Rural Rental Housing (RRH) Assistance

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 the

Rural Rental Housing (RRH) program. This action is taken to implement

legislative reforms mandated by the Agriculture, Rural Development,

Food and Drug Administration, and Related Agencies Appropriations Act,

1997, Pub. L. 104-180, enacted August 6, 1996, and to implement Pub. L.

105-86, enacted November 18, 1997, which amends the maximum loan term

for Section 515 loans from 50 years to 30 years. The intended effect of

these reforms is to improve the effectiveness and efficiency of the

Section 515 RRH program.

DATES: The effective date of this final rule is January 22, 1998.

FOR FURTHER INFORMATION CONTACT: Linda Armour or Carl Wagner, Senior

Loan Specialists, Multi-Family Housing Processing Division, RHS, U.S.

Department of Agriculture, Room 5349--South Building, Stop 0781, 1400

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

720-1608.

SUPPLEMENTARY INFORMATION:

Classification

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

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

of Management and Budget.

Paperwork Reduction Act

The information collection requirements contained in this

regulation have been previously approved by the Office of Management

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

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

Paperwork Reduction Act of 1995. Under the Paperwork Reduction Act of

1995, no persons are required to respond to a collection of information

unless it displays a valid OMB number. The valid OMB control number

assigned to the collection of information in these final regulations is

displayed at the end of the affected section of the regulation. This

rule does not impose any new information collection requirements from

those approved by OMB.

Civil Justice Reform

This rule has been reviewed under Executive Order 12988, 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 Mandates Reform Act

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

L. 104-4, establishes requirements for Federal agencies to assess the

effects of their regulatory actions on State, local, and tribal

governments and the private sector. Under section 202 of the UMRA, 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.

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, Pub. L.

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

Background

On August 6, 1996, Congress enacted the Agriculture, Rural

Development, Food and Drug Administration, and Related Agencies

Appropriations Act, 1997, Pub. L. 104-180 (herein referred to as the

Act). The Act included six reforms to the multifamily housing (MFH)

program, which the Agency was directed to implement without delay. Four

of the six reforms were directive and could be implemented as enacted

without the need for public comment. However, public comment was needed

for the other two reforms, which provided for substantive changes in

the manner in which MFH loan requests are processed and gave the

Secretary administrative discretion in their implementation. Because of

the mandate to implement the reforms immediately, the rule was

published as an interim final rule on May 7, 1997 (62 FR 25062),

effective upon publication. The rule included a 60-day comment period,

which ended on July 7, 1997.

Discussion of Comments

A total of seventeen written comments were received from

developers, nonprofit groups, Rural Development staff, members of

Congress, and state housing agencies. The Agency appreciates the time

and effort that went into these comments, many of which offered

detailed and constructive suggestions.

Several commentors expressed their support for the four directive

reforms,

[[Page 67217]]

which have been adopted without change in this final rulemaking

document:

(1) Assurance That Project Transfers Are in the Best Interest of the

Tenants and the Government

Two commentors indicated support for the provisions pertaining to

project transfers. One stressed the importance of maintaining the

Agency's inventory in good condition to avoid health and safety

problems.

(2) Elimination of the Occupancy Surcharge

Two commentors indicated their support of this legislative change.

One suggested that the monies collected prior to the elimination of the

surcharge be used for other program opportunities such as funding the

Section 538 program or for servicing rental assistance (RA), if not

returned to the properties. The Agency will consider these

recommendations on this issue.

(3) Changes to the Equity Loan Program

Two comments were received on the equity loan program. One

indicated support for the legislative changes and noted that the Agency

has not yet established an office of rental housing preservation which

would make decisions relative to prepayment and incentives, as

authorized by section 537 of the Housing Act of 1949. The second

commentor expressed the opinion that the preservation of low income

housing stock could not be accomplished without significant financial

incentives for borrowers and predicted that new approaches to the

prepayment issue would be forthcoming from the courts or Congress in

the near future.

(4) Implementation of Penalties for Equity Skimming by Project Owners

and Managers

Two commentors indicated their support for this legislation. One

urged the Agency to act quickly in pursuing parties who abuse the

program to the detriment of residents and other borrowers.

The majority of the comments on the interim final rule addressed

the two reforms that included administrative discretion in their

implementation: (1) Prioritization of assistance and (2) assurances

that the amount of assistance provided is no more than necessary. Based

on comments received, several minor changes have been made in the final

rule.

(1) Prioritization of Assistance

Sections 1944.228, ``Ranking of rural places based on greatest need

for Section 515 housing,'' and 1944.229, ``Establishing the list of

designated places for which Section 515 applications will be invited,''

were added to 7 CFR part 1944 to implement the statutory requirements

pertaining to prioritization of Section 515 assistance. The statute

directs the Secretary to identify and designate rural areas with the

greatest need for Section 515 housing, taking into consideration the

incidence of poverty, the lack of affordable housing and existence of

substandard housing, the lack of mortgage credit, the rural

characteristics of the location, and other factors determined by the

Secretary that demonstrate the need for affordable housing.

