

Paragraph 3550.73(g). This paragraph requires that all

persons furnishing materials and labor in connection with a

construction contract must sign a release of claimants document. Again,

this is an industry standard form and documents to the homebuyer and

lender that all persons have been paid. It precludes mechanics liens

from being filed against the property and protects the best financial

interest of the homeowner and lender. Form FmHA 1924-10, ``Release of

Claimants,'' is used for this purpose and is part of the information

collection package.

Paragraph 3550.73(h). This paragraph requires that a

dealer-contractor must provide a warranty on a manufactured home.

Again, this is an industry standard and ensures the homeowner that

their new home is warranted in case of defects. The paragraph further

requires the dealer-contractor to furnish the homeowner with a copy of

all manufacturer's warranties. This would be for appliances, heating

systems, etc., and it again warrants such items from defect and

provides the homeowner with information regarding the product and who

to contact for further information. Form FmHA 1924-11, ``Builders

Warranty,'' is used for this purpose and is part of the information

collection package.

Paragraph 3550.112(d)(2). This paragraph requires when

borrowers file a claim under hazard and flood insurance, that they

notify RHS of any loss or damage to the security property. Under this

supervised credit program, RHS requires notification of insurable

losses to protect the governments financial interest in the property

and to assist our customers with any advice or counsel on ensuring that

damages are corrected in a workmanlike manner.

Paragraph 3550.113. Under the Section 504 grant program,

if a person obtains a 504 grant, and sells the property within 3 years,

the grant must be repaid. This paragraph requires grant recipients to

sign a grant agreement acknowledging this regulatory requirement. The

intent is to ensure that the recipient understands this provision and

provides the government with documentation to secure any proceeds if

the property is sold.

Paragraph 3550.158(b). This paragraph requires that

borrowers on active military duty, whose interest rates are reduced to

6% pursuant to the Soldiers and Sailors Relief Act, must notify RHS

when they are no longer in active status. The reduced interest rate is

only available to persons in active military duty. The borrower must

notify RHS when they are no longer on active status so that the

interest rate may be changed back to the rate specified in the

Promissory Note. This is to ensure that borrowers do not receive

benefits to which they are not entitled.

Paragraph 3550.159(a). This paragraph requires borrowers

who wish to lease mineral rights on security property to obtain

authorization form RHS. This is an industry standard. Lenders require

such authorization to ensure that the property will remain suitable as

a residence, and their security interests are not adversely affected.

Paragraph 3550.159(b). This paragraph requires borrowers

who wish RHS to subordinate its lien to obtain the Agency's consent.

This is an industry standard. Lenders require such authorization to

ensure that their security interests are not adversely affected.

Paragraph 3550.159(c). This paragraph requires borrowers

who wish to obtain a partial release from RHS for

[[Page 15403]]

the sale or exchange of security property or granting of a right-of-way

across the security property, must obtain approval from RHS. This is an

industry standard. Lenders require such authorization to ensure that

the property will remain suitable, and their security interests are not

adversely affected.

Paragraph 3550.159(d). This paragraph requires borrowers

who wish to lease the security property must obtain RHS consent. RHS

requires prior consent to ensure that the borrower does not receive

payment assistance to which they would no longer be eligible if they

cease to occupy the property, to know the whereabouts of the borrower,

and to ensure that the government's security interests are not

adversely affected.

Paragraph 3550.160. RHS credit is not intended to replace

or supplant private credit. Borrowers agree, a condition of obtaining

assistance, that they must refinance to other credit should it become

available. This paragraph requires that borrowers must periodically

provide RHS with financial data to ascertain their potential to secure

other credit. The borrower must complete a financial statement which

would document their income and debts. This information is used by RHS

to determine if the borrower, as required by statute, must refinance

with another lender.

Paragraph 3550 160(c)(3). This paragraph provides a

borrower, who has been requested to refinance, the opportunity to

provide RHS with additional information to document their inability to

refinance to other credit. This provision exists to give the borrower

every opportunity to dispute RHS's decision prior to their application

for other credit. Most private lenders charge application and related

fees to submit an application. This opportunity may preclude the

borrower from incurring this expense if additional information may

change the RHS decision.

Paragraph 3550.160(d). This paragraph requires that

borrowers who were requested to refinance to other credit, and are

unable to secure other financing, must provide documentation to RHS on

their inability to refinance. This is critical to ensure that the

borrower made a good faith effort to refinance and document that the

borrower cannot move to other credit.

Paragraph 3550.164(d). This paragraph requires that a

recipient of unauthorized assistance be notified in writing and given

the opportunity to provide information to alter the RHS determination

that the assistance they received was unauthorized. This provision

exists to provide the borrower with every opportunity to refute the RHS

action being taken.

Paragraph 3550.207(b). This paragraph requires that

borrowers on a moratorium (temporary stop on mortgage payments) must

provide RHS with financial information to demonstrate that the

moratorium should be continued. This is to ensure that a borrower does

not receive assistance to which they are no longer entitled.

Paragraph 3550.253. This paragraph provides guidance on

settlement of a debt by compromise or adjustment. The provisions allows

such action to be initiated by RHS or the applicant for the settlement

actions. The debtor's offer and a financial statement is required. This

is an industry standard and necessary to settle debts still owed to a

lender. Form FmHA 1956-1, ``Request for Debt Settlement,'' is used for

this purpose and is part of the information collection package.

Public Burden in Existing FmHA Regulations

As mentioned, public burden for the direct SFH programs is

currently approved in several information collection dockets. These

existing information collection dockets will be handled as follows:

7 CFR Part 1910, Subpart A--Receiving and Processing

Applications. RHS will make a technical correction to the existing

approved information collection docket (0575-0134) at the final rule

stage to transfer only the public burden for the direct Section 502 and

504 loan and grant programs to the information collection docket for 7

CFR Part 3550. Every effort will be made streamline and eliminate any

unnecessary public burden for the direct SFH programs before the

technical correction is made.

7 CFR Part 1944, Subpart A--Section 502 Rural Housing Loan

Policies, Procedures, and Authorizations. RHS will transfer the

existing approved information collection docket (0575-0059) at the

final rule stage to the information collection docket for 7 CFR Part

3550. It should be noted that RHS reduced the burden in this regulation

by 250,000 hours in October 1995.

Every effort will be made streamline and eliminate any unnecessary

public burden for the direct SFH programs before the transfer is

accomplished.

7 CFR Part 1944, Subpart J--Section 504 Rural Housing

Loans and Grants. RHS will transfer the existing approved information

collection docket (0575-0062) to the information collection docket for

7 CFR Part 3550. Every effort will be made streamline and eliminate any

unnecessary public burden for the direct SFH programs before the

transfer is accomplished.

7 CFR Part 1951, Subpart C--Offsets of Federal Payments to

FmHA Borrowers. RHS will make a technical correction to the existing

approved information collection docket (0575-0119) at the final rule

stage to transfer only the public burden for the direct Section 502 and

504 loan and grant programs to the information collection docket for 7

CFR Part 3550. Every effort will be made streamline and eliminate any

unnecessary public burden for the direct SFH programs before the

technical correction is made.

7 CFR Part 1951, Subpart F--Analyzing Credit Needs and

Graduation of Borrowers. RHS will make a technical correction to the

existing approved information collection docket (0575-0093) at the

final rule stage to transfer only the public burden for the direct

Section 502 and 504 loan and grant programs to the information

collection docket for 7 CFR Part 3550. Every effort will be made

streamline and eliminate any unnecessary public burden for the direct

SFH programs before the technical correction is made.

7 CFR Part 1951, Subpart G--Borrower Supervision,

Servicing and Collection of Single Family Housing Loan Accounts. RHS

will transfer the existing approved information collection docket

(0575-0060) to the information collection docket for 7 CFR Part 3550.

RHS will also be proposing a reduction in the existing information

collection docket. For example, with the establishment of the

centralized servicing unit borrowers past due on their payment will

receive timely and consistent servicing of their accounts. With prompt

servicing, fewer borrowers will become seriously delinquent on their

accounts thereby reducing the number of workout agreements executed by

borrowers. Every additional effort will be made streamline and

eliminate any unnecessary public burden for the direct SFH programs

before the transfer is made.

7 CFR Part 1951, Subpart M--Servicing Cases Where

Unauthorized Loan or Other Financial Assistance Was Received--Single

Family Housing. RHS will transfer the existing approved information

collection docket (0575-0105) to the information collection docket for

7 CFR Part 3550. RHS will also be proposing a reduction in the existing

information collection docket. For example, when RHS has agreed to

continue with the loan of a borrower who otherwise would not qualify

for a SFH loan either because the loan was made for an unauthorized

purpose or

[[Page 15404]]

the borrower was not eligible for financial assistance the borrower

will no longer be required to repay all of subsidy recapture up to 100%

of the proceeds available. These borrowers will now have recapture

calculated in the same manner as other SFH borrowers. Every additional

effort will be made streamline and eliminate any unnecessary public

burden for the direct SFH programs before the transfer is made.

