Guaranteed Rural Rental Housing Program

SUMMARY: The Rural Housing Service (RHS) is issuing new regulations for

the Guaranteed Rural Rental Housing Program (GRRHP). This action is

taken to implement the ``Housing Opportunity Program Extension Act of

1996.'' The program is intended to increase the supply of affordable

rural multifamily housing through partnerships between the Agency and

major lending sources, including banks, state and local housing finance

agencies, and bond issuers.

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

Written comments must be received on or before September 21, 1998. The

comment period for information collection under the Paperwork Reduction

Act of 1995 continues through September 21, 1998.

ADDRESSES: Submit written comments, in duplicate, to the Chief,

Regulations and Paperwork Management Branch, Rural Housing Service,

U.S. Department of Agriculture, Stop 0743, 1400 Independence Avenue,

SW, Washington, DC 20250-0743. Also, comments may be submitted via the

Internet by addressing them to ``[email protected]'' and must

contain the word ``Housing'' in the subject line. All written comments

will be available for public inspection during regular work hours at

the above address.

FOR FURTHER INFORMATION CONTACT: Carl W. Wagner, Acting Division

Director, Multi-Family Housing Processing Division, Rural Housing

Service, USDA, STOP 0781, 1400 Independence Avenue, SW, Washington, DC

20250-0781, telephone: (202) 720-1604.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be significant for the purposes of

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

Management and Budget.

Discussion of Use of Interim Final Rule

The Rural Housing Service exercises its emergency authority

pursuant to section 534(c) of the Housing Act of 1949 to issue interim

regulations for the section 538 Guarantee Rural Rental Housing program.

Rural areas have been particularly impacted by a series of major

natural disasters over the past six months, including the tornado

destruction in the central and southern states. Only by providing

funding under this interim rule will critically needed multi-family

rental projects be undertaken and completed as soon as possible this

year. This is important because the Agency will give priority in

guarantee approvals provided under this interim rule for housing

developments in designated disaster areas. This will help ensure that

low and moderate-income families served by these projects will have

greater likelihood of securing safe, decent, affordable housing prior

to winter. Further, the Agency finds the interim rule a reasonable step

under the unusual circumstances since most interested parties have had

ample opportunity to comment on the section 538 program from pilots

conducted by the Agency over the past two years and since these same

parties will have ample opportunity to comment on the interim rule

prior to the publication of the final rule for Fiscal Year 1999 funding

cycle. For the same reason, good cause is shown for publication of the

rule without advance notice and opportunity for comment. However,

comments will be accepted for 60 days after publication of this interim

rule and will be considered when the rule is finalized.

Program funding levels are made public in a ``Notice of Funds

Availability'' (NOFA) published concurrently with this interim final

rule. Approximately $38 million in guaranteed loans is available in

this fiscal year. Potential applicants are encouraged to apply as soon

as possible and specifically take note of the priority to be given to

areas impacted by Presidentially-declared disasters.

Civil Justice Reform

This rule has been reviewed under Executive Order 12988, Civil

Justice Reform. In accordance with this order: (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 unless those regulations specifically allow bringing

suit at an earlier time.

Programs Affected

The affected program is listed in the Catalog of Federal Domestic

Assistance under Number 10.415, Rural Rental Housing Loans.

Intergovernmental Consultation

The program is subject to Executive Order 12372 which requires

intergovernmental consultation with state and local officials.

Intergovernmental consultation has been conducted in accordance with 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 the

Agency 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, an

Environmental Impact Statement is not required.

Regulatory Flexibility Act

This rule has been reviewed with regard to the requirements of the

Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has

determined and certified by signature of this document that this rule

will not have a significant economic impact on a substantial number of

small entities even though this rulemaking action does involve a new

program. At current funding levels of approximately $38 million, less

than 30 applications are likely to be approved for guarantees. The

requirements for participation will not affect small entities to a

greater extent than large entities.

Unfunded Mandates Reform Act

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

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, the Agency generally

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

for 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 the Agency to

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identify and consider a reasonable number of regulatory alternatives

and adopt the least costly, more cost-effective, or least burdensome

alternative that achieves the objections 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.