Section 1944.228 of the interim rule provides that places will be

ranked as follows: Places must qualify as rural areas in accordance

with 7 CFR 3550.10, lack mortgage credit for borrowers in accordance

with Sec. 1944.211(a)(2), and demonstrate a need for multifamily

housing based on the following factors, with equal weight given to

each: the incidence of poverty, measured by determining households

below 60 percent of the county rural median income; the incidence of

substandard housing, measured by determining the number of occupied

housing units lacking complete plumbing or having more than one

occupant per room; and the lack of affordable housing, measured by

determining households below 60 percent of rural median income who are

paying more than 30 percent of income in rent.

Twelve commentors addressed the provisions of Sec. 1944.228 and

offered thoughtful suggestions for modifying the ranking system.

Specific areas addressed were:

Ranking Factors

Several commentors felt the ranking factors should be expanded. One

commentor suggested using additional factors such as the availability

of existing subsidized housing, the number of vacancies in existing

subsidized housing, demand, the availability of services, the

anticipated growth of the area, and the availability of adequate

utilities. We agree that these factors need to be considered and, in

fact, they are taken into consideration, either in the selection of

ranked places for the designated place list or in the market

feasibility determination. For example, after places have been ranked

using the Census data, the list is reviewed to determine if any of the

``build and fill'' conditions exist, one of which is a high vacancy

rate in existing RHS or similar assisted rental units. Places with any

``build and fill'' condition may not be included on the designated

place list; they are deferred until the condition no longer exists. The

other recommended factors (demand, anticipated growth, availability of

housing, services, and utilities) are part of the market feasibility

determination. The Agency believes this is the most effective way to

take these factors into consideration. It would not be feasible to

obtain and maintain current market data on all rural communities for

inclusion in the initial ranking process.

Weights of the Ranking Factors

Three commentors felt the formula provided an advantage to larger

rural communities and two of these expressed the opinion that the

Agency should consider percentages instead of raw numbers to give

smaller rural communities a better opportunity to compete. In fact, the

formula used by the Agency, which was not published in the Federal

Register, considered both raw numbers and percentages. A ranking score

was assigned to each place for the three factors (income, rent

overburden, and substandard housing) based on the percentage of its

total households and on the actual number of households or substandard

units. Each score for these six rankings was totaled to reach a final

ranking score. This method targets communities that demonstrate a high

potential need for housing assistance both by raw numbers and high

percentages of their total households. This has resulted in a good mix

of small to mid-size rural communities, and we plan to continue with

this methodology.

One commentor suggested giving less weight to substandard housing;

another suggested giving more weight to rent overburden. We considered

these suggestions and ran data for several States with the adjusted

factors. The results were inconclusive and we feel that, in the absence

of supporting data or documentation, it would be premature to make

changes in the formula. We intend to leave the weights unchanged for

the remainder of the 3-year designated place cycle but will continue to

evaluate the benefits of modifying the formula for future cycles.

Use of 60 Percent of County Rural Median Income

Two commentors disagreed with the Agency's use of 60 percent of

county rural median income to determine households in poverty. One

commentor suggested using 80 percent; the other felt strongly that 30

percent more closely represented households in poverty, and thus areas

of greatest need,

[[Page 67218]]

as required by the statute. The Agency has compared the various

percentages of county rural median income in several states to the

National poverty figure. Based on our review, we agree that 30 percent

more closely approximates the National poverty figure. As a result,

ranking will be based on households at or below 30 percent of county

rural median income. The ranking data has been calculated for all

States based on this figure and will be used to select any additional

designated places. Places that are currently on the designated place

list will remain on the list for the remainder of their 3-year

designation period, or until removed or deferred in accordance with

Sec. 1944.229(d). The revised ranking data and list of designated

places are discussed further in the ``Implementation Proposal''.

Adding Counties to the Ranking List

Two commentors suggested the Agency rank counties as well as

communities. This is an issue that was considered at length in the

development of the interim final rule. Because the statute mandates the

Secretary to identify and target areas of greatest need, we felt that a

county-wide designation was too broad, since the needs of the

communities within a county can vary widely. If an entire county were

designated, an applicant might well choose areas that have higher

incomes and less substandard housing, even though the true need for

housing may be greater in another community. We believe it is necessary

to identify and designate specific communities to ensure that funds are

directed to areas of greatest need and, therefore, we have not revised

this provision.

Flexibility in the Ranking Factors

Eight commentors felt the ranking factors should allow more

flexibility for state and local conditions. This is another issue that

was discussed at length in the development of the interim final rule.

We recognize that conditions and goals vary from state to state;

however, we believe it is critical to maintain National standards for

program consistency. In addition, it would be difficult for States to

obtain objective data that could be added to the ranking formula.

Instead of providing flexibility in the ranking factors, we provided

flexibility in the selection of designated places. This was

accomplished in the regulation by allowing States to select places from

further down the ranking list, but still within the top ranked, that

have been identified as high need areas in the state Consolidated Plan

or state needs assessment. To provide further flexibility, we have

included provisions in the final rule for States with an active state

leveraging program. Details are given below under the heading

``Designated places for States with an active state leveraging

program''.

As published in the interim final rule, Sec. 1944.229,

``Establishing the list of designated places for which Section 515

applications will be invited'', provides that the number of designated

places may equal up to 5 percent of the State's total eligible rural

places but must equal, in all cases, at least 10 places. To be included

on the list of designated places, a place must have 250 or more

households as a minimum feasibility threshold for multifamily housing

and may not have any of the ``build and fill'' conditions specified in

Sec. 1944.213(f)(2). Places that meet the minimum size threshold and do

not have any ``build and fill'' conditions are then selected in rank

order to form the list of designated places. This section provides the

flexibility for States, with National Office concurrence, to select up

to 10 percent of their designated places to provide geographic

diversity or to reach high need areas, provided such places are within

the top-ranked 10 percent of the state's total rural places.