7 CFR Part 1955, Subpart A--Liquidation of Loans Secured

by Real Estate and Acquisition of Real and Chattel Property. RHS will

make a technical correction to the existing approved information

collection docket (0575-0109) at the final rule stage to transfer only

the public burden for the direct Section 502 and 504 loan and grant

programs to the information collection docket for 7 CFR Part 3550.

Every effort will be made streamline and eliminate any unnecessary

public burden for the direct SFH programs before the technical

correction is made.

7 CFR Part 1955, Subpart B--Management of Property. RHS

will make a technical correction to the existing approved information

collection docket (0575-0110) at the final rule stage to transfer only

the public burden for the direct Section 502 and 504 loan and grant

programs to the information collection docket for 7 CFR Part 3550.

Every effort will be made streamline and eliminate any unnecessary

public burden for the direct SFH programs before the technical

correction is made.

7 CFR Part 1956, Subpart B--Debt Settlement--Farmer

Programs and Housing. RHS will make a technical correction to the

existing approved information collection docket (0575-0118) at the

final rule stage to transfer only the public burden for the direct

Section 502 and 504 loan and grant programs to the information

collection docket for 7 CFR Part 3550. Every effort will be made

streamline and eliminate any unnecessary public burden for the direct

SFH programs before the technical correction is made.

Estimate of Burden: Public reporting burden for this collection of

information is estimated to range from 5 minutes to 3 hours response.

Respondents: Applicants seeking financial assistance through RHS to

purchase adequate housing in rural America and borrowers who have

received such assistance.

Estimated Number of Respondents: 822,570.

Estimated Number of Responses per Respondent: 1.5.

Estimated Total Annual Burden on Respondents: 217,195.

The complete text of the subject regulations is published herein

for public review and comment. Additional copies of the proposed

regulations or copies of the referenced forms may be obtained from the

Director, Regulations and Paperwork Management Division, at (202) 720-

9725. Comments are invited on: (a) whether the proposed collection of

information is necessary for the proper performance of the functions of

the agency, including whether the information will have practical

utility; (b) the accuracy of the agency's estimate of the burden of the

proposed collection of information including the validity of the

methodology and assumptions used; (c) ways to enhance the quality,

utility and clarity of the information to be collected; and (d) ways to

minimize the burden of the collection of information on those who are

to respond, including through the use of appropriate automated,

electronic, mechanical, or other technological collection techniques or

other forms of information technology.

Comments must be received on or before June 7, 1996, to be assured

of consideration. All responses to this notice will be summarized,

included in the request for OMB approval, and will become a matter of

public record. Comments should be submitted to the Desk Officer for

Agriculture, Office of Information and Regulatory Affairs, Office of

Management and Budget, Washington, D.C. 20503 and to the Director,

Regulations and Paperwork Management Division, U.S. Department of

Agriculture, RECD, Ag. Box 0743, Washington, DC 20250. A comment to OMB

is best assured of having its full effect if OMB receives it within 30

days of publication of this rule.

List of Subjects in 7 CFR Part 3550

Accounting, Administrative practice and procedure, Conflicts of

interests, Environmental impact statements, Equal credit opportunity,

Fair housing, Grant programs--Housing and Community Development, Loan

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

housing, Manufactured homes, Reporting and recordkeeping requirements,

Rural areas, Subsidies.

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

added to read as follows:

CHAPTER XXXV--RURAL HOUSING SERVICE, UNITED STATES DEPARTMENT OF

AGRICULTURE

PART 3550--SINGLE FAMILY HOUSING

Subpart A--General

Sec.

3550.1 Applicability.

3550.2 Purpose.

3550.3 Equal opportunity and fair housing.

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.

3550.11-3550.50 [Reserved]

Subpart B--Section 502 Origination

3550.51 Program objectives.

3550.52 Loan purposes.

3550.53 Borrower 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 Loan-to-value ratio.

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.

3550.75-3550.100 [Reserved]

Subpart C--Section 504 Origination

3550.101 Program objectives.

3550.102 Grant and loan purposes.

3550.103 Construction standards and requirements.

3550.104 Maximum loan and grant.

3550.105 Eligibility requirements.

3550.106 Applications.

3550.107 Ownership requirements.

3550.108 Loan rates and terms.

3550.109 Security requirements (loans only).

3550.110 Appraisals.

3550.111 Escrow account.

3550.112 Insurance (loans only).

3550.113 Repayment agreement (grants only).

3550.114-3550.150 [Reserved]

Subpart D--Regular Servicing

3550.151 Servicing goals.

3550.152 Loan payments.

3550.153 Fees and charges.

3550.154 Inspections.

3550.155 Escrow account.

3550.156 Borrower obligations.

3550.157 Payment subsidy.

[[Page 15405]]

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.

3550.165-3550.200 [Reserved]

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 Work-out 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.

3550.212-3550.250 [Reserved]

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.

3550.254-3550.300 [Reserved]

Authority: 5 U.S.C. 301 and 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. It addresses the requirements of sections

502 and 504 of the Housing Act of 1949, as amended, and includes

policies regarding both origination and servicing. Procedures for

implementing the regulations in this part can be found in program

handbooks, available in any Rural Economic Community Development (RECD)

office. The provision on the expenditure of any funds under this part

is contingent upon the availability of funds to the agency.

Sec. 3550.2 Purpose.

The purpose of the RHS single family direct 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 that do not currently own adequate housing, and that

cannot obtain other credit, the opportunity to acquire, build,

rehabilitate, improve or relocate dwellings in rural areas. The section

504 program offers loans to 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.

Sec. 3550.3 Equal opportunity and fair housing.

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 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 1246, and Executive Order 11063, as amended by

Executive Order 12259 as applicable. The Civil Rights Compliance

Requirements of the U.S. Department of Agriculture are spelled out in 7

CFR part 1901, subpart E.

Sec. 3550.4 Reviews and appeals.

(a) Participant rights. Whenever RHS makes a decision that will

adversely affect a participant, RHS will inform the participant that

the decision can be reviewed by the next level supervisor, and indicate

whether the decision can be appealed to the National Appeals Division

(NAD) according to the regulations set forth in 7 CFR part 11.

Nonprogram (NP) participants are not entitled to appeal rights except

with regard to denial of NP loan assistance.

(b) Non-appealable decisions. The following types of decisions are

not appealable.

(1) Decisions made by parties outside of RHS, even when those

decisions are used as a basis for RHS decisions.

(2) Decisions that do not meet the definition of an ``adverse

decision'' under 7 CFR part 11.

(3) Decisions involving parties who do not meet the definition of

``participant'' under 7 CFR part 11.

(4) Decisions with regard to subject matters not covered by 7 CFR

part 11.

(5) Interest rates as set forth in agency procedures, except

appeals alleging application of the incorrect interest rate.

(6) Refusal to request an administrative waiver permitted by

program regulations.

(7) Denials of assistance due to lack of funds.

(c) Next-level review. Any adverse decision, whether appealable or

non-appealable, may be reviewed by the next-level supervisor.

(d) NAD Review. (1) A participant may request that NAD review the

agency's findings of non-appealability. In cases where the adverse

decision is based on both appealable and non-appealable actions, the

adverse action is not appealable.

(2) A participant may request that NAD review any decision that is

appealable.

(3) NAD will review the participant's request in accordance with 7

CFR part 11.

(e) Actions pending the outcome of an appeal. (1) Assistance will

not be discontinued pending the outcome of an appeal of any adverse

decision.

(2) Real Estate Owned (REO) properties will not be held off the

market pending appeal of a decision to deny credit.

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 goals in a manner that will

protect, enhance, and restore environmental quality.

(b) Regulatory references. Processing and servicing actions under

this part will be undertaken consistent 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 may affect RHS implementation

of certain provisions of this part, 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

[[Page 15406]]

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.

A State Director 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.

(a) 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 by RHS

employees who:

(1) Are not themselves the applicant.

(2) Are not members of the family or close known relatives of the

applicant.

(3) Do not have an immediate working relationship with the

applicant, the employee related to the applicant, or the employee who

would normally conduct the activity.

(4) Do not have a business or close personal association with the

applicant.

(b) Applicant responsibility. The applicant must disclose any known

relationship or association with a RHS employee when such information

is requested.

(c) RHS employee responsibility. A RHS employee must disclose any

known relationship or association with an applicant, regardless of

whether the relationship or association is known to others. Loans may

not be used by RHS employees and loan closing agents, or members of

their families to purchase REO property, security property from a

borrower, or security property at a foreclosure sale.

