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

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1944

RIN 0575-AB93

Processing Requests for Section 515 Rural Rental Housing (RRH)

Loans

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service,

Rural Utilities Service, and Farm Service Agency, USDA.

ACTION: Final rule.

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

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

Farmers Home Administration (FmHA), amends its regulations for

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

This action is taken to improve loan processing procedures to better

accomplish the program's purpose of providing rental housing to rural

areas of greatest need.

In a future rulemaking document the comment period will be reopened

for the proposed market study revisions (Exhibit A-8 of 7 CFR part

1944, subpart E) only.

DATES: The effective date of this final rule is June 6, 1997.

FOR FURTHER INFORMATION CONTACT: Linda Armour, Senior Loan Specialist,

Multi-Family Housing Processing Division, RHS, U.S. Department of

Agriculture, Room 5349--South Building, Stop 0781, Washington, D.C.

20250, telephone (202) 720-1608.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be significant for purposes of

Executive Order 12886 and therefore has been reviewed by the Office of

Management and Budget.

Paperwork Reduction Act

The information collection requirements contained in this

regulation have been previously approved by the Office of Management

and Budget (OMB) under the provisions of 44 U.S.C. Chapter 35 and have

been assigned OMB control number 0575-0047, in accordance with the

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

information collection requirements.

Civil Justice Reform

This rule has been reviewed under Executive Order 12778, Civil

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

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

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

(3) administrative proceedings in accordance with 7 CFR part 11 must be

exhausted before bringing suit in court challenging action taken under

this rule.

Unfunded Mandate Reform Act

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

generally must prepare a written statement, including a cost-benefit

analysis, for proposed and final rules with ``Federal mandates'' that

may result in expenditures to State, local, or tribal governments, in

the aggregate, or to the private sector, of $100 million or more in any

one year. When such a statement is needed for a rule, section 205 of

the UMRA generally requires RHS to identify and consider a reasonable

number of regulatory alternatives and adopt the least costly, more

cost-effective or least burdensome alternative that achieves the

objectives of the rule.

This rule contains no Federal mandates (under the regulatory

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

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

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

National Performance Review

This regulatory action is being taken as part of the National

Performance Review program to eliminate unnecessary regulations and

improve those that remain in force.

Programs Affected

The affected program is listed in the Catalog of Federal Domestic

Assistance under Number 10.415, Rural Rental Housing Loans.

Intergovernmental Consultation

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

part 3015, subpart V, this program is subject to Executive Order 12372

which requires intergovernmental consultation with State and local

officials. RHS has conducted intergovernmental consultation in the

manner delineated in RD Instruction 1940-J.

[[Page 25072]]

Executive Order 12778

The Office of the General Counsel has determined that these

regulations meet the applicable standards provided in section 2(a) and

2(b)(2) of Executive Order 12778. The provisions of this rule will not

have retroactive effect prior to the effective date. The provisions of

this rule will preempt state and local laws to the extent such state

and local laws are inconsistent herewith. The administrative appeal

provisions published at 7 CFR parts 11 and 780 must be exhausted before

action for judicial review may be brought.

Environmental Impact Statement

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

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

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment and in

accordance with the National Environmental Policy Act of 1969, Public

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

Background

RHS has recognized the need to revise the manner in which Section

515 loan proposals are selected for processing to ensure that

affordable rental housing reaches areas of the greatest need. This

resulted from internal reviews by the Agency and reports from the

General Accounting Office, the USDA Office of the Inspector General

(OIG), and the Surveys and Investigations Staff of the House Committee

on Appropriations. In response to such findings, RHS published a

proposed rule on January 17, 1996 (61 FR 1153). This rule proposed

changes to the manner in which loans were selected for funding and

complied with statutory provisions of the Housing Act of 1949 at that

time. In addition, other program enhancements were proposed to improve

the quality of loan underwriting. Since publishing the proposed rule,

the Agriculture, Rural Development, Food and Drug Administration, and

Related Agencies Appropriations Act, 1997, Public Law 104-180 (herein

referred to as the Act) was enacted on August 6, 1996. The Act amended

the Housing Act of 1949 and revised the manner in which RHS selects

loan proposals. The provisions of the Act conflicted with many of the

revisions contained in the proposed rule. As a result, the Agency is

not implementing the changes affecting the priority point system which

were initially proposed on January 17, 1996.