Nine commentors addressed the provisions of Sec. 1944.229 in the

following areas:

Establishing the Number of Designated Places

Five commentors felt that the limit of 5 percent of the state's

total eligible rural places was too restrictive and did not provide

sufficient diversity. Recommended percentages ranged from 10 to 20

percent. One commentor recommended a percentage of places equal to 25

percent of the state's total rural households. An analysis of several

states showed that the latter suggestion was equivalent to

approximately 10 percent of the states' total rural places. We reviewed

the ranking data for several States and found that there was little

difference in the ranking scores between places that rank in the top 5

percent compared to those within the top 10 to 20 percent, simply

because of the volume of places being ranked. Therefore, a small

increase in the percentage of designated places will still target the

neediest communities. Accordingly, the 5 percent limit has been

modified in the final rule to allow States to designate up to 10

percent of their total eligible rural places. In addition, based on

comments that expressed concern that Indian reservations, colonias,

Empowerment Zone and Enterprise Communities (EZ/ECs), and Rural

Economic Area Partnership (REAP) communities were frequently not

included on the list of designated places, the final rule provides that

States may designate these special high-need areas in addition to their

10 percent or minimum 10 places.

Build and Fill Conditions

Three commentors mentioned their support for ``build and fill'',

which is widely understood to mean that no additional Section 515

housing will be approved if other Section 515 or similar assisted units

have been approved, are under construction, or not yet filled. However,

the ``build and fill'' provisions include other conditions which

indicate that the market does not currently need additional rental

housing: existing Section 515 or similar assisted housing units are

experiencing high vacancies; a request for a Servicing Market Rate Rent

(SMR) is pending or in effect and still needed; or the need in the

market area is for additional rental subsidies and not for additional

housing units. Places with any of these conditions may not be included

on the designated place list. States are responsible for reviewing

their ranking list, consulting with HUD and other housing agencies, and

deferring places with ``build and fill'' conditions. In response to the

comments we received recommending that the Agency consider these or

similar market factors in the ranking data, we believe the provision

which defers places with ``build and fill'' conditions accomplishes

just that. One commentor noted that places were listed on the

designated place list with high vacancies in assisted housing

complexes. Any such instances should be brought to the attention of the

RHS State office staff for their review. The Agency will continue to

stress the importance of reviewing the designated place list annually

for ``build and fill'' conditions. Another commentor recommended

including low income housing tax credit (LIHTC) units in the definition

of assisted housing complexes for purposes of ``build and fill''. We

agree and have added a specific reference to LIHTC units in the ``build

and fill'' provisions in Sec. 1944.213(f)(2).

Minimum Number of Households for Designated Places

Four commentors objected to the requirement that designated places

have a minimum of 250 households and noted that market demand should be

the determining factor, not an arbitrary size requirement. We agree

that market demand should determine project feasibility; however, we

feel that places

[[Page 67219]]

with fewer than 250 households rarely have sufficient demand or the

support services necessary for multifamily complexes. We believe it is

prudent to maintain a National feasibility standard and, therefore,

have retained this provision. We have also retained the ability for

States that have been successful in developing and operating

multifamily units in very small communities to request an exception

from the National Office to establish a lower state-wide feasibility

threshold. In addition, based on concerns that Indian reservations are

sometimes excluded because households are frequently split between two

or more communities within the same reservation, we have modified this

provision to specify that, for Indian reservations, there must be 250

or more households on the reservation.

Designated Places for States With an Active State Leveraging Program

Eight comments were received from Rural Development State staff,

state housing agencies, members of Congress, and applicants, urging the

Agency to provide more flexibility for States with an active state

leveraging program. It was noted that, in many cases, the areas

targeted by the state agencies did not correspond to the RHS designated

places. As a result, funds that had been set aside by state agencies

for leveraging with RHS funds were not able to be fully used. The

Agency is committed to partnering with other providers of resources;

however, at the same time, we have a legislative mandate to designate

rural areas of greatest need and to direct RHS funds to those areas. To

accomplish both priorities, we have added provisions in the final rule

to allow States with a formal state leveraging program and agreement

with their state agency to develop a partnership designated place list

with the state agency, which must be approved by the National Office.

Places selected for the list must be high-need areas based on criteria

consistent with the Agency's statutory requirements as well as the

state's authorizing requirements. All loan requests (including those

for places on the partnership designated place list) will be scored

together as one group. In order of point score or, where there are

point score ties, in order of point score and number assigned in

accordance with Sec. 1944.231(b)(3), two ranking lists will be formed:

the RHS ranking list will include loan requests for places on the RHS

place list, and the partnership ranking list will include loan requests

for places on the partnership place list. Selection for further

processing will be as follows: Loan requests must first be selected

from the RHS ranking list that, based on total development cost (TDC),

are proportionate to the State's RHS allocation. Loan requests will

then be selected in order of highest point score (or point score and

tie-breaker number), regardless of whether the loan requests are on the

RHS ranking list or the partnership ranking list. For example, a State

with a Section 515 allocation of $2 million has three loan requests on

the RHS ranking list with point scores of 20, 9, and 5 respectively;