Sec. 3550.10 Definitions.

Acceleration. Demand for immediate repayment of the entire balance

of a debt if the security instruments are breached or other conditions

for repayment occur.

Adjusted annual income. Used to determine whether an applicant is

income-eligible. Adjusted income provides for deductions to account for

varying household circumstances and expenses. See Sec. 3550.54 of

subpart B of this part for a complete description of adjusted income.

Adjustment. An agreement by RHS to release a debtor from liability

upon receipt of a reduced amount paid as an initial lump sum and

periodic additional payments over a period of up to 5 years.

Amortized payment. Equal monthly payments under a fully amortized

mortgage loan which provides for the scheduled payment of interest and

principal over the term of the loan. The proportion of the principal is

reduced, and the proportion represented by the principal repayment

increases correspondingly.

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 to RHS under the section 502

or 504 programs.

Cancellation. A decision by RHS to cease collection activities and

release the debtor from personal liability for any remaining amounts

owed.

Co-signer. 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 co-signer 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.

Compromise. An agreement by RHS 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 by RHS 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.

Cross-collateralized loan. A situation in which a single property

secures both Rural Housing Service and Farm Service Agency loans.

Custodial property. Borrower-owned real property that serves as

security for a RHS loan that has been taken into possession by RHS 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.

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% of their principal and interest

payments at 1% for up to 15 years. The deferred amounts are due on

sale.

Deficient housing. A dwelling that lacks complete plumbing; lacks

adequate heating; is dilapidated or structurally unsound; or has an

overcrowding situation that will be corrected with loan funds.

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; or

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

whom is age 62 or older, or disabled, and who is 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 surviving family shall be classified as an

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

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

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

Escrow account. An account maintained by RHS 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 or unit which is: more than 1

year old; or less than 1 year old but the dwelling

[[Page 15407]]

is not covered by an approved 10-year warranty plan.

False information. Information that the recipient knew or should

have known was incorrect at the time it was provided.

Full-time student. A person who carries at least the minimum number

of credit hours considered to be full-time by their college or

vocational school.

Hazard. A condition of the property which jeopardizes the health or

safety of the occupants or members of the community, but which does not

make it unfit for habitation. (See also the definition of major hazard

in this section.)

HUD. The U.S. Department of Housing and Urban Development.

Inaccurate information. Incorrect information inadvertently

provided by a recipient without intent to obtain benefits fraudulently.

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 subsidy that reduces the effective interest rate

of a loan. (See Sec. 3550.68(d) of subpart B of this part.) Since

October 27, 1995, new subsidies have been provided through payment

assistance.

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 from a non-RHS source closed

simultaneously with a RHS loan or grant.

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 greater than the very low-income

limit, but that does not exceed the HUD established low-income limit

(generally 80% 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 which is built to Federally

Manufactured Home Construction and Safety Standard (FMHCSS) and RHS

Thermal Performance Standards (TPS) of 7 CFR part 1924, subpart A. It

is transportable in one or more sections, which in the traveling mode

is 10-body feet or more in width, and when erected on site is 400 or

more square feet, 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. Permanent foundations are required.

Market value. The value of the property as determined by a current

appraisal.

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 Public Law 96-399 (October 8, 1980).

Moderate-income. An adjusted income greater than the low-income

limit, but that does not exceed the 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 (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.

Moratorium. A period of up to two years during which scheduled

payments for principal and interest, or principal, interest and

deposits to the escrow accounts are not required, but are subject to

repayment at a later date.

Mortgage. A form of security instrument or lien on real property

including a real estate mortgage or a deed of trust.

Net family assets. Are considered in the calculation of annual

income. See Sec. 3550.54 of subpart B of this part for a complete

description.

Net recovery value. The appraised value of the security property

minus anticipated liquidation expenses as determined by RHS.

New dwelling. A dwelling to be constructed or that is less than 1

year old and is covered by an approved 10-year warranty plan as

described in subpart A of part 1924 of this title.

Nonprogram (NP) property. Property that does not meet the program

eligibility requirements outlined in Sec. 3550.56 and Sec. 3550.57 of

subpart B of this part.

Nonprogram (NP) terms. Credit terms available from RHS when the

applicant or property is not program-eligible.

Offset. Deductions from a borrower's federal retirement benefits,

salary, income tax refund, or payments from other federal agencies to

the borrower to pay a debt owed to RHS. Deductions from retirement

benefits and salary only apply to current and former federal employees.

Participant. For the purpose of 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 a RHS

decision, in accordance with 7 CFR part 11.

Payment assistance. Subsidy used beginning October 27, 1995, to

reduce mortgage payments. (See Sec. 3550.68(c) of subpart B of this

part.)

Payment subsidy. A general term which 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,

has a record of such an impairment, or is regarded as having such an

impairment. As used in this definition, the phrase:

(1) Physical or mental impairment includes--

(i) Any physiological disorder or condition, cosmetic

disfigurement, or anatomical loss affecting one or more of the

following body systems: neurological; musculoskeletal; special sense

organs; respiratory, including speech organs; cardiovascular;

reproductive; digestive; genitourinary; hemic and lymphatic; skin; and

endocrine; or

(ii) Any mental or psychological disorder, such as mental

retardation organic brain syndrome, emotional or mental illness, and

specific learning disabilities. The term ``physical or mental

impairment'' includes, but is not limited to, such diseases and

conditions as orthopedic, visual, speech, and hearing impairments,

cerebral palsy, epilepsy, muscular dystrophy, multiple sclerosis,

cancer, heart disease, diabetes, mental retardation, emotional illness,

HIV disease (whether symptomatic or

[[Page 15408]]

asymptomatic), and drug addiction and alcoholism.

(2) Major life activities include functions such as caring for

one's self, performing manual tasks, walking, seeing, hearing,

speaking, breathing, learning, and working.

(3) Has a record of such an impairment means has a history of, or

has been misclassified as having, a mental or physical impairment that

substantially limits one or more major life activities.

(4) Is regarded as having an impairment means--

(i) Has a physical or mental impairment that does not substantially

limit major life activities but is treated by the agency as

constituting such a limitation;

(ii) Has a physical or mental impairment that substantially limits

major life activities only as a result of the attitudes of others

toward such impairment; or

(iii) Has none of the impairments defined in paragraph (1) of this

definition but is treated by the agency as having such an impairment.

PITI ratio. The amount paid by the borrower for principal,

interest, taxes, and insurance, divided by repayment income.

Primary loan. The oldest RHS loan on the property.

Prior lien. A security instrument or a judgment against the

security property that is superior to the RHS debt instrument.

Program-eligible applicant. Person meeting the eligibility

requirements described in Sec. 3550.53 of subpart B of this part.

Program-eligible property. A property eligible to be financed under

this part, as determined by the criteria listed in Sec. Sec. 3550.56

through 3550.59 of subpart B of this part.

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 to protect the security

interest of the government which 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.

RECD. Rural Economic Community Development, a mission area within

the Department of Agriculture which includes the Rural Housing Service.

REO. 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 adjusted annual income. See

Sec. 3550.54 of subpart B of this part 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 interest rate. The current unsubsidized interest rate offered

by RHS, available in any RECD office.

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, and

(A) Is not contained within a Metropolitan Statistical Area, and

(B) Has a serious lack of mortgage credit for low- and moderate-

income households as determined by the Secretary of Agriculture and

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.

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, or other documented

agreements between RHS and the borrower.

Secured loan. A loan that is collateralized by property so that in

the 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 a

RHS loan.

Total debt ratio. The amount paid by the borrower for principal,

interest, taxes, insurance and any continuing obligations, divided by

the 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.

Unsecured loan. A loan evidenced only by the borrower's promissory

note.

Value appreciation. The current market value of an RHS financed

property minus: the unpaid balance of the RHS debt; reasonable selling

expenses (if any); and the original equity (if any) of the borrower.

Very low-income. An adjusted income that does not exceed the HUD-

established very low income limit (generally 50% 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 priority extended to any person applying for

a loan or grant under this part who has been honorably discharged,

including clemency discharges, or released from the active forces of

the United States Army, Navy, Air Force, Marine Corps, or Coast Guard,

who served on active duty in such forces:

(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; or

(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.

Secs. 3550.11-3550.50 [Reserved]

Subpart B-Section 502 Origination

Sec. 3550.51 Program objectives.

Section 502 of the Housing Act of 1949 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 encouraged to use section 502

funds in conjunction with funding

[[Page 15409]]

or financing from other sources, if possible. Sections 3550.52 through

3550.73 of this subpart set forth the requirements for originating

loans or program terms. Section 3550.74 of this subpart describes the

differences for origination of loans on nonprogram 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 a 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. 3550.203 of subpart

E of this part.