In a separate rulemaking document, published elsewhere in this

issue of the Federal Register, RHS is implementing the provisions of

the Act. These changes are effective upon publication.

This rulemaking document implements the other program enhancements

proposed on January 17, 1996, which were not affected by the Act. This

rulemaking action is effective June 6, 1997.

RHS is also publishing elsewhere in this issue of the Federal

Register a Notice of Funding Availability (NOFA) announcing the

application requirements for Fiscal Year 1997 Section 515 funding.

Applicants for the Section 515 program should be aware that, although

the implementation dates are staggered, the provisions of both

rulemaking provisions published this date in the Federal Register and

the provisions contained in the NOFA will apply to any Section 515 loan

request to be processed in FY 1997.

Implementation Proposal

This rule includes provisions pertaining to applicant eligibility

and loan processing procedures that affect loan proposals in process.

All pending loan requests to be processed in FY 97 will be reviewed for

compliance and eligibility based on this regulation. Details of the

provisions adopted in this rule are given in the ``Discussion of

Comments'' section.

Discussion of Comments

The proposed rule was published in the Federal Register, 61 FR

1153, on January 17, 1996, with a 60-day comment period that ended

March 18, 1996. Nineteen comments were received during the comment

period from RHS personnel, developers, attorneys, housing advocacy

groups, and others.

As previously discussed, the revisions to the point system will not

be implemented because of recent legislation that directs the Secretary

to develop objective criteria for identifying and designating areas

with the greatest need for Section 515 housing. We appreciate the many

constructive comments that were received regarding the proposed

revisions. Many of these were general comments that were helpful in

developing regulations to implement the Act. We would also like to

thank the RHS staff who reviewed and provided excellent comments on the

draft census data and priority point scores for the revised system.

Two comments were received regarding the Agency's reserve account

requirements. One commentor expressed the opinion that Agency

requirements were not sufficient for the replacement of major building

components and recommended increasing the annual reserve account

requirement from one percent of the RHS loan amount to an amount

between five and seven percent. The second commentor mentioned the need

to address reserve account requirements for participation loans. As a

result, we have included guidance on reserve requirements for

participation loans in this rule. In addition, we have modified the

instructions for the Agency's loan agreement to ensure that reserve

levels are based on the total project, regardless of whether RHS is the

sole lender or is participating with other funding sources. The revised

instructions require that the fully funded reserve amount be based on

the project's total development cost (TDC) or the appraised value,

whichever is greater, rather than on the RHS loan amount.

Comments on the major proposed changes are discussed below:

1. Section 1944.211(a)(15). Eligibility requirements for applicants

with noncompliance issues or fair housing violations.

Five comments were received on this section:

Two comments pertained to paragraph (i), which provides that the

State Director may request a waiver from the Deputy Administrator,

Multi-Family Housing, to the requirement that applicants must be in

compliance with existing workout plans for a minimum of 6 months. One

commentor noted that this paragraph was inconsistent with existing

Agency policy, which gives the State Director the authority to grant

this waiver. This was an oversight; we have changed the appropriate

paragraph to be consistent with this policy. The second commentor

suggested that good faith borrowers be allowed to request a waiver

themselves. We believe the decision to request a waiver should be made

by the Agency; good faith borrowers should work with their local RHS

servicing official, who may request a waiver from the State Director

when circumstances warrant.