Background

The ``Agriculture, Rural Development, Food and Drug Administration,

and Related Agencies Appropriation Act, 1996'', provided funds to the

Department to implement a multifamily mortgage guarantee program

subject to enactment of authorizing legislation. On March 28, 1996,

President Clinton signed the ``Housing Opportunity Program Extension

Act of 1996,'' which authorized the section 538 Guaranteed Rural Rental

Housing Program for the 1996 fiscal year. Appropriations acts have

extended the program through the 1998 fiscal year. The program is

intended to reach the needs of rural America by complementing the

section 515 Rural Rental Housing direct loan program. It is anticipated

that beneficiaries of the program will be rural residents with low and

moderate incomes. The rural residents will be provided rental housing

through borrowers who receive financing from lenders encouraged to

support multifamily affordable housing by the use of loan guarantees.

Participants are encouraged to utilize the section 538 program in

conjunction with other affordable housing financing and equity sources.

The Agency has developed regulations which are based on information

gathered during the implementation of the fiscal year (FY) 1996 and

1997 demonstration programs. The demonstration programs were based upon

informal listening sessions that were conducted by the Agency which

were attended by approximately fifty different stakeholders, primarily

those individuals representing mortgage bankers, federal agencies,

housing interest groups, secondary market institutions, commercial

bankers, private developers and various government regulatory agencies.

The Agency received numerous comments and suggestions that were

instructive in designing and structuring the demonstration program. The

four most significant suggestions that were instituted in the

demonstration program were: (1) use of NOFA with one point of contact,

(2) simple application package, (3) no second underwriting review, and

(4) compatibility with products already found in the secondary market.

The Agency and stakeholders were clear about using the guarantee

program to serve low and moderate-income families in strong markets.

The Agency took many of the recommendations provided by the

stakeholders for the demonstration programs, as well as for the

regulation that follows.

In the first demonstration in FY 1996, the Agency sought to explore

the optimum level of the initial guarantee fee, response to a 90

percent guarantee, and the need and receptiveness in rural markets to a

guaranteed multifamily housing loan program. In that demonstration

year, 50 proposals were received. Agency funding was sufficient for 10

proposals, two of which used tax exempt bonds permitted for the first-

year demonstration. In most proposals, a combination of leverage and

strong markets produced units that were affordable by low and moderate-

income families. An initial guarantee fee of 1 percent and a limitation

for the interest rate spread of 300 basis points (3 percent) over the

30 year bond rate were accepted in the marketplace. Of the proposals

that are now built and renting, the rate of occupancy is above average,

evidencing the need and demand for this housing in rural America.

In the FY 1997 demonstration, the Agency reduced the interest rate

spread to 200 basis points (2 percent) and added a one-half percent

annual renewal fee to the guarantee fee. Tax exempt bonds were not

permitted for the FY 97 demonstration. It was also clear the

demonstration program was completely viable without the use of tax

exempt bonds. The Agency received 20 proposals and funded 16. The

reduced number of proposals was determined to be the result of a late

notice, short turnaround time for submission of the proposals, lack of

formal regulations, and some confusion as to the availability of the

program in States that received approval of a proposal the first year.

In all other regards, though, the fact that feasible projects were

developed on such short notice illustrated a strong interest and need

for the program.

While the Agency is soliciting comments on all provisions of the

regulation, the Agency is specifically looking for comments on the

following areas:

(1) Occupancy Requirements

The Agency is capping rents (including any tenant-paid utilities)

at 30 percent of 115 percent of the area median income (the maximum

rent that can be charged and still have the unit affordable to a

moderate income family). However, to assure longer-term affordability

to moderate-income tenants, the Agency also requires the average rents

for all units to not exceed 30 percent of 100 percent of area median

income. This should be easily accomplished since many proposals include

Low-Income Housing Tax Credits that would restrict tenant eligibility

to those at 60 percent of median income or below. The Agency is

specifically looking for comments on the following: Does this rule

unduly restrict borrower participation in the program? Is it a

practical step to assure long term affordability to intended low and

moderate-income families? Does it affect the ability of developers to

acquire other financing, or to rehabilitate complexes in the out years?