(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 fees, architectural and engineering fees, technical fees, title

clearance fees, and loan closing fees; appraisal, surveying,

environmental, and tax monitoring 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.

(3) Reasonable connection fees 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 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 and property insurance premiums.

(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 a RHS Real Estate Owned (REO) property.

(e) Loan restrictions. Loan funds may not be used to:

(1) Refinance debts on a manufactured home.

(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- Borrower eligibility requirements.

(a) Income eligibility. The adjusted income of an applicant must

not exceed the applicable low-income limit for the area, adjusted for

household size (available in any Rural Economic Community Development

(RECD) office). Section 3550.54 of this subpart provides a detailed

discussion of the calculation of adjusted income.

(b) Citizenship status. The applicant must be a natural person

(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, or a noncitizen who qualifies as

a legal alien as defined in Sec. 3550.10 of subpart A of this part.

(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) In either case, 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. (1) Current homeowners with

a non-RHS loan may receive RHS loan funds to refinance an existing loan

under the conditions outlined in Sec. 3550.52(b) of this subpart, or to

purchase a new dwelling if the current dwelling cannot reasonably be

brought up to local code requirements.

(2) Current homeowners with a RHS loan may receive additional loan

funds to repair the dwelling.

(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

[[Page 15410]]

handled in accordance with FmHA Instruction 1940-M, available in any

RECD office.

(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 plus recurring monthly debts does not exceed 38 percent of the

applicant's repayment income.

(2) A low-income applicant is considered to have repayment ability

when the monthly amount required for payment of PITI does not exceed 33

percent of the applicant's repayment income, and the monthly amount

required to pay PITI plus recurring monthly debts does not exceed 38

percent of repayment income.

(3) Repayment ratios may exceed the percentages specified in

paragraphs (g)(1) and (g)(2) of this section if the applicant has

demonstrated an ability to meet higher debt obligations, or if RHS

determines, based on other compensating factors, that the household has

a higher repayment ability.

(h) Credit qualifications. Applicants must be unable to secure the

necessary credit from other sources upon terms and conditions that the

applicant could reasonably be expected to fulfill. Applicants must have

a credit history that indicates reasonable ability and willingness to

meet debt obligations. An outstanding judgment obtained by the United

States in a federal court, other than the United States Tax Court,

demonstrates an unacceptable credit history.

(1) Indicators of unacceptable credit include:

(i) Incidents of more than two debt payments more than 30 days late

within the last 12 months.

(ii) Loss of security due to a foreclosure if the foreclosure has

been completed within the last 36 months.

(iii) An outstanding Internal Revenue Service (IRS) tax lien or any

other outstanding tax liens with no satisfactory arrangement for

payment.

(iv) A court-created or court-affirmed obligation or judgment

caused by nonpayment that is currently outstanding or has been

outstanding within the last 12 months, except for those excluded in

paragraphs (h)(2)(ii) and (h)(2)(iii) of this section.

(v) Two or more rent payments paid 30 or more days late within the

last two years, or within the last year if the applicant has

experienced no other credit problems in the past two years. This may be

waived if the RHS loan will reduce shelter costs significantly and

contribute to an improved repayment ability.

(vi) Outstanding collection accounts with a record of irregular

payment with no satisfactory arrangements for repayment, or collection

accounts that were paid in full within the last six months.

(vii) Non-agency debts written off within the last 36 months.

(viii) Agency debts that were debt settled, or are being considered

for debt settlement.

(2) The following will not be considered indicators of unacceptable

credit:

(i) Lack of a credit history.

(ii) A bankruptcy in which debts were discharged more than 36

months prior to the date of application or where an applicant

successfully completed a bankruptcy debt restructuring plan and has

demonstrated a willingness to meeting obligations when due for the 12

months prior to the date of application.

(iii) A judgment satisfied more than 12 months before the date of

application, or foreclosure with no monetary loss that was completed

more than 12 months before the date of application.

(3) When an application is rejected because of unacceptable credit,

the applicant will be informed of the reason and source of information.

(4) Co-signers. If an applicant does not meet the repayment ability

requirements, the applicant can have another party join the application

as a co-signer.

(5) Additional applicants. If an applicant does not meet the

repayment ability requirements, the applicant can have other household

members join the application.

Sec. 3550.54- Calculation of income and assets.

(a) Annual income. Annual income is the full amount of income all

adult household members living on the financed property are expected to

receive over the next 12 months from the sources listed in paragraphs

(a)(1) through (a)(8) of this section. Income from the sources listed

in paragraphs (c) and (d) of this section is excluded from the

calculation of annual income. Annual income is the base from which

adjusted income and repayment income are calculated. The following is a

complete list of the sources of income that may contribute to annual

income.

(1) The gross amount, before any payroll deductions, of wages and

salaries, overtime pay, commissions, fees, tips, bonuses, and other

compensations for personal services. If a cost of living allowance or a

proposed increase in income is expected to take place on or before loan

approval, loan closing, or the effective date of the payment assistance

agreement, it will be included as income.

(2) The net income from the operation of a farm, business, or

profession. The following provisions apply:

(i) Expenditures for business or farm expansion, capital

improvements, or payments of principal on capital indebtedness shall

not be used as deductions in determining income. A deduction is allowed

in the manner prescribed by Internal Revenue Service (IRS) regulations

only for interest paid in amortizing capital indebtedness.

(ii) Farm and nonfarm business losses are considered ``0'' in

determining annual income.

(iii) A deduction, based on straight line depreciation, is allowed

in the manner prescribed by IRS regulations for the exhaustion, wear

and tear, and obsolescence of depreciable property used in the

operation of a trade, farm, or business by a member of the household.

The deduction must be based on an itemized schedule showing the amount

of straight line depreciation.

(iv) Any withdrawal of cash or assets from the operation of a farm,

business, or profession will be included in income, except to the

extent the withdrawal is reimbursement of cash or assets invested in

the operation by a member of the household.

(v) A deduction is allowed for verified business expenses, such as

lodging, meals, and fuel, for business trips made by salaried employees

who must meet these expenses without reimbursement.

(vi) Housing related expenses for the property being financed such

as mortgage interest, real estate taxes, and insurance, which may be

claimed as business expense deductions for income tax purposes, will

not be deducted from annual income.

(3) Interest, dividends, and other net income of any kind from real

or personal property, including:

(i) The share received by adult members of the household from

income distributed from a trust fund.

(ii) Any withdrawal of cash or assets from an investment except to

the extent the withdrawal is reimbursement of cash or assets invested

by a member of the household.

(iii) Where the household has net family assets in excess of

$5,000, the greater of the actual income derived from all net family

assets or a percentage of the value of such assets

[[Page 15411]]

based on the current passbook savings rate, as determined by RHS.

(4) The full amount of periodic payments received from Social

Security (including Social Security received by adults on behalf of

minors or by minors intended for their own support), annuities,

insurance policies, retirement funds, pensions, disability or death

benefits, and other similar types of periodic receipts. Amounts

received from the United States Government which are attributable to

underpayment of benefits for one or more prior months shall be excluded

in the calculation of annual income as provided in 42 U.S.C.

1382b(a)(7).

(5) Payments in lieu of earnings, such as unemployment and

disability compensation, worker's compensation, and severance pay.

(6) Public assistance, unless exempted by federal statute.

(7) Periodic allowances, such as:

(i) Alimony and child support awarded in a divorce decree or

separation agreement, unless the applicant certifies the payments are

not received, and the applicant provides documentation to RHS that a

reasonable effort has been made to collect the payments through the

official entity responsible for enforcing such payments; or

(ii) Recurring monetary gifts or contributions from someone who is

not a member of the household.

(8) All regular pay, special pay (except for persons exposed to

hostile fire), and allowances of a member of the armed forces who is

the applicant or spouse, whether or not that family member lives in the

home.

(b) Adjusted income. Adjusted income is the household's annual

income, as defined in paragraph (a) of this section, less any of the

following deductions for which the household is eligible. Adjusted

income is used to determine program eligibility for sections 502 and

504 and the amount of payment subsidy for which the household qualifies

under section 502.

(1) A deduction as determined under section 501(b)(5) of the

Housing Act of 1949, as amended, for each family member, not including

an applicant or spouse, who is under 18 years of age, 18 or older with

a disability, or a full-time student.

(2) A deduction as determined under section 501(b)(5) of the

Housing Act of 1949, as amended, for any elderly family.

(3) For non-elderly households, a deduction of expenses related to

the care of household members with disabilities that:

(i) Enable a family member to work,

(ii) Are not reimbursed from insurance or any other source, and

(iii) Are in excess of three percent of annual income.