One commentor felt the Agency included items in the list of fair

housing violations that were not found in the Fair Housing Act and

suggested eliminating the Fair Housing provisions. The same commentor

found certain statements to be vague and asked for a definition of

several phrases, including ``unusual circumstances'', ``in compliance

with requirements of existing debts'', ``unacceptable compliance

reviews'', and ``acting in good faith''. Two commentors submitted

language they felt would accomplish the Agency's purpose and be

``defensible''.

[[Page 25073]]

The suggested language omits the 6-month compliance period for

borrowers with workout plans and instead requires only that an approved

workout plan be in place; it also changes the provision that borrowers

with serious violations will not be considered eligible to a provision

that applicants or principals who had been debarred are eligible if the

debarment period has expired.

We have made several changes to this section based on the comments

we received. The suggested wording regarding debarment has been

included but modified to state that applicants who had been debarred

but whose debarment period has expired will be considered for

eligibility, subject to all eligibility requirements. We have retained

our requirement for the 6-month compliance period to help ensure the

applicant is complying with the terms of the workout plan and not

merely signing a token plan in order to meet eligibility requirements.

We have further defined ``in compliance with existing debts,''

``unusual circumstances,'' and ``acted in good faith.'' The paragraph

on civil rights violations has been revised to specify that the

applicant and principals must be in compliance with the Civil Rights

Act of 1964, in accordance with their Assurance Agreement, Form RD 400-

4.

2. Section 1944.213(f)(3). ``Build and fill'' policies.

Because of the loan processing changes required by the Act, the

proposed language in section 1944.213(f)(3) regarding preapplications

and applications was not adopted in this rule. One commentor expressed

the opinion that the build and fill provisions should not apply if

there was no similarity between the proposed units and existing units

in type or kind, for example, family units versus elderly, 1-and 2-

bedroom units versus 3-and 4-bedroom units. We considered this

suggestion; however, regardless of type or size units, we believe it is

necessary to assess the impact of newly developed units on the existing

housing supply before authorizing additional units. For example, newly

developed units may create vacancies in existing single or multi-family

units that meet, or partially meet, the housing needs of the community.

Therefore, no changes have been made to this policy.

3. Section 1944.215(n), establishing profit base on initial

investment, has been revised to include provisions pertaining to low-

income housing tax credit (LIHTC) syndication proceeds.

4. Section 1944.215(x) has been added to require the RHS servicing

official to complete Form RD 2006-38, ``Civil Rights Impact Analysis

Certification,'' to ensure compliance with the civil rights policy of

the Rural Development mission area.

5. Section 1944.231. Several revisions were proposed to this

section but have not been adopted in this rule because of the changes

in loan processing procedures required by the Act.

6. Section 1944.233. Participation with other funding sources.

Ten comments were received on this section. No commentors opposed

this section but several changes were recommended:

Three commentors felt we should not require a minimum amount of RHS

participation. Two of these felt the Agency should be as flexible as

possible and should determine the amount of the loan on a case by case

basis; one felt it was in the ``best interest of the government'' for

RHS to provide the minimum funds necessary.

We carefully weighed the pros and cons of establishing a minimum

RHS funding level for participation loans. A major consideration is

whether sufficient RHS rental assistance (RA) will be available for the

large number of participation loans that could be developed without a

minimum RHS funding level. Nevertheless, we want to encourage and

participate in as many jointly-funded proposals as possible. Therefore,

each state will be responsible for determining the amount of RHS loan

funds and RA that can be provided for participation loans, based on the

Agency's funding priorities, the state's funding and RA levels, and the

amount of assistance needed to make the participation loan feasible. If

RHS RA is to be provided, RHS loan participation must equal at least

ten percent of the TDC unless an exception is granted to allow a lower

percentage of participation by the Administrator or Deputy

Administrator for Housing in accordance with Sec. 1944.240. No

preference will be given to participation loans, and all loans must be

processed in accordance with Agency regulations and funding priorities.