Is this preferable to requiring tenant certifications to assure the

complex is serving low-and moderate-income families?

(2) Competitive Process and Selection Criteria

The regulations are developed for a fully funded program where

funding authority would be sufficient to meet demand. Therefore, the

regulations do not include selection criteria and give the Agency

Administrator the discretion to establish such criteria in NOFA that

entails a competitive process. The Agency intends to review the

potential demand for the program annually and use a competitive process

when it appears that demand outweighs available funding.

Purpose and Program Summary

The program has been designed to increase the availability of

affordable multifamily housing through partnerships between the Agency

and lending sources, as well as state and local housing finance

agencies and bond issuers. Qualified lenders will be authorized to

originate, underwrite, and close loans for multifamily housing projects

to be guaranteed under this program. Projects may be for new

construction or acquisition with substantial rehabilitation. The Agency

will guarantee such loans upon review of the lender's underwriting

package, appraisal report, appropriate certifications, project

information, and satisfactory completion of the appropriate level of

environmental

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review by the Agency. Lenders will be responsible for loan

underwriting, management and servicing associated with these projects.

The lender will be expected to provide servicing or contract for

servicing of each loan it underwrites. In turn, RHS will guarantee the

lender's loan up to 90 percent of total development cost and commits to

pay up to a maximum of 90 percent of the outstanding principal and

interest balance of such loan in the case of default of the loan and

filing of a claim. In no event will the Agency pay more than 90 percent

of the original principal amount. This means that the Agency will have

a risk exposure under the GRRHP of approximately 80 percent of the

total development cost. Any losses would be split on a pro-rata split

between the lender and the Agency from the first dollar lost.

Program applicability and funding will be announced by NOFA

published in the Federal Register. When program funding levels exceed

$100 million, funds are allocated to states based on the following

criteria: (1) State's percentage of National rural population, 2)

State's percentage of the National number of rural households between

50 and 115 percent of the area median income, and (3) State's

percentage of National average cost per unit. These criteria for

allocation of funds to the states are consistent with other Agency

housing programs. The criteria will enable the Agency to allocate funds

based on a state's population and available households with income

sufficient to meet the proposed rents, and to adjust the allocation for

per unit new construction cost. The purpose of having a cost factor is

to assure units produced reflect criteria for need, especially for high

cost states. Eighty percent of the weight will be divided equally

between population and income and 20 percent based on cost. When the

funding levels are under $100 million, funds will all be held in a

National office reserve and made available administratively in

accordance with the NOFA and program regulations.

Subpart A--General Provisions

This subpart includes the purpose and legislative authority for

GRRHP, definitions of terms found in the regulation, the general

provisions and federal requirements applicable to the program, and the

authority to issue a competitive NOFA in the event demand exceeds

available funding. Key policies of this subpart are:

Section 3565.5 Ranking and Selection Criteria

The Agency intends to guarantee proposals that provide housing to

the areas of greatest need. While a variety of financing packages is

possible, the demand in the eligible market areas will determine the

economic and market feasibility of the proposed development. In the

event demand is projected to exceed available funds, the Agency

reserves the option to establish selection criteria in an annual NOFA.

This flexibility permits the Agency to create and modify the criteria

to assure that facilities with guaranteed loans are geographically

dispersed and ensure that the high need areas are served. Criteria used

in the demonstration programs and under consideration may include the

following:

(1) Partnering and Leveraging

In order to develop the maximum number of housing units and promote

partnerships with states, local communities, and other partners with

similar housing goals, participation loans and leveraging are

encouraged.

(2) Priority Based On Interest Rate

Priority will be provided to the proposals that set the lowest

interest rate spread (difference between the 30-year Treasury Bill rate

and the note rate). However, the program will permit proposals that

require up to 200 basis points (2 percent) over the 30 year Treasury

Bill rate.