and two loan requests on the partnership ranking list with point scores

of 18 and 15. The first loan request that will be processed is the

highest ranked proposal on the RHS list, with a point score of 20. This

request has a TDC of $1.2 million, of which the RHS loan request is

$500,000. The next request that will be processed is the second ranked

proposal on the RHS list, with a point score of 9. This loan request

has a TDC of $1 million, of which the RHS loan request is $750,000. The

total amount of RHS funds requested for these two proposals

($1,250,000) is less than the RHS allocation of $2 million; however,

the total TDC for the two requests equals $2.2 million, which exceeds

the State's allocation. This satisfies the provision that loans must be

funded in places on the RHS designated place list proportionate to the

RHS allocation. Having satisfied this provision, the next loan requests

will be selected in order of highest point score, regardless of whether

they are on the RHS list or the partnership list. In this example,

assuming there are sufficient funds remaining, the next loan request to

be processed would be the 18-point request on the partnership list,

followed by the 15-point request on the partnership list, and then by

the 5-point request on the RHS list.

Section 1944.230 was added in the interim final rule to establish

provisions on loan application submission deadlines and the

availability of funds. This section specifies that the Agency will

publish annually in the Federal Register a Notice of Funds Availability

(NOFA), any limits on the amount of individual loan requests, the dates

for the funding cycles, and the deadline for submission of loan

applications.

Five commentors addressed this section. Two commentors expressed

their support for the NOFA system; one commentor was opposed; the other

two offered suggestions but did not indicate strong feelings one way or

the other. One of the supporters felt the NOFA system was a very cost

effective way for developers to participate in the program without

having development money tied up for several years waiting for funds to

become available. We agree, and would like to add that the decision to

move to a NOFA system was reached with extensive input from the Section

515 stakeholders who participated in the development of the reform

regulations.

The commentor who opposed the NOFA system felt that it: (1)

Encouraged applicants to expend funds for proposals that might not

materialize; (2) eliminated nonprofit applicants because they lack the

time and money to put together an application; and (3) nearly

eliminated leveraging because of the problems coordinating with

partners. On the first issue, we believe the NOFA system will be more

cost effective, not less, since applicants do not have to incur costs

over a period of time waiting for funds to become available. The

submission requirements for applicants are the same under the NOFA

system as under the previous regulations, so the cost of submitting a

loan request has not changed; the difference is that, under the

previous system, applicants were required to maintain the site option

and update the market and financial information annually and still were

not guaranteed of funding because of the backlog of requests and

limited availability of funds. Under the NOFA system, applicants know

within a short timeframe whether their loan request has been selected.

No further costs are incurred unless or until the applicant reapplies

in the next funding cycle. As a point of interest, the Agency is

reviewing the Section 515 submission requirements to determine if the

initial cost to applicants can be reduced, for example, by modifying

the initial market analysis requirements. These changes are being

considered as part of the Agency's ``reinvention'' regulation, which is

scheduled to be published for comment early in 1998. On the second

issue, we do not believe the NOFA system precludes nonprofits from

applying. In fiscal year 1997, the period of time for submitting

applications was shortened because of the time involved in writing and

publishing the regulations. However, in future years, the Agency will

publish NOFA as early as possible in the fiscal year and provide a

longer application period. In addition, places are designated for 3

years, so applicants can continue to develop applications prior to

publication of NOFA. On the third issue of coordinating NOFA with other

funding cycles, we believe this issue will also be alleviated by the

publication of NOFA early in the fiscal year. The earlier publication

of NOFA

[[Page 67220]]

will enable States to coordinate the RHS funding cycle with the state

agency's funding cycle. Three other commentors on this section also

mentioned the importance of coordinating with other funding cycles and

publishing the NOFA as early as possible.

One commentor suggested adding a provision that a project must have

full funding committed by the end of the fiscal year and must start

construction within a specified number of days (270 was suggested) or

lose its obligation. We agree that it is necessary to establish and

enforce processing deadlines or timeframes and we are addressing this

issue in the reinvention of the multifamily regulations.

Section 1944.231, processing loan requests, was revised in the

interim final rule to incorporate processing procedures for the NOFA

system and to add provisions for scoring and ranking loan requests

under the new system. Six commentors addressed this section in the

following areas:

Application Requirements

Two commentors discussed the application process and requirements.

One suggested that the Agency develop a uniform application package and

checklist to ensure that all applications are received in the same

format and judged by compliance to that format. We think this is an

excellent idea and are developing a checklist and administrative

guidance on determining a complete application that will be provided to

States concurrently with the publication of this rule. The other

commentor objected to the elimination of the term ``preapplication'',

believing this served no useful purpose and was changed merely for the

sake of change. We adopted the term ``initial loan request'' (or

``initial application'') because we believe it to be more appropriate

for the NOFA process, which is a one-step annual selection process

instead of the two-step process previously used, in which

preapplications were kept on hand until funds became available. We also

feel the terms are more consistent with those used by other lenders.