Two commentors noted that the proposed provisions regarding RA for

participation loans in this section were inconsistent with existing

Agency policy, which stipulates that, where all units require RA, the

RHS loan must equal at least 50 percent of TDC; where all units do not

require RA, the RHS loan must equal at least 25 percent and the RA

provided will be commensurate with RHS' loan participation (for

example, if RHS is providing 40 percent of the funds, no more than 40

percent of the units may receive RA). RA has been distributed this FY

based on existing policy; however, beginning in FY 1997, RA will be

distributed in accordance with Sec. 1944.233, which provides that RHS

RA can be provided on any unit where the debt service does not exceed

what it would have been if RHS provided full financing, up to the RA

limits established annually in RD Instruction 1940-L.

Several commentors felt that additional guidance was needed on

security requirements for participation loans; one commentor offered

suggestions for guidelines based on recent experience with jointly

funded Community Facility projects. As a result, we have added

additional guidance to this section.

We have added a paragraph designated ``Design requirements,'' to

ensure that complexes comply with the provisions of Sec. 1944.215 and

Sec. 1944.222 and that any nonessential facilities permitted under this

section are designed and operated with appropriate safeguards for

tenant health and safety.

7. Exhibit A-7, section II.A. Addition of a requirement in Exhibit

A-7 that the Market Study address need and demand for both family and

elderly households and the applicant's loan proposal reflect the

greater need.

Four commentors supported this requirement; three opposed it. Those

who opposed this measure felt that the applicant should have a choice

if there was a need for both types of housing. One commentor stated

that demand will almost always be greater for families and that little,

if any, elderly housing will be built if this requirement is

implemented, leaving the elderly no choice but to live in family

complexes although they often do not wish to do so.

After considering the arguments on both sides, we are adopting this

measure with the following modifications: First, we believe the

community should be aware of the results of the market analysis in all

cases, including the analyst's recommendations regarding project type

and size. We have revised exhibit A-7 to advise that the applicant will

make available to the community the market study's conclusions

regarding need and demand in the community and recommendations

regarding number of units, type and number of bedrooms. This does not

require the release of the market study in its entirety. Second, we

have revised ``greater need'' to ``greater proportionate need'', that

is, the share or percentage of the community's total rental units that

are designated for the elderly will be compared to the community's

share of elderly households, and the share of total rental units for

families will be compared to the share of family

[[Page 25074]]

households in the community. Third, the applicant's proposed complex

type must reflect the greater proportionate need of the community. (For

mixed complexes, the unit mix must reflect the proportionate need of

family and elderly households.) In unusual circumstances, an exception

may be granted to this requirement by the State Director if at least

one of the following conditions is met: the community's housing plan

indicates that the community's greater immediate need is for the

complex type of the smaller proportionate need and the plan includes a

specific proposal to address the housing needs of the other household

type; the complex has the support of a public community forum

represented by diverse interests; or the units are needed because of an

emergency or hardship situation, for example, a loss of housing caused

by a natural disaster. The circumstances for the exception must be

clearly documented in the casefile.

8. Exhibit A-7, section II.G. Use of a market survey to establish

market feasibility on a case-by-case basis for proposals of 12 or fewer

units.

Three commentors supported this change; three opposed it. One

commentor who supported the revision recommended that this authority be

limited to loan requests meeting specific conditions or from small

nonprofit applicants. Those who opposed this option believe a

professional market study is needed in all cases; one commented that

loan quality has improved since the Agency began requiring professional

market studies.

Opinions were evenly split on this issue, with good arguments for

both sides. Because this change is optional for each State and requires

a decision on a case-by-case basis under specific conditions, we have

implemented this provision.

9. Implementation of a preliminary preapplication stage including a

preliminary market analysis, or a preliminary market analysis only

(with an otherwise full preapplication).