(3) Preference for Proposals in a Colonia, Tribal Land or EZ/EC

Community or State Identified Place.

Those proposals 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, will receive preference.

(4) Geographic Diversity

Priority will be given for smaller rural communities versus larger

rural communities.

(5) Commitment to Maintain Low-and Moderate-Income Occupancy

Preference will be given for commitments by the applicant to

maintain occupancy throughout the term of the loan for neediest (based

on income) of the target population, with a priority at initial

occupancy for low-income families.

(6) Preference for Family Proposals

Proposals addressing a need for family units with large bedroom

mixes (3-5 bedrooms) will receive preference.

(7) Administrator's discretion

The Agency reserves the Administrator's discretion to effectively

use funding to best explore program structure and effectiveness

consistent with the best interests of the Government.

Section 3565.6 Exclusion of Tax-exempt Debt

Tax-exempt financing is not eligible for a loan guarantee in this

program. However, the Agency has structured the program to be

compatible with other affordable housing programs such as the Low

Income Housing Tax Credit, taxable bonds, HOME Investment Partnerships

Program (HOME) funds, and other State or locally funded tenant

assistance or grants. Reviewers will note that regulations addressing

eligibility of lenders, lien position, and minimum reporting to the

Agency are intended to foster compatibility with the secondary market

and other lenders' standards.

Subpart B--Guarantee Requirements

This subpart describes loans eligible for guarantee, extent of the

guarantee and the guarantee fees. This subpart includes the

transferability of the guarantee and the procedures the Agency will

follow in the event the guarantee is reduced, suspended, or terminated.

Key policies of this subpart are:

Section 3565.51 Eligible Loans and Advances

The Agency will guarantee a permanent loan or a combination

construction and permanent loan. The Agency will not guarantee a

construction loan that will not be converted into a permanent loan with

an Agency guarantee. The construction loan may not exceed 12 months.

The Agency will guarantee construction contracts (not to exceed 90

percent of the work in place) which have credit enhancements, such as

an acceptable irrevocable letter of credit or pledge of collateral or

both, to protect the government's guarantee. The Agency believes that

providing construction guarantees will foster greater participation in

the program, especially in many rural areas which suffer from a lack of

available mortgage credit.

Section 3565.52 Extent of Guarantee

The Agency will guarantee repayment of an amount not to exceed 90

percent of the total unpaid principal and

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interest of the loan but, in all cases, not more than 90 percent of the

original principal amount. Any losses would be based on a pro-rata

sharing of the risk between the Agency and the lender. For example:

assume the total development cost is $1,000,000, with the original loan

principal amount being 90 percent of the total development cost or

$900,000. The Agency guarantees 90 percent of $900,000, providing a

maximum guarantee equal to $810,000. If this loan were liquidated and

the property sold for $600,000, the claim would be for $270,000

($900,000-$600,000=$300,000 x 90 percent = $270,000). The lender's

loss would be $30,000.

Section 3565.53 Guarantee Fees

At the time of issuance of a loan guarantee under this program, the

Agency will collect an initial guarantee fee equal to 100 basis points

(1 percent) of the guaranteed principal obligation of the loan from the

lender. The Agency will also collect an annual servicing fee of 50

basis points (\1/2\ percent) based on the outstanding principal and

interest of the guarantee portion of the loan on the first and each

subsequent anniversary of the loan as long as the guarantee remains

outstanding. These fees are fairly standard in the industry. They were

used under the section 538 demonstration programs and found to be

acceptable. They also significantly reduce the cost of the program.

Subpart C--Lender Requirements

This subpart provides the Agency policy on types of lenders and

their eligibility requirements for participation in the program. Lender

review and approval for participation in the program is covered in this

subpart. A lender must be eligible and approved to participate in the

program. This subpart also covers a lender's ongoing eligibility

requirements and responsibilities.

Sec. 3565.101 Responsibility of lenders

A participating lender must originate and service a guaranteed loan

in accordance with the regulation and program requirements throughout

the life of a loan or guarantee, whichever is less. In exceptional

circumstances the Agency, in its sole discretion, may permit the

transfer of servicing from the originating lender to a servicer.