(4) For elderly households only, a deduction of the sum of expenses

related to household members with disabilities that are necessary to

enable a family member to work and medical expenses that:

(i) Will not be reimbursed by insurance or any other source, and

(ii) Is in excess of three percent of annual income.

(5) A deduction of expenses for the care of minors 12 or under that

enable a family member to work or to further the applicant's education.

(c) Repayment income. Repayment income is used in calculating the

household's principal, interest, taxes, and insurance (PITI) and Total

Debt ratios, which, in turn, indicate repayment ability. Repayment

income is the household's annual income, as defined in paragraph (a) of

this section, plus income from any of the following additional sources.

(1) Payments received for the care of foster children or foster

adults (usually individuals with disabilities, unrelated to the

applicant, who are unable to live alone).

(2) Amounts granted specifically for, or in reimbursement of, the

cost of medical expenses.

(3) Earnings in excess of an amount determined under section

501(b)(5) of the Housing Act of 1949, as amended, for each full-time

student 18 years old or older, excluding the head of household and

spouse.

(4) Any earned income tax credit.

(5) Adoption assistance payments in excess of an amount determined

under section 501(b)(5) of the Housing Act of 1949, as amended, per

adopted child.

(6) Amounts received by the family in the form of refunds or

rebates under state or local law for property taxes paid on the

dwelling unit.

(7) Amounts paid by a state agency to a family with a

developmentally disabled family member living at home to offset the

cost of services and equipment needed to keep the developmentally

disabled family member at home.

(8) Any other revenue that a federal statute exempts.

(d) Income exclusions. Sources of income excluded from both annual

and repayment income include:

(1) Income of live-in aides.

(2) Income from employment of minors, including foster children.

(3) Student financial aid paid directly to the student or the

educational institution.

(e) Net family assets. (1) The value of equity in real property,

other than the dwelling or site; cash on hand; savings; checking

accounts; demand deposits; and the market value of stocks, bonds, and

other forms of capital investments, including voluntary retirement

plans that are accessible to the applicant such as individual

retirement accounts (IRAs), 401(k) plans, and Keogh accounts, as well

as amounts that can be withdrawn from other retirement and pension

funds without retiring or terminating employment, but exclude:

(i) Interests in American Indian trust land,

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

loan,

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

furniture and automotive,

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

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

engaged in such operation, and

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

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

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

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

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

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

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

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

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

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

member receives important consideration not measurable in dollar terms.

Sec. 3550.55 Applications.

(a) Application submissions. All persons applying for RHS loans

must file a written application in a format specified by RHS.

Applications will be accepted even when funds are not available.

(b) Agency processing of applications. (1) Incomplete applications

will be returned to the applicant specifying in writing the additional

information that is needed to make the application complete.

(2) An applicant may voluntarily withdraw an application at any

time.

(3) RHS may periodically request in writing that applicants

reconfirm their interest in obtaining a loan. RHS may withdraw the

application of any applicant who does not respond within the specified

time frame.

[[Page 15412]]

(4) Applicants who are eligible will be notified in writing. If

additional information becomes available that indicates that the

original eligibility determination may have been in error, RHS may

reconsider the application and the applicant may be required to submit

additional information.

(5) Applicants who are ineligible will be notified in writing and

provided with the specific reasons for the rejection.

(c) Funding priorities. When funding is insufficient to serve all

program-eligible applicants, applications will be considered and funded

using the funding priorities specified in this paragraph. Within

priority categories, applications will be processed and funded in the

order that the completed applications are received. In the case of

applications with equivalent priority status that are received on the

same day, preference will be extended to applicants qualifying for a

veteran's preference.

(1) First priority will be given to borrowers who request

subsequent loans to correct health and safety hazards.

(2) Second priority will be given to applicants who qualify for any

of the following preferences:

(i) Hardship circumstances including applicants living in deficient

housing for more than six months, current homeowners in danger of

losing a property through foreclosure, and other circumstances

determined by RHS on a case-by-case basis to constitute a hardship.

(ii) Loans related to the sale of an REO property.

(iii) Loans related to the transfer of an existing RHS property.

(iv) Loans for the construction of dwellings in an RHS-approved

Mutual Self-Help project.

(v) Loans that will leverage funding or financing from other

sources.

(3) Applications from applicants who do not qualify for priority

consideration in paragraphs(c)(1) or (c)(2) of this section.

Sec. 3550.56 Site requirements.

(a) Rural areas. Loans may be made only in rural areas designated

by RHS. If an area designation is changed to non-rural:

(1) New conditional commitments will be made and existing

conditional commitments will be honored only in conjunction with an

applicant for a section 502 loan who applied for assistance before the

area designation changed.

(2) REO property sales and transfers with assumption may be

processed.

(3) Subsequent loans may be made either in conjunction with a

transfer with assumption of an RHS loan, or to repair properties that

have RHS loans.

(b) Site standards. Sites must be developed in accordance with

subpart C of part 1924 of this title and any applicable standards

imposed by a state or local government.

(1) The site must not be large enough to subdivide into more than

one site under existing local zoning ordinances.

(2) The site must not include farm service buildings, though small

outbuildings such as a storage shed may be included.

Sec. 3550.57- Dwelling requirements.

(a) Modest dwelling. The property must be one 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

(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.

(d) New dwellings. Construction must meet the requirements in

subpart A of part 1924 of this title.

(c) Existing dwellings. Existing dwellings must be structurally

sound; functionally adequate; in good repair, or to be placed in good

repair with loan funds; have adequate electrical, heating, plumbing,

water, and wastewater disposal systems; be free of termites and other

wood damaging pests and organisms; and meet the thermal performance

requirements of subpart A of part 1924 of this title.

Sec. 3550.58- Ownership requirements.

After the loan is closed, the borrower must have an acceptable

interest in the property as evidenced by one of the following.

(a) Full fee ownership. Acceptable full fee ownership is evidenced

by a fully marketable title with a deed vesting a fee interest in the

property to the borrower.

(b) Secure leasehold interest. To be acceptable a leasehold

interest must have an unexpired term that is at least 150 percent of

the term of the mortgage, unless the loan is guaranteed, in which case

the unexpired term of the lease must be at least two years longer than

the loan term. In no case may the unexpired term be less than 15 years.

(c) Life estate interest. To be acceptable a life estate interest

must provide the borrower with rights of present possession, control,

and beneficial use of the property. Generally, persons with any

remainder interests must be signatories to the mortgage. The remainder

interests need not be included in the mortgage to the extent that one

or more of the persons holding remainder interests are not legally

competent (and there is no representative who can legally consent to

the mortgage), cannot be located, or if the remainder interests are

divided among such a large number of people that it is not practical to

obtain the signatures of all of the remainder interests. In such cases,

the loan may not exceed the value of the property interests owned by

the persons executing the mortgage.

(d) Undivided interest. Generally, all legally competent co-owners

will be required to sign the mortgage. When one or more of the co-

owners are not legally competent (and there is no representative who

can legally consent to the mortgage), cannot be located, or the

ownership interests are divided among so large a number of co-owners

that it is not practical for all of their interests to be mortgaged,

their interests not exceeding 50 percent may be excluded from the

security requirements. In such cases, the loan may not exceed the value

of the property interests owned by the persons executing the mortgage.

(e) Possessory rights. Acceptable forms of ownership include

possessory rights on an American Indian reservation or state-owned land

and the interest of an American Indian in land held in severalty under

trust patents or deeds containing restrictions against alienation,

provided that land in trust or restricted status will remain in trust

or restricted status.

Sec. 3550.59- Security requirements.

Before approving any loan, RHS will impose requirements to secure

its interests.

(a) Adequate security. Generally a loan will be considered

adequately secured only when all of the following requirements are met:

(1) RHS obtains at closing a mortgage on all ownership interests in

the security property.

(2) No liens prior to the RHS mortgage exist at the time of closing

and no junior liens are likely to be taken immediately subsequent to or

at the time of closing, unless the other liens are taken as part of a

leveraging strategy. Liens junior to the RHS lien will be allowed at

loan closing if the junior lien will not interfere with the purpose or

repayment of the RHS loan and the total value of all liens on the

property is less than the property's market value.

(3) The provisions of subpart B of part 1927 of this title

regarding title clearance and the use of legal services have been

followed.

[[Page 15413]]

(4) Existing and proposed property improvements are totally on the

site and do not encroach on adjoining property.

(b) Guaranteed payment. Mortgage insurance guaranteeing payment

from a government agency or Indian tribe is adequate security.

Sec. 3550.60- Escrow account.

RHS may require that borrowers deposit into an escrow account

amounts necessary to ensure that the account will contain sufficient

funds to pay real estate taxes, hazard and flood insurance premiums,

and other related costs when they are due.