Three commentors favored implementing both a preliminary

preapplication stage and market analysis; one commentor favored a

preliminary market analysis only; two opposed either option; two

commentors did not give an opinion (one wanted more information and

felt little was saved from the existing process, the other stated that

if a preliminary market analysis is implemented, a site visit should be

required). The arguments for continuing to require a full

preapplication and market analysis were compelling: (1) As much

information, if not more, is required to reject a proposal as to

authorize it; if rejected, it would be very difficult to defend the

Agency's decision based on preliminary information only; (2) Since two

Agency reviews would be required (preliminary and full), the processing

time would not be shortened; and (3) If a full market study is

requested at a later time, it implies a decision has been made and it

would be more difficult than ever to reject based on market

feasibility.

Because of the valid concerns of those opposing this change and

because there is no appreciable time savings, we are not implementing

either option at this time. In addition, with the low volume of new

loan requests because of reduced funding levels and the backlog of

approved proposals, implementation of a simplified application process

would not result in significant savings to either the public or RHS.

List of Subjects in 7 CFR Part 1944

Administrative practice and procedure, Aged, Handicapped, Loan

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

housing, Mortgages, Nonprofit organizations, Rent subsidies, Rural

areas.

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

amended as follows:

PART 1944--HOUSING

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

follows:

Authority: 5 U.S.C. 301; 42 U.S.C. 1480.

Subpart E--Rural Rental and Rural Cooperative Housing Loan

Policies, Procedures, and Authorizations

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

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

Sec. 1944.211 Eligibility requirements.

(a) * * *

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

cooperative sources on terms and conditions that allow establishment of

rent or occupancy charges within the payment ability of eligible

tenants or members.

* * * * *

(15) Meet the following requirements if the applicant, including

the principals, has prior or existing RHS debts and is applying for a

new or subsequent loan or requesting incentives to preclude prepayment.

Applicants who do not meet these requirements will be rejected for

failure to meet the applicable provisions of this section, as well as

Sec. 1965.213(c)(2)(i) of subpart E of part 1965 of this chapter, if

applicable.

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

with existing debts in accordance with all legal and regulatory

requirements and agreements, including the Promissory Note, Loan

Agreement, and mortgage, all applicable local, state, and federal laws,

and must provide regular financial and other required reports within

required timeframes; or, if the applicant fails to meet any of these

requirements, has an approved workout plan in effect that meets the

provisions of paragraph (a)(15)(ii) of this section.

(ii) An applicant or principal with an approved workout plan in

effect to correct deficiencies in an existing RHS debt may be

considered for eligibility if the applicant or principal has been in

compliance with the provisions of the workout plan for 6 months. The

State Director may waive this requirement for borrowers who have acted

in good faith but are in noncompliance through circumstances beyond

their control, including substantial local economic downturn, natural

disaster, assuming responsibility for a troubled loan through

substitution of the general partners, or assuming a loan with an

existing workout plan.

(iii) Applicants and principals must be in compliance with the

provisions of the Civil Rights Act of 1964 (in accordance with their

Form RD 400-4, ``Assurance Agreement'') and all other civil rights

laws. If the Agency has reasonable grounds, based on a substantiated

complaint, the Agency's own investigation, or otherwise, to believe

that the representations of an applicant or borrower as to civil rights

compliance are in some material respect untrue or are not being

honored, assistance may be deferred or denied.

(iv) Applicants or principals who have been debarred but whose

debarment period has expired will be considered for eligibility subject

to all requirements of this section.

(v) Applicants, including principals, who have been determined

ineligible by one state may not be determined eligible by another State

until the problems have been corrected or workout plans are in effect

in all States in which the applicant or principal is operating.

* * * * *

Sec. 1944.212 [Amended]

3. Section 1944.212 is amended by adding the words ``purchase and''

after the word ``such'' in the introductory text of paragraph (b).

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

(n)(2) and adding paragraph (x) to read as follows:

[[Page 25075]]

Sec. 1944.215 Special conditions.