Scoring Loan Requests

The interim regulation provides that loan requests will be scored

based on five factors:

(1) The presence and extent of leveraged assistance (including

services, abatement of taxes, etc.) for the units that will serve RHS

income-eligible tenants, not including tax credits or donated land. (0

to 20 points)

Five commentors addressed this loan scoring factor. One commentor

felt the Agency needed to quantify amounts for services and tax

abatements; another felt the 0-20 point range was too subjective. The

same commentor recommended that the Agency reexamine its decision to

give points for leveraged assistance because the benefits of the

leveraged funds might be offset by an increase in demand for rental

assistance. Another commentor felt that leveraging should not dominate

the scoring and suggested that the Agency consider several additional

factors, which are discussed below in ``Other scoring factors''. One

commentor said it was unclear whether tax credit funds were eligible to

receive points for leveraging, and three commentors recommended that

tax credit funds that are dedicated back to the project's development

or operation or to tenant subsidies be eligible to receive points.

In response to the comment that the range of 0 to 20 points is too

subjective, the Agency provided separate administrative guidance to RHS

staff at the time the regulation was published to ensure that all loan

requests were scored consistently. We also provided guidance on

establishing a value for services and tax abatements. On the issue of

whether tax credit funds may be considered leveraged assistance for

purposes of awarding points, we agree that any funds the applicant

contributes to the proposal in excess of his or her required

contribution, including tax credit proceeds, should be eligible for

consideration for points as long as there is an equal or positive

impact on basic rents. We have modified this provision accordingly in

the final rule. Regarding the demand for rental assistance (RA), we do

not foresee a major impact on RA usage, especially with the increased

interest in developing mixed-income complexes that require only partial

RA.

(2) The loan request is for units to be developed in a colonia,

tribal land, or EZ/EC community, or in a place identified in the state

Consolidated Plan or state needs assessment as a high need community

for multifamily housing. (20 points)

No comments were received on this loan selection factor; however,

the Agency inadvertently omitted REAP (Rural Economic Area Partnership)

communities in the list of high need areas in the interim final rule.

This omission has been corrected in the final rule.

(3) The loan request is in support of a National Office initiative

announced in NOFA. (20 points)

One commentor addressed this factor, expressing a concern that,

without specific parameters, the factor could be used for politically

motivated initiatives.

This factor was developed to ensure there is flexibility in the

regulation for initiatives that are consistent with the statute that

would enable the Secretary to direct funds to specific areas or for

specific purposes in the event of unforeseen circumstances or events.

We feel it is important to maintain this flexibility and, in the

absence of other opposing comments, we have retained this provision.

(4) The loan request is in support of an optional factor developed

by the State that promotes compatibility with special housing

initiatives in conjunction with state-administered housing programs

such as HOME funds or low income housing tax credits (LIHTC). A factor

thus developed cannot duplicate factors already included in this

paragraph and must be provided to the National Office prior to the

funding cycle for concurrence and inclusion in the NOFA. (20 points)

One comment was received on this provision. The commentor felt that

the factor needed further description and expressed a concern that it

could be used to give preference to LIHTC loan requests, effectively

excluding other loan requests.

This provision was included to give Rural Development State

Directors more flexibility in working with their states to accomplish

common housing goals, which we believe is critical to the Agency's

partnership efforts. Factors developed under this provision require

National Office concurrence, and we have retained this provision in the

final rule.

(5) The loan request includes donated land meeting the provisions

of Sec. 1944.215(r)(4). (5 points)

One commentor felt that the Agency needed to redefine its

provisions pertaining to preference for donated land in

Sec. 1944.215(r)(4), stating that the 1-year ownership requirement was

too restrictive. The same commentor expressed the opinion that the

value of land provided at no cost to the project should be included as

leveraging or factored into the evaluation of costs.

On the first issue, the provisions for donated land preference are

based on statute, and pertain to land donated by States, units of local

government, public bodies, and nonprofit organizations. The 1-year

ownership restriction was added to prevent abuse of this preference and

may be waived by the State Director if it is clearly documented that

there was no intent to circumvent the provisions.

On the issue of including donated land as leveraged assistance or

factoring the value into the evaluation of costs,

[[Page 67221]]

the regulations do provide for this. Section 1944.211(a)(4) provides

that the borrower's contribution may be in the form of cash, land, or a

combination thereof. Any land value (as determined by the appraisal)

that exceeds the borrower's required contribution may be considered

leveraged assistance up to the amount which, when added to the loan and

grant amounts from all sources, does not exceed the security value of

the project. This applies to all donated land; therefore, donated land

meeting the provisions of Sec. 1944.211(a)(4) may receive 5 points

under the donated land scoring factor and may also be eligible for

points for leveraged assistance under the leveraged assistance factor.

We have revised the point score factor for leveraged assistance to

remove the exclusion of donated land.

Other Scoring Factors

Several commentors suggested additional factors for scoring loan

requests. One commentor recommended awarding points for proposals in

communities with RUS financed water or sewer systems to encourage total

rural development. We agree there is merit in encouraging total rural

development; however, awarding points for RUS financed facilities would

penalize other communities with adequate systems that were not

developed through RUS, or communities whose residents are unable to

support the cost of these systems. In developing the interim final

rule, we considered a similar provision whereby communities would be

required to have water and sewer systems to qualify as a designated

place; however, for the same reason, i.e., that communities that could

not support the cost would be penalized, we did not adopt this

provision. Another commentor noted that leveraged assistance should not

dominate the scoring, and suggested other factors to consider such as

design, construction quality, experience of the development team,

resident services, ease of maintenance, and compatibility with the

community. We agree these factors are critical to a successful proposal

and, in developing the interim final rule, we considered awarding

points for many of these same factors. However, we felt it would not be

possible to develop standards for factors that require subjective

judgments, such as an assessment of quality or experience, that could

be equally applied to all proposals. With our competitive selection

process, we believe it is essential to maintain an objective scoring

process and, therefore, we have not adopted these factors.