(a) At loan settlement, or upon creation of the escrow account, RHS

may require borrowers to deposit funds sufficient to pay taxes and

insurance premiums applicable to the mortgage for the period since the

last payments were made.

(b) RHS will estimate the amount of funds due on the basis of

current data and reasonable estimates of future expenditures.

(c) Escrow accounts will be administered in accordance with the

Real Estate Settlement and Procedures Act of 1974 (RESPA) and section

501(e) of the Housing Act of 1949.

Sec. 3550.61- Insurance.

(a) Borrower responsibility. Until the loan is paid in full the

borrower must furnish and continually maintain hazard and flood

insurance on property securing RHS loans, with companies, in amounts,

and on terms and conditions acceptable to RHS. Borrowers who are

required to have insurance may be required to escrow funds to ensure

payment.

(b) Amount. Essential buildings must be insured in an amount at

least equal to their depreciated replacement value.

(c) Flood insurance. Flood insurance must be obtained and

maintained for the life of the loan for all property located in a

Special Flood Hazard Area (SFHA/0 as determined by the Federal

Emergency Management Agency (FEMA). If flood insurance is not available

in a SFHA, the property is not eligible for federal financial

assistance.

(d) Losses. (1) Loss deductible clauses may not exceed $250 or one

percent of the insurance coverage, whichever is greater. The deductible

for any one building may not exceed $750.

(2) Borrowers must immediately notify RHS of any loss or damage to

insured property and collect the amount of the loss from the insurance

company.

(3) Depending on the amount of the loss, RHS may require that loss

payments be supervised. All repairs and replacements done by or under

the direction of the borrower, or by contract, will be planned,

performed, inspected, and paid for in accordance with subpart A of part

1924 of this title.

(4) When insurance funds remain after all repairs, replacements,

and other authorized disbursements have been made, the funds will be

applied in the following order:

(i) Prior liens, including delinquent property taxes.

(ii) Past-due amounts.

(iii) Protective advances due.

(iv) Applied as an extra payment if the borrower has less than 20

percent equity in the property.

(v) Released to the borrower if the borrower has 20 percent or more

equity in the property.

(5) If a loss occurs when insurance is not in force, the borrower

is responsible for making the needed repairs or replacements and

ensuring that the insurance is reinstated on the property.

(6) If the borrower is not financially able to make the repairs,

RHS may take one of the following actions:

(i) Make a subsequent loan for repairs.

(ii) Subordinate the RHS lien to permit the borrower to obtain

funds for needed repairs from another source.

(iii) Permit the borrower to obtain funds secured by a junior lien

from another source.

(iv) Make a protective advance to protect the government's

interest.

(v) Accelerate the account.

Sec. 3550.62- Appraisals.

(a) Requirement. An appraisal is required when the debt to be

secured exceeds $15,000 or whenever RHS determines that it is necessary

to establish the adequacy of the security. Other real estate that is

mortgaged as additional security will be appraised when it represents a

substantial portion of the security for the loan. Appraisals must be

made in accordance with the Uniform Standards of Professional Appraisal

Practices (USPAP) and subpart C of part 1922 of this title.

(b) Fees. RHS will charge a fee for each loan application that

requires an appraisal. The appraisal fee will be waived on appraisals

done for subsequent loans needed to make minimal, essential repairs.

Fees collected in connection with a dwelling constructed under an

approved conditional commitment will be paid to the contractor at

closing to offset the cost of the real estate appraisal that is

included in the conditional commitment fee.

Sec. 3550.63- Maximum loan amount.

A loan may not exceed the limit established by section 203(b) of

the National Housing Act, except by the amount of the RHS appraisal fee

and the required contribution to an escrow account for taxes and

insurance, unless RHS authorizes an exception.

(a) Area-wide exception. Area-wide exceptions may be granted when

RHS determines that the section 203(b) limit is too low to enable

applicants to purchase adequate housing.

(b) Individual Exceptions. Individual exceptions may be granted to

accommodate the specific needs of an applicant, such as to serve

exceptionally large households or to provide reasonable accommodation

for a household member with a disability. Any additional loan amount

approved must not exceed the amount required to address the specific

need.

Sec. 3550.64 Down payment.

Applicants are required to contribute a portion of net family

assets toward purchase of the property. Elderly families must use any

net family assets in excess of $10,000 for this purpose; non-elderly

families must use net family assets in excess of $7,500. Applicants may

contribute assets in addition to the required down payment to further

reduce the amount to be financed.

Sec. 3550.65 Loan-to-value ratio.

(a) General requirements. Except as noted in paragraph (c) of this

section, total indebtedness, including the RHS loan plus other liens,

may exceed the market value of the security property only as needed to

cover the amount of the RHS appraisal fee and the required contribution

to establish an escrow account for taxes and insurance.

(b) Loans limited to 90% of the market value. Loans for new

dwellings are limited to 90% of the market value plus the amount of the

RHS appraisal fee and the required contribution to establish an escrow

account for taxes and insurance unless:

(1) RHS has issued a conditional commitment for the property,

(2) The loan will be closed prior to the start of construction, so

that RHS can ensure that the construction conforms to subpart A of part

1924 of the title, or

(3) Documentation is provided indicating that the construction was

inspected by either the Federal Housing Administration (FHA) or

Department of Veterans Affairs (VA) and meets the requirements imposed

by either agency.

(c) Loan in excess of market value. Total indebtedness, including

the RHS loan plus other liens, may exceed the market value of the

property when:

(1) RHS makes a subsequent loan for closing costs only,

simultaneously with the sale of a REO property or a transfer.

[[Page 15414]]

The total indebtedness may exceed the lesser of the sales price or

market value of the security property by up to one percent, plus the

required contribution to establish an escrow account for taxes and

insurance.

(2) RHS makes a subsequent loan for repairs necessary to protect

the government's security interest. The excess amount may not exceed

the cost of the essential repairs, reasonable closing costs, and the

required contribution to establish an escrow account for taxes and

insurance.

(3) RHS refinances the loan of an existing RHS borrower. The excess

can be no more than is necessary to refinance the borrower's

outstanding indebtedness plus closing costs associated with the new

loan, and the required contribution to establish an escrow account for

taxes and insurance.

Sec. 3550.66 Interest rate.

Loans will be written using the RHS interest rate in effect at loan

approval or loan closing, whichever is lower. Information about current

interest rates is available in any RECD office.

Sec. 3550.67 Repayment period.

Loans will be scheduled for repayment over a period that does not

exceed the expected useful life of the property as a dwelling. The loan

repayment period will not exceed:

(a) Thirty-three years for initial and subsequent loans.

(b) Thirty-eight years for initial loans if the applicant's

adjusted annual income does not exceed 60 percent of area median and

the longer term is necessary to show repayment ability. The repayment

period of subsequent loans for these borrowers may be up to the lesser

of the remaining term or 33 years.

(c) Ten years for loans not exceeding $2,500 that are not secured

by a mortgage.

Sec. 3550.68 Payment subsidies.

RHS currently administers two types of payment subsidies. Before

October 27, 1995 RHS assistance was provided in the form of interest

credit. Since that time, subsidies have been provided in the form of

payment assistance. Payment subsidies are subject to recapture when the

borrower transfers title or ceases to occupy the property. Borrowers

must sign a subsidy repayment agreement at the time subsidy is

received.

(a) Eligibility for payment subsidies. (1) To be eligible to

receive payment subsidy, an applicant or borrower must agree to

personally occupy the property.

(2) An applicant may receive payment assistance for initial loans

or assumptions at new rates and terms if the applicant's adjusted

annual income does not exceed either the applicable low-income limit at

the time of loan approval, or the applicable moderate-income limit at

the time of loan closing. The loan for which payment assistance is

being requested must have term of at least 25 years.

(3) A borrower receiving a payment subsidy on an initial loan may

receive a payment subsidy on a subsequent loan if the borrower's income

does not exceed the moderate-income limit.

(4) A borrower not receiving a payment subsidy is eligible for

payment assistance if the borrower's adjusted annual income does not

exceed the applicable moderate-income limit.

(5) A payment subsidy may be granted when a loan is assumed on the

terms of the promissory note only if the original loan was approved on

or after August 1, 1968.

(b) Conversion from interest credit to payment assistance. A

borrower currently receiving interest credit will continue to receive

it for the initial loan and for any subsequent loan for as long as the

borrower is eligible and remains on interest credit. A borrower who has

never received interest credit, or who has stopped receiving interest

credit and at a later date again qualifies for a payment subsidy, will

receive payment assistance.

(c) Calculation of payment assistance. The amount of payment

assistance is the difference between the installment due on the

promissory note and the greater of the payment amortized at the

equivalent interest rate or the payment calculated based on the

required floor payment.

