# Rural Rental Housing (RRH) Assistance

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-33396

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 23, 1997
- **Citation:** 62 FR 67216

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-33396. Public record. Not legal advice.