* * * * *

(n) * * *

(1) Cash contributions made by the applicant from the applicant's

own resources, which, when added to the loan and grant amounts from all

sources, do not exceed the security value of the project. Proceeds

received by the applicant from the syndication of low-income housing

tax credits (LIHTC) and contributed to the project may be considered

funds from the applicant's own resources for the portion of the

proceeds which exceeds:

(i) the allowable developer's fee determined by the State Agency

administering the LIHTC, and

(ii) the amounts expected to be contributed to the transaction, as

determined by the State Agency administering the LIHTC.

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

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

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

security value of the project. An appraisal will be completed in

accordance with applicable RHS regulations. Value of the applicant's

contribution will be determined on an ``as is'' basis less liens

against the property.

* * * * *

(x) Civil Rights Impact Analysis. It is the policy within the Rural

Development mission area to ensure that the consequences of any

proposed project approval do not negatively or disproportionately

affect program beneficiaries by virtue of race, color, sex, national

origin, religion, age, disability, or marital or familial status. To

ensure compliance with these objectives, the RHS approval official will

complete Form RD 2006-38, ``Civil Rights Impact Analysis

Certification.''

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

paragraph (a) to read as follows:

Sec. 1944.221 Security.

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

protects the financial interest of the Government. A first mortgage

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

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

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

indicated in Sec. 1944.233(f).

* * * * *

6. Section 1944.233 is added to read as follows:

Sec. 1944.233 Participation with other funding sources.

In order to develop the maximum number of affordable housing units

and promote partnerships with states, local communities, and other

partners with similar housing goals, RHS participation loans are

encouraged.

Apartment complexes developed with participation funds may serve

lower income households exclusively (RHS very-low and low income-

eligible households; LIHTC income-eligible households) or may be

marketed to households with mixed incomes. The following will apply:

(a) RHS loan and rental assistance (RA) participation.

(1) RHS may participate with loan funds only, or with both RA and

loan funds, as provided in paragraphs (a)(2) and (a)(3) of this

section.

(2) If RHS RA is being provided, RHS loan participation should

equal at least ten percent of the project's total development cost

unless authorization for a lower percentage of participation is

obtained from the National Office in accordance with Sec. 1944.240.

(3) RHS RA may be provided on any unit where the debt service does

not exceed what the debt service would have been on that unit if RHS

provided full financing. The number of RHS RA units available for

participation loans is limited and established annually through subpart

L of part 1940 of this chapter.

(b) General conditions.

(1) The number of units that will serve RHS income-eligible tenants

must equal or exceed the number of units financed by RHS, determined by

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

cost.

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

necessary to make the project feasible in accordance with

Sec. 1944.213(a).

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

Director's loan approval authority unless written authorization is

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

(4) The complex will be operated and managed in compliance with RHS

requirements and regulations.

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

proportion of units higher than the percentage receiving RA or similar

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

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

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

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

(c) Design requirements. Complexes must comply with the provisions

of Secs. 1944.215 and 1944.222.

(1) Design features such as patios or balconies, washers and

dryers, and garbage disposals may be included if they are customary for

the area and needed for marketability.

(2) Mixed income complexes may include nonessential common

facilities such as swimming pools provided:

(i) The facility is not financed with RHS funds,

(ii) The complex is able to support the facility's operating and

maintenance costs through collection of a user fee from tenants who

subscribe to the service, and

(iii) The facility is designed and operated with appropriate

safeguards for tenant health and safety.

(d) Borrower contribution and return on investment.

(1) The minimum required borrower contribution will be based on the

RHS loan amount and determined in accordance with Sec. 1944.213(b).

(2) For limited profit borrowers, additional funds exceeding the

minimum required contribution that are provided from the borrower's own

resources (not loans or grants from other sources) may be included in

the borrower's initial investment, for purposes of determining return

on investment, as provided in Sec. 1944.215(n).