Nonprofit Preference

One commentor supported the preference for nonprofit applicants but

asked for clarification on how the preference was given; another

commentor stated that loan requests from nonprofit applicants should be

selected by merit and not by lottery. In response to the first comment,

preference is given to loan requests from nonprofit or public body

applicants meeting the provisions of Sec. 1944.231(e) by giving

preference in the event of point score ties. If there are point score

ties for loan requests from two or more applicants meeting the

provisions of Sec. 1944.231(e), selection is made by lottery. In

response to the suggestion that applicants be selected by merit and not

by lottery, we feel it would not be possible to develop objective

standards for judging the quality or experience of applicants that

could be uniformly applied; therefore, we have retained the lottery

provisions for point score ties.

Conditional Commitments

Two commentors recommended that the Agency issue a conditional or

``soft'' commitment when funding from other sources is contingent upon

RHS funding. We recognize that this has been a problem in many

instances, with both parties wanting the other to make the first

commitment. The following policy will be followed: The Agency will

publish NOFA as early in the year as possible to coordinate with other

funding cycles. Loan proposals that include secondary funds from other

sources that have been requested but have not yet been committed will

be scored and ranked based on the requested funds: Provided, That (1)

the applicant includes evidence of a filed application for funds, and

(2) the funding date of the requested funds will permit processing of

the loan request in the current year, or, in the event the applicant

does not receive the requested funds, will permit processing of the

next highest ranked proposal in the current year. States will issue a

conditional commitment letter to the applicant with a specific deadline

for providing a commitment of funds from the other lender. If the

deadline is not met, the application will be returned as incomplete.

The next highest ranked proposal will then be selected for further

processing.

(2) Assurances That the Amount of Assistance Provided is No More Than

Necessary

Section 1944.213 was revised in the interim final rule to implement

the statutory reforms pertaining to necessary assistance. Four

commentors expressed their support for these provisions and recommended

minor revisions as follows:

Developer's Fees

One commentor noted that the section on developer's fees was

included twice, once in Sec. 1944.213(a)(1)(iv) and again in

Sec. 1944.213(a)(2). This error has been corrected in the final rule.

Fee Norms

One commentor expressed support for the fee norms in

Sec. 1944.213(a)(1) but suggested that the rule clarify that the fee

norms are to be used only in cases where an executed Memorandum of

Understanding (MOU) with the state agency is not in effect.

The regulation pages provided to RHS staff included a provision to

this effect, as well as other administrative guidance, that was not

published in the Federal Register. Interested parties may obtain a copy

of the regulation pages from any Rural Development office.

Loan Request Analysis

The same commentor expressed support for the requirement that RHS

consult with the applicant and the state allocating agency in cases of

potential excess assistance to strive to reach an agreement for

reducing any excess, and asked that the phrase ``and state agency'' be

added after the words, ``In the event that excess assistance is not

reduced through an agreement with the applicant,'' in

Sec. 1944.213(a)(3)(iii). This revision has been made in the final

rule.

Excess Assistance

Two commentors suggested that if excess assistance is determined,

the funds be put into project reserves or otherwise used to benefit the

project, instead of reducing the amount of assistance. One of the

commentors noted that current mandated reserve levels are minimal and

it would make good sense to increase the reserve level.

We agree that additional funds could be used to benefit the

project; however, we do not believe this would be consistent with our

statutory mandate to provide only the amount of assistance necessary

for the development of the project. As a point of interest, the project

reserve requirements are being revised as part of the reinvention

effort, which should alleviate the problems we

[[Page 67222]]

have experienced because of underfunded reserves.

In addition to the reforms discussed above, this rule includes a

change in the maximum loan term for Section 515 loans from 50 years to

30 years. This change is mandated by Pub. L. 105-86, enacted November

18, 1997.

Implementation Proposal

The provisions of this rule become effective 30 days from the date

of publication and all loans will be processed in accordance with the

revised regulations. The final rule changes the income basis for the

ranking data from 60 percent of county rural median income to 30

percent and increases the number of designated places that may be

selected. This, in turn, may affect loan requests on hand that were

issued an AD-622, ``Notice of Preapplication Review Action,'' inviting

a formal application prior to November 7, 1996 (the date Agency staff

were advised not to issue additional AD-622s pending the implementation

of the new statutory requirements). For purposes of this discussion,

these loan requests will be referred to as ``AD-622s''.

The interim final rule announced the Agency's intent to fund AD-

622s on hand, in date order received, provided they met the new

statutory requirements and were in designated places. Agency staff were

directed to return AD-622s that were not in designated places. This was

later amended by a Notice published in the Federal Register (62 FR

32752) on June 17, 1997, which directed Agency staff to hold the AD-

622s until after the publication of the final rule because of

anticipated changes in the designated place requirements.

Based on the large number of comments supporting an increase in the

number of designated places, the final rule has been modified to allow

States to select designated places up to 10 percent of their total

rural places. Places currently on the designated place list will remain

on the list for the duration of their 3-year designation period or

until removed or deferred in accordance with Sec. 1944.229(d). States

may add places from the new ranking list up to the maximum 10 percent.