(1) The floor payment is a minimum percentage of adjusted annual

income that the borrower must pay for PITI as follows:

(i) Very low-income borrowers must pay a minimum of 22 percent;

(ii) Low-income borrowers with adjusted annual income below 65

percent of median income must pay a minimum of 24 percent; and

(iii) Low-income borrowers with adjusted annual incomes between 65

and 80 percent of median income must pay a minimum of 26 percent.

(2) The equivalent interest rate is determined by a comparison of

the borrower's adjusted annual income to the median income for the area

in which the security property is located. The following chart is used

to determine the equivalent interest rate paid by applicants eligible

for payment assistance.

Percentage of Median Income Equivalent Interest Rate

When the applicant's adjusted income is:

Equal to or more than (percent): BUT less than: THEN the equivalent interest rate is

(percent)*

00 50.01% of median income 1

50.01 55% of median income 2

55 60% of median income 3

60 65% of median income 4

65 70% of median income 5

70 75% of median income 6

75 80.01% of median income 6.5

80.01 50% of median income 7.5

90 100% of median income 8.5

100 110% of median income 9

110 or more than median income 9.5

* Or note rate, whichever is less; in no case will the equivalent interest rate be less than one percent.

(d) Calculation of interest credit. The amount of interest credit

granted is the difference between the sum of the annual installments

due at the promissory note interest rate and the greater of:

(1) 20 percent of the borrower's adjusted annual income less the

cost of real estate taxes and insurance, or

(2) The amount the borrower would pay if the loan were amortized at

an interest rate of one percent.

(e) Annual review. The borrower's income will be reviewed annually

to determine whether the borrower is eligible for continued payment

subsidy. The borrower must notify RHS whenever an adult member of the

[[Page 15415]]

household changes or obtains employment so that RHS can determine

whether a review of the borrower's circumstances is required.

Sec. 3550.69- Deferred mortgage payments.

For qualified borrowers, RHS may defer up to 25 percent of the

monthly principal and interest payment at one percent for up to 15

years. Assistance may be granted only at initial loan closing and is

reviewed annually. Deferred mortgage payments are subject to recapture

when the borrower transfers title or ceases to occupy the property.

(a) Eligibility. In order to qualify for deferred mortgage

payments, all of the following must be true:

(1) The applicant's adjusted income, at the time of initial loan

approval, does not exceed the applicable very low-income limits.

(2) The loan term is 38 years, or 30 years for a manufactured home.

(3) The applicant qualifies for an equivalent interest rate of one

percent.

(4) The applicant's payments for principal and interest, calculated

at a one percent interest rate for the maximum allowable term, plus

estimated costs for taxes and insurance exceeds:

(i) For applicants receiving payment assistance, 29 percent of the

applicant's repayment income by more than $10 per month, or

(ii) For applicants receiving interest credit, 20 percent of

adjusted income by more than $10 per month.

(b) Amount and terms. (1) The amount of the mortgage payment to be

deferred will be the difference between the applicant's payment for

principal and interest, calculated at one percent interest for the

maximum allowable term, plus estimated costs for taxes and insurance

and:

(i) For applicants receiving payment assistance, 29 percent of the

applicant's repayment income.

(ii) For applicants receiving interest credit, 20 percent of

adjusted income.

(2) Deferred mortgage payment agreements will be effective for a 12

month period.

(3) Deferred mortgage assistance may be continued for up to 15

years after loan closing. Once a borrower becomes ineligible for

deferred mortgage assistance, the borrower can never again receive

deferred mortgage assistance, even if income decreases at a later date.

(c) Annual review. The borrower's income, taxes, and insurance will

be reviewed annually to determine eligibility for continued deferred

mortgage assistance. The borrower must notify RHS whenever an adult

member of the household changes or obtains employment so that RHS can

determine whether a review of the borrower's circumstances is required.

Adjustments to deferred mortgage assistance will be effective as of the

date of income change.

Sec. 3550.70 Conditional commitments.

A conditional commitment is a determination by RHS that a dwelling

to be offered for sale will be acceptable for purchase by a qualified

RHS loan applicant if it is built or rehabilitated in accordance with

RHS-approved plans, specifications, and regulations and priced within

the applicable HUD section 203(b) limit. The conditional commitment

does not reserve funds, does not guarantee funding, nor does it ensure

that an eligible loan applicant will be available to buy the dwelling.

(a) Eligibility. To be eligible to request a conditional

commitment, the builder, dealer-contractor, or seller must:

(1) Have an adequate ownership interest in the property, as defined

in Sec. 3550.58 of this subpart, prior to the beginning of any planned

construction;

(2) Have the experience and ability to complete any proposed work

in a competent and professional manner;

(3) Have the legal capacity to enter into the required agreements;

(4) Be financially responsible and have the ability to finance or

obtain financing for any proposed construction or rehabilitation.

Anyone who receives five or more conditional commitments during a 12-

month period must obtain RHS approval of an affirmative marketing plan;

(5) Comply with the requirements of subpart E of part 1901 of this

title and all applicable laws, regulations, and Executive Orders

relating to equal opportunity.

(b) Limitations. Conditional commitments for new or substantially

rehabilitated dwellings will not be issued after construction has

started. RHS may limit the total number of conditional commitments

issued in any locality based on market demand.

(c) Commitment period. A conditional commitment will be valid for

12 months from the date of issuance. The commitment may be extended for

up to an additional six months if there are unexpected delays in

construction caused by such factors as bad weather, materials

shortages, or marketing difficulties. Conditional commitments may be

canceled if construction does not begin within 60 days after the

commitment is issued.

(d) Conditional commitments involving packaging of applications. A

conditional commitment may be made to a seller, builder, or dealer-

contractor who packages an RHS loan application for a prospective

purchaser. In cases where the dwelling is pre-sold and is to be

constructed for sale to a specific eligible applicant, all of the

following conditions must be met:

(1) The conditional commitment will not be approved until the RHS

loan has been approved;

(2) Construction will not begin until loan funds are obligated for

the loan. Exceptions may be made when it appears likely that funding

will be forthcoming and as long as the RHS lien priority is not

jeopardized. The sales agreement must indicate that the loan has been

approved but not funded and must provide that if the loan is not closed

within 90 days of the date of approval, the contractor may terminate

the sales agreement and sell the property to another party. If the

sales agreement is terminated, the conditional commitment will be

honored for another eligible loan applicant for the remaining period of

the commitment.

(3) The RHS loan will be closed only after the dwelling is

constructed or the required rehabilitation completed and final

inspection has been made.

(e) Fees. An application for a conditional commitment must include

payment of the conditional commitment fee. The fee will be refunded if

for any reason preliminary inspection of the property or investigation

of the conditional commitment applicant indicates that a conditional

commitment will not be issued. Application fees will not be refunded

for any property on which the required appraisal has been made.

(f) Failure of conditional commitment applicant or dwelling to

qualify. The conditional commitment applicant will be informed if the

conditional commitment is denied. Conditional commitments will be

cancelled if the property does not meet program requirements,

(g) Changes in plans, specifications, or commitment price. The

holder of the conditional commitment must request approval for changes

in plans, specifications, and commitment price. RHS may approve the

changes if the following requirements are met:

(1) The property price does not exceed the maximum loan limit, and

increases in costs are due to factors beyond the control of the

commitment holder;

(2) The property is still eligible and has not been optioned by a

RHS applicant;

(3) The requested changes are justifiable and appropriate.

[[Page 15416]]

(h) Builder's warranty. The builder or seller, as appropriate, must

execute either a RHS-approved ``Builder's Warranty,'' or provide a 10-

year insured warranty when construction is completed or the loan is

closed.

Sec. 3550.71 Special requirements for condominiums.

RHS loans may be made for condominium units under the following

conditions:

(a) Approval. The unit is in a project approved or accepted by HUD,

the Federal National Mortgage Association (Fannie Mae), or the Federal

Home Loan Mortgage Corporation (Freddie Mac).

(b) Compliance with statutes. The condominium project complies with

the requirements of the condominium enabling statute and all other

applicable laws. Any right of first refusal in the condominium

documents will not impair the rights of RHS to:

(1) Foreclose or take title to a condominium unit pursuant to the

remedies in the mortgage;

(2) Accept a deed or assignment in lieu of foreclosure in the event

of default by a mortgagor; and

(3) Sell or lease a unit acquired by RHS.

(c) If RHS obtains title to a condominium unit pursuant to the

remedies in its mortgage or through foreclosure, RHS will not be liable

for more than 3 months of the unit's unpaid regularly budgeted dues or

charges accrued before acquisition of the title to the unit by RHS. The

homeowners association's lien priority may not include costs of

collecting unpaid dues.