(3) A loan from the borrower to the project may be considered,

provided the loan proposal meets all conditions of this section and the

loan to the project is from the borrower's own resources. LIHTC

proceeds may be considered the borrower's own resources as provided in

Sec. 1944.215(n)(1).

(e) Reserve requirements. RHS reserve requirements (the annual

reserve requirement and the fully funded reserve amount) will be

determined on a case-by-case basis, taking into consideration the

reserve requirements of the other participating lenders, so that the

aggregate fully funded reserve amount established by RHS and the other

lenders equals at least 10 percent of the project's total development

cost (TDC) or appraised value, whichever is greater. For example, if

the other lenders do not have reserve requirements, RHS will establish

its reserve requirements to meet the full aggregate amount (at least 10

percent of the TDC or appraised value of the project, whichever is

greater), regardless of the RHS loan amount. On the other hand, if the

other lenders have aggregate reserve requirements equal to or higher

than the minimum 10 percent of TDC or appraised value required by RHS,

and

[[Page 25076]]

the amount is sufficient to meet project needs based on its capital

improvement plan, it may not be necessary for RHS to establish

additional reserve requirements. Reserve requirements and procedures

for reserve withdrawals should be agreed upon by all lenders and

included in the intercreditor or participation agreement referenced in

paragraph (g) of this section.

(f) Security requirements.

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

Agency's participation is 50 percent or more.

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

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

cannot be negotiated, an exception may be requested to accept a second

lien position in accordance with Sec. 1944.240. The State Director will

submit requests to accept a second lien position to the Deputy

Administrator, Multi-Family Housing with comments and recommendations.

(3) RHS will take a first lien on project revenue from rent or

occupancy payments; RHS, State, or private RA payments; and operating

and reserve accounts.

(g) Participation agreement. RHS will enter into a participation

(or intercreditor) agreement with the other lenders that clearly

defines each party's relationship and responsibilities to the others.

7. Section 1944.234 is added to read as follows:

Sec. 1944.234 Actions prior to loan approval.

Prior to loan approval the application will be reviewed for

continued eligibility. The applicant may be required to submit updated

information at that time.

8. Exhibit A-7 of subpart E is amended in paragraph I.H. by

revising the words ``preapplication package'' to read ``loan request'';

and by revising paragraph I.E. and section II; and by adding a new

paragraph III.D. to read as follows:

EXHIBITS TO SUBPART E

* * * * *

Exhibit A-7--Information To Be Submitted With a Loan Request For a

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

Loan

* * * * *

I. * * *

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

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

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

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

condition, the servicing official may require the applicant to

provide documentation regarding the availability of other credit.

* * * * *

II. Need and demand.

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

facility (family, elderly, congregate, mixed, group home, or

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

eligible prospective tenants or members who are permanent residents

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

the program is to provide housing for the eligible permanent

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

as college students in a college town, military personnel stationed

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

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

included in determining need and project size. Similarly, homeowners

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

study must include a discussion of the current market for single

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

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

elderly homeowners may reinforce the need for rental housing, but

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

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

households. The conclusions of the market study must be provided to

the community by the applicant, through direct contact with

community officials whenever possible. The type of complex (family,

elderly, etc.) that is proposed by the applicant must reflect the

greater proportionate need and demand of the community, that is, the

share or percentage of the community's total rental units that are

designated for the elderly will be compared to the community's share

of elderly households, and the share of total rental units for

families will be compared to the share of family households in the

community. (For mixed complexes, the unit mix must reflect the

proportionate need of each household type.) In unusual

circumstances, where there is a compelling need for a complex type

that does not represent the greater proportionate need (i.e., family

vs. elderly need), the State Director may consider granting an

exception to this requirement. At least one of the following

conditions must be met in order to consider an exception: the

community's or State's housing plan indicates that the greater

immediate need is for the complex type of the smaller proportionate

need and the plan includes a specific proposal to address the

housing needs of the other household type; the complex has the

support of a public community forum represented by diverse

interests; or the units are needed due to an emergency or hardship

situation, for example, a loss of housing caused by a natural

disaster. The circumstances for the exception must be documented in

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

need in the market area based on renter household size and the

bedroom mix of existing units. Market feasibility for the proposed

units will be determined by RHS based on the market information

provided by the applicant (requirements are described in section

II.E. of this exhibit), RHS' knowledge of the market area and

judgment concerning the need for new units, RHS' experience with the

housing market in the State and local area, and the U.S. Department

of Housing and Urban Development's (HUD's) or similar lender's

analysis of market feasibility for the proposed units.