Using the revised place list, States may process AD-622s in

designated places, in date order the complete application was received,

up to the amount of the State's allocation. Existing AD-622s may be

processed in this manner until the beginning of FY 2000. As in FY 1997,

NOFA for FY 1998 will list those States that have AD-622s on hand that

will use their direct allocation.

List of Subjects in 7 CFR Part 1944

Administrative practice and procedure, Aged, Handicapped, Loan

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

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

Rural 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 1944.205 is amended in the definition of ``Eligible

tenants or cooperative members'' by revising the words ``exhibit C of

subpart A of this part 1944 (available in any FmHA or its successor

agency under Pub. L. 103-354 office)'' to read ``7 CFR 3550.53'', and

by adding in alphabetical order definitions to read as follows:

Sec. 1944.205 Definitions.

* * * * *

EZ/EC. Empowerment Zone or Enterprise Community.

* * * * *

REAP. Rural Economic Area Partnership.

* * * * *

3. Section 1944.213 is amended by removing paragraph (a)(1)(iv), in

paragraph (a)(3)(iii) by adding the words ``and state agency''

following the words ``In the event that excess assistance is not

reduced through an agreement with the applicant''; and by adding the

word ``, LIHTC'' following the word ``HUD'' in the introductory text of

paragraph (f)(2) and in the first sentence of paragraphs (f)(2)(ii) and

(f)(2)(iii).

4. Section 1944.214 is amended by revising paragraph (b) to read as

follows:

Sec. 1944.214 Rates and terms.

* * * * *

(b) Amortization period. Each loan will be scheduled for payment

within a period that is necessary to assure that the loan will be

adequately secured, taking into account the probable depreciation of

the security. The payment period will not exceed 30 years; however, if

necessary to ensure affordability, the loan may be amortized for a

period not to exceed 50 years.

5. Section 1944.228 is amended in paragraphs (c)(1) and (c)(3) by

revising the words ``60 percent'' to read ``30 percent''.

6. Section 1944.229 is amended by revising paragraphs (a), (b)(1),

(c), and (d), and by adding a new paragraph (f) to read as follows:

Sec. 1944.229 Establishing the list of designated places for which

Section 515 applications will be invited.

* * * * *

(a) Establishing the number of designated places. Initially, the

number of designated places may equal up to 10 percent of the state's

total eligible rural places ranked in accordance with Sec. 1944.228,

but must equal, in all cases, at least 10 places. For example, in a

state with 1,000 total rural places, the State may designate up to 10

percent, or 100 places. However, in a state with 60 total rural places,

the State would use the minimum number of 10 places, since 10 percent

of 60 equals 6. In states where 10 percent equals more than the minimum

number of 10, consideration in determining the number of places to

include on the list should be given to the size and population of the

state, funding levels, and the potential for leveraging. If warranted

by funding levels, the Administrator may authorize in NOFA the

selection of designated places up to 20 percent of the States' total

rural places.

(1) States may designate a higher number of places than 10 percent

or the minimum 10 places to reach high-need areas in accordance with

paragraph (c)(3) of this section.

(2) States that anticipate high loan activity because of leveraging

may designate a number of places higher than 10 percent or the minimum

10 places with the concurrence of the National Office.

(b) * * *

(1) Must have 250 or more households as a minimum feasibility

threshold for multi-family housing, or, for Indian reservations, must

have 250 or more households within the boundaries of the reservation;

and

* * * * *

(c) Selection of designated places. Places meeting the requirements

of paragraph (b) of this section will be selected from the ranking list

as follows:

(1) At least 80 percent of the State's total designated places must

be selected in rank order from the list.

(2) With concurrence from the National Office, up to 20 percent of

the State's designated places may be selected for geographic diversity.

For example, in a state with 1,000 total rural places, the State has

elected to select designated places equal to the maximum 10 percent, or

100 places. Of

[[Page 67223]]

the 100 places, at least 80 percent, or 80 places, must be selected

from the places that meet the requirements of paragraph (b) of this

section in order of their ranking; up to 20 percent, or 20 places, may

be selected for geographic diversity. Places selected for geographic

diversity must be the highest ranked place in each geographic division

designated by the State, which must correspond with established State

divisions, such as districts, regions, or servicing areas.

(3) In addition to the designated places selected in accordance

with paragraphs (c)(1) and (c)(2) of this section, States may designate

the following high need areas for multi-family housing:

(i) Places identified in the state Consolidated Plan or similar

state plan or needs assessment report.

(ii) EZ/ECs, Indian reservations or communities located within the

boundaries of tribal allotted or trust land, colonias, or REAP

communities.

(d) Length of designation. Places will remain on the list of

designated places for 3 years or until a loan request is selected for

funding or the community is otherwise deferred for other ``build and

fill'' conditions, whichever occurs first. Places that are deferred

before the end of the 3-year designation period will be reviewed

annually for potential inclusion on the next year's list of designated

places. A place may be removed from the list prior to the end of the 3-

year designation period because of a substantial loss of income-

eligible population or an increase in the affordable rental housing

supply, for example, a place that experiences the closing of a military

base or other major employer.