(d) In case of condemnation or substantial loss to the units or

common elements of the condominium project, unless at least two-thirds

of the first mortgagees or unit owners of the individual condominium

units have given their consent, the homeowners association may not:

(1) By act or omission seek to abandon or terminate the condominium

project;

(2) Change the pro rata interest or obligations of any condominium

unit in order to levy assessments or charges, allocate distribution of

hazard insurance proceeds or condemnation awards, or determine the pro

rata share of ownership of each condominium unit in the common

elements;

(3) Partition or subdivide any condominium unit;

(4) Seek to abandon, partition, subdivide, encumber, sell, or

transfer the common elements by act or omission; (the granting of

easements for public utilities or other public purposes consistent with

the intended use of the common elements by the condominium project is

not a transfer within the meaning of this clause); or

(5) Use hazard insurance proceeds for losses to any condominium

property (whether units or common elements) for other than the repair,

replacement, or reconstruction of the condominium property.

(e) All taxes, assessments, and charges that may become liens prior

to the first mortgage under local law relate only to the individual

condominium units and not to the condominium project as a whole.

(f) No provision of the condominium documents gives a condominium

unit owner or any other party priority over any rights of RHS as first

or second mortgagee of the condominium unit pursuant to its mortgage in

the case of a payment to the unit owner of insurance proceeds or

condemnation awards for losses to or taking of condominium units or

common elements.

(g) If the condominium project is on a leasehold the underlying

lease provides adequate security of tenure.

(h) At least 70 percent of the units have been sold. Multiple

purchases of condominium units by one owner are counted as one sale

when determining if the sales requirement has been met.

(i) No more than 15 percent of the unit owners are more than 1

month delinquent in payment of homeowners association's dues or

assessments at the time the RHS loan is closed.

Sec. 3550.72 Community land trusts.

Eligible dwellings located on land owned by a community land trust

may be financed under section 502 if:

(a) The loan meets all the requirements of this subpart, and

(b) Any restrictions, imposed by the community land trust on the

property or applicant are:

(1) Reviewed and accepted by RHS before loan closing, and

(2) Automatically and permanently terminated upon foreclosure or

acceptance by RHS of a deed-in-lieu of foreclosure.

Sec. 3550.73 Manufactured homes.

With the exception of the restrictions and additional requirements

contained in this section, section 502 loans on manufactured homes are

subject to the same conditions as all other section 502 loans.

(a) Loan purposes. RHS may finance the following when a real estate

mortgage covers both the unit and the site:

(1) An eligible new unit for an eligible site owned by the

applicant.

(2) An eligible new unit and an eligible site.

(3) Site development work in accordance with subpart A of part 1924

of this title.

(4) Subsequent loans for equity or repair with a transfer or credit

sale, or a subsequent loan for repair of a unit if the unit is

currently financed with a section 502 loan.

(5) Transportation and set-up costs if an eligible new unit is

financed.

(b) Loan restrictions. RHS may not use loan funds to finance:

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

section 502 loan or is a RHS REO property.

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

(3) Existing debts owed by the applicant.

(4) Alteration or remodeling of the unit after the initial loan is

made.

(5) Furniture, including movable articles of personal property such

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

televisions, radios, stereo sets, and other similar items of personal

property. Furniture does not include wall-to-wall carpeting,

refrigerators, ovens, ranges, washing machines, clothes dryers, heating

or cooling equipment, or other similar items.

(6) Repairs not associated with transfer or credit sale, or a unit

currently financed with a section 502 RH loan.

(c) Dealer-contractors. No loans will be made on a manufactured

home sold by any entity that is not an approved dealer-contractor.

(d) Loan term. The maximum term of a loan on a manufactured home is

30 years.

(e) Construction and development. Unit construction, site

development and set-up must conform to the FMHCSS and subpart A of part

1924 of this title. Development under the mutual self-help and borrower

construction methods is not permitted for manufactured homes.

(f) Contract requirements. The dealer-contractor must sign a

construction contract, as specified in Sec. 1924.6 of subpart A of part

1924 of this title which will cover both the unit and site development

work. The use of multi-contracts is prohibited. A dealer-contractor may

use subcontractors if the dealer-contractor is solely responsible for

all work under the contract. Payment for all work will be in accordance

with subpart A of part 1924 of this title, except no payment will be

made for materials or property stored on site (e.g., payment for a unit

will be made only after it is permanently attached to the foundation).

(g) Lien release requirements. All persons furnishing materials or

labor in connection with the contract must sign

[[Page 15417]]

a Release by Claimants document, as specified in Sec. 1924.6 of subpart

A of part 1924 of this title, except the manufacturer of the unit. The

manufacturer of the unit must furnish an executed manufacturer's

certificate of origin that the unit is free and clear of all legal

encumbrances. The use of a Release by Claimants document is optional in

a State if the State Director has issued a State Supplement not

requiring its use. However, in all States the certificate of origin is

required.

(h) Warranty requirements. A dealer-contractor must provide a

warranty in accordance with the provisions of Sec. 1924.12 of subpart A

of part 1924 of this title. The warranty must identify the unit by

serial number. The dealer-contractor must certify that the unit

substantially complies with the plans and specifications and the

manufactured home has sustained no hidden damage during transportation

and, if manufactured in separate sections, that the sections were

properly joined and sealed according to the manufacturer's

specifications. The dealer-contractor will also furnish the applicant

with a copy of all manufacturer's warranties.

Sec. 3550.74 Nonprogram loans.

RHS may provide credit on nonprogram (NP) terms to allow applicants

to assume existing RHS debt on new rates and terms. If additional funds

are required to purchase the property, the applicant must obtain them

from another source. NP terms may be extended to applicants who do not

qualify for program credit, or for properties that do not qualify as

program properties, when it is in the best interest of the government.

NP loans are originated and serviced according to the requirements for

program loans except as indicated in this subpart.

(a) NP loan purpose. NP loans may be offered to expedite:

(1) Sale of a REO property.

(2) Assumption of an existing program loan.

(3) Conversion of a program loan that has received unauthorized

assistance.

(4) Continuation of a loan on a portion of a security property when

the remainder is being transferred and the RHS debt is not paid in

full.

(b) Rates and terms. (1) Term:

(i) For an applicant who intends to occupy the property, the term

will not exceed 30 years.

(ii) For other applicants, the term will not exceed 10 years. If

more favorable terms are necessary to facilitate the sale, the loan may

be amortized over a period of up to 20 years with payment in full due

not later than 10 years from the date of closing.

(iii) An applicant with a NP loan under paragraph (b)(1)(i) of this

section who wishes to retain the property and purchase a new property

with RHS credit must purchase the second property according to the

terms of paragraph (b)(1)(ii) of this section, even if the new property

will serve as the applicant's principal residence.

(2) NP loans are written at the RHS interest rate in effect at the

time of loan approval.

(3) NP borrowers are not eligible for program benefits such as

payment assistance, deferred mortgage assistance, or a moratorium.

(c) Additional requirements. (1) NP applicants other than public

bodies and nonprofit organizations must pay a nonrefundable application

fee.

(2) NP applicants must make a down payment based on purchase price

in the case of credit sales, or, in the case of assumptions, on the

lower of market value of the property or debt incurred. The downpayment

will also be based upon whether the applicant intends to personally

occupy the property or use it for other purposes.

(3) NP applicants cannot finance loan closing costs.

(4) Loans will be secured only by the property purchased.

(5) RHS may require a NP applicant to pay a one-time tax service

fee to cover the cost of monitoring the property's tax status.

(d) Reduced restrictions. (1) NP applicants need not be unable to

obtain other credit in order to receive a NP loan and are not required

to refinance with private credit when they are able to do so.

(2) NP applicants are not required to occupy the property.

(3) NP applicants are not subject to leasing restrictions.

(4) Liquidation may be delayed for up to 90 days to permit a NP

borrower to liquidate voluntarily.

(e) Waiver of fees. When the purpose of the loan is the conversion

of a program loan that has received unauthorized assistance or

continuation of a loan on a portion of a security property when the

remainder is being transferred, the application fee, down payment, and

appraisal fee may be waived.

Sec. Sec. 3550.75-3550.100 [Reserved]

Subpart C--Section 504 Origination

Sec. 3550.101- Program objectives.

This subpart sets forth policies for administering loans and grants

under section 504(a) of Title V of the Housing Act of 1949. Section 504

loans and grants are intended to help very low-income owner-occupants

in rural areas repair their properties.

Sec. 3550.102- Grant and loan purposes.

Dwellings repaired with section 504 funds must be modest.

(a) Grant funds. Grant funds may be used only to pay costs for

repairs and improvements which will remove identified health and safety

hazards or to repair or remodel dwellings to make them accessible and

This text is long and has been trimmed here. Open the source document for the complete record.