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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A96-8492

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** April 8, 1996
- **Citation:** 61 FR 15395

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-8492. Public record. Not legal advice.