* * * * *

(f) Partnership designated place list. States with an active

leveraging program and formal partnership agreement with the state

agency may establish a partnership designated place list consisting of

places identified by the partnership as high need areas based on

criteria consistent with the Agency's and the state's authorizing

statutes. The partnership agreement and partnership designated place

list must have the concurrence of the Administrator. Ranking and

selection of loan requests for places on the partnership designated

place list will be in accordance with Sec. 1944.231(b)(3)(iii) and

Sec. 1944.231 (b)(6) of this subpart.

7. Section 1944.231 is amended by revising paragraphs

(b)(2)(iii)(A) and (b)(2)(iii)(B), and by adding paragraphs (b)(3)(iii)

and (b)(6) to read as follows:

Sec. 1944.231 Processing loan requests.

* * * * *

(b) * * *

(2) * * *

(iii) * * *

(A) The presence and extent of leveraged assistance for the units

that will serve RHS income-eligible tenants at basic rents comparable

to those if RHS provided full financing. Eligible types of leveraged

assistance include loans and grants from other sources, contributions

from the borrower above the required contribution indicated by the

Sources and Uses Comprehensive Evaluation, and tax abatements or other

savings in operating costs provided that, at the end of the abatement

period when the benefit is no longer available, the basic rents are

comparable to or lower than the basic rents if RHS provided full

financing. Scoring will be based on the presence and extent of

leveraged assistance for each loan request compared to the other loan

requests being reviewed, computed as a percentage of the total

development cost of the units that will serve RHS income-eligible

tenants. A total monetary value will be determined for leveraged

assistance such as tax abatements or services in order to compare such

items equitably with leveraged funds. As part of the loan application,

the applicant must include specific information on the source and value

of the services for this purpose. Proposals will then be ranked in

order of the percent of leveraged funds and assigned a point score

accordingly. Loan proposals that include secondary funds from other

sources that have been requested but have not yet been committed will

be processed as follows: the proposal will be scored based on the

requested funds: Provided, that the applicant includes evidence of a

filed application for the funds; and the funding date of the requested

funds will permit processing of the loan request in the current funding

cycle, or, if the applicant does not receive the requested funds, will

permit processing of the next highest ranked proposal in the current

year. The Agency will issue a conditional commitment to the applicant

with a specific deadline for providing a commitment of funds from the

other source. If the deadline is not met, the application will be

returned as incomplete and the next ranked proposal will be processed.

(0 to 20 points)

(B) The loan request is for units to be developed in a colonia,

tribal land, EZ/EC, or REAP community, or in a place identified in the

state Consolidate Plan or state needs assessment as a high need

community for multi-family housing. (20 points)

* * * * *

(3) * * *

(iii) States with a partnership designated place list developed in

accordance with Sec. 1944.229(f) of this subpart, will score and rank

loan requests as follows:

(A) All loan requests (including those for places on the

partnership designated place list) will be reviewed and scored together

as one group, following the process described in paragraph (b)(2) of

this section.

(B) Using the point score and rank order established in accordance

with paragraphs (b)(3)(i) and (b)(3)(ii) of this section, two separate

ranking lists will be formed: the RHS ranking list will consist of loan

requests for places on the State's designated place list; the

partnership ranking list will consist of loan requests for places on

the partnership designated place list. Selection of loan requests for

further processing will be in accordance with paragraph (b)(6) of this

section.

* * * * *

(6) Selection of loan requests for further processing for States

with a partnership ranking list. States with a partnership ranking list

developed in accordance with paragraph (b)(3)(iii) of this section,

will use the following process:

(i) Loan requests must first be selected in rank order from the RHS

ranking list that, based on total development cost (TDC), are

proportionate to the State's RHS allocation amount.

(ii) After loan requests have been selected in accordance with

paragraph (b)(6)(i) of this section, remaining RHS funds must be used

for the next highest scoring loan requests (or point score and tie-

breaker number assigned in accordance with paragraph (b)(3) of this

section), regardless of whether they are on the RHS ranking list or the

partnership ranking list.

* * * * *

8. Section 1944.233 is amended in paragraph (a)(3) by revising both

occurrences of the words ``debt service'' to read ``basic rent'', and

in paragraph (b)(5) by revising the words ``a debt service'' to read

``basic rents''.

9. Exhibit A of subpart E is amended in section IV.B.2.c. in the

second sentence by revising the words ``50 years'' to read ``30 years,

with an amortization period not to exceed 50 years.''

10. Exhibit A-7 of subpart E is amended by removing paragraph VII

and by redesignating paragraphs VIII and IX as paragraphs VII and VIII

respectively.

[[Page 67224]]

11. Exhibit A-9 off subpart E is amended by adding a new paragraph

17 to read as follows:

Exhibit A-9--Additional Information To be Submitted for Rural

Rental Housing (RRH) and Rural Cooperative Housing (RCH) Loan Requests

* * * * *

17 Comments must be submitted in accordance with 7 CFR, part 3015,

subpart V, ``Intergovernmental Review of Department of Agriculture

Programs and Activities.'' See RD Instruction 1940-J (available in any

Rural Development office).

12. Exhibit H of subpart E is amended in the fourth sentence by

revising the words ``50-year maximum life of the loan'' to read ``30-

year maximum life of the loan''.

Dated: December 18, 1997.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 97-33396 Filed 12-22-97; 8:45 am]

BILLING CODE 3410-XV-U