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

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

schedule listing the proposed cost of any nonshelter service to be

provided.

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

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

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

This information will determine the levels of incomes in the market

area which will support the basic rents while also qualifying the

borrower for tax credits.

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

feasibility will be evidenced by the names and addresses of

prospective members who have definitely affirmed their intention of

becoming cooperative members in the proposed project. In the event

some persons cannot be accepted for membership for financial or

other reasons, the cooperative should obtain more names than the

number of proposed units in order to assure adequate feasibility

coverage. Exhibit A-4 of this subpart contains a Cooperative Housing

Survey form which may be used for this purpose.

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

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

required. The qualifications of the person preparing the market

study should include some housing or demographic experience. The

following requirements apply:

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

qualifications, and a certification of the accuracy of the study

must be included.

(2) Market analysts must affirm that they will receive no fees

which are contingent upon approval of the project by RHS, before or

after the fact, and that they will have no interest in the housing

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

will need to fully disclose the nature of the identity.

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

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

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

analyst in the Section 515 program.

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

reports, state or county data centers, individual employers,

industrial directories, and other sources of local economic and

housing information such as newspapers, realtors, apartment owners

and managers, community groups, and chambers of commerce is

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

information which professional market studies are required to

provide. The study must be presented in clear, understandable

language. Negative as well as positive market trends

[[Page 25077]]

must be disclosed and discussed. Statistical data must be

accompanied by analytical text which explains the data and its

significance to the proposed housing. Mathematical calculations must

be expressed in actual numbers and may be accompanied by

percentages. Each table or section must identify the source of the

data. A brief statement of the methodology used in the study should

be included in the foreword and in other sections where necessary

for clarity. RHS personnel will utilize the market study checklist

found at exhibit A-12 of this subpart (available in any Rural

Development office) as a means of measuring market study

credibility.

(5) The market study will include:

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

with respect to city boundary lines, residential developments,

employment centers, and transportation; the location and description

of available services and facilities and their distances from the

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

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

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

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

accessibility, and terrain.

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

each major employer within the community and market area, its

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

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

the location. If income data cannot be obtained from individual

employers, salary information for the community can be obtained from

the state employment commission.

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

including population figures by year, number and percentage of

increase or decrease, and population characteristics by age.

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

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

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

e. Building permits issued and demolitions by year by single

unit dwelling and multiple unit dwelling. In nonreporting

jurisdictions, this information may be substituted with the number

of requests for electric service connections, number of water or

sewer hookups, etc., obtained from local suppliers.

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

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

homes, and number lacking some or all plumbing facilities.

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

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

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

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

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

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

existing comparable housing supply and vacancy rates, the absorption

rate of recently completed units, the number of comparable units

currently proposed or under construction, and current and projected

economic conditions.

F. For congregate housing proposals with central dining area or

housing involving a group living arrangement, a narrative statement

from local, state, or federal government agencies supporting the

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

its trade area is required.

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

may authorize the use of a market survey to establish market

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

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

vacancy rates and long waiting lists in existing assisted or

comparable rental units. The casefile must be documented

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

for the market survey.

III. * * *

D. Appropriate zoning or evidence of capability to be

appropriately zoned.

* * * * *

Dated: May 1, 1997.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 97-11818 Filed 5-6-97; 8:45 am]

BILLING CODE 3410-XV-U