Section 3565.102 Lender Eligibility

Those lenders currently approved and considered eligible by the

Federal National Mortgage Association, the Federal Home Loan Mortgage

Corporation, the Federal Home Loan Bank Members, or the Department of

Housing and Urban Development for guaranteed loan programs supporting

multifamily housing are included as eligible lenders for this program.

In addition, State Housing Finance Agencies (HFAs) are also considered

eligible to participate in the program provided they demonstrate they

have the ability to underwrite, originate, process, close, service,

manage, and dispose of multifamily housing loans in a prudent manner.

Other lenders have the opportunity to enter into a correspondent bank

relationship with approved lenders in order to participate in the

program. The Agency is striving to have as broad a pool of eligible

lenders as possible.

Section 3565.103 Approval Requirements

To become an approved lender, eligible lenders (see Sec. 3565.102)

must meet a set of requirements for ongoing participation in the

program. The Agency will establish and maintain a ``list of approved

lenders.'' The Agency will establish threshold requirements for

becoming an approved lender and then require annual certification to

show compliance with the continuing requirements for retaining the

status of approved lender. The Agency ``approved lender'' list and

review procedures meet the legislative requirements without placing

unnecessary burden on the lenders participating or wanting to

participate in the program.

The Agency is also considering requiring that approved lenders have

computer systems that comply with year 2000 technology. The Agency is

specifically interested in comments on such an eligibility requirement,

the potential vulnerability to the servicing of a guaranteed portfolio

with systems that are not year 2000 compliant, the potential

vulnerability to the Agency, and the requirement's impact on lenders

participation in the program.

Subpart D--Borrower Eligibility Requirements

This subpart contains the basic eligibility and loan underwriting

requirements for loans on which an Agency guarantee is requested. It

also contains identity of interest requirements, limitations for

borrowers, as well as required certifications. These reinforce the

Agency's intention not to re-underwrite the loan when borrower

thresholds are met. Subparts H and I of this part outline the Agency's

broad oversight responsibilities of the lender, the borrower and the

project.

Subpart E--Loan Requirements

This subpart provides the Agency's direction to the lender in

evaluating loans for compatibility with GRRHP. Also provided in this

subpart are acceptable loan rates and terms. Key policies of this

subpart are:

Section 3565.202 Tenant Eligibility and Section 3565.203 Restrictions

on rents.

The Agency recognizes that many of the proposals seeking a

guarantee under this program may have alternate financing sources that

will be more restrictive in terms of income limits for eligible

tenants. The law establishes a mandate to serve low and moderate-income

families. Therefore, the rent cap for initial occupancy corresponds to

the maximum ``affordable'' rent (based on legislated standard of 30

percent of income for rent and utilities) for moderate-income families.

After initial occupancy, a tenant's income may exceed these limits;

however, the Agency plans to restrict the average rents, including

utilities, for the overall project to no more than 30 percent of 100

percent of area median income for the term of the loan. This is

intended to assure broader marketability and longer occupancy by low-

and moderate-income families. Lenders will be required to provide an

annual rent certification, and the Agency intends to monitor rents.

Section 3565.204 Maximum Loan Amount

The enabling legislation mandates that the maximum loan amount

eligible for guarantee involve a principal amount (including initial

service charges, appraisal, inspection, and other reasonable fees) not

to exceed 97 percent of the development costs of the housing and

related facilities or the value of the housing and facilities

(whichever is less) for a borrower that is a nonprofit organization or

an agency or body of any State or local government. For a borrower that

is a for-profit entity, the principal amount eligible for guarantee may

be up to 90 percent of the development costs of the housing and related

facilities or the value of the housing and facilities (whichever is

less). In order to contain costs and keep project units modest in

design and amenities, the Agency has set a cap for such part of the

property as may be attributable to dwelling use equal to the applicable

maximum per unit dollar amount limitations under section 207(c) of the

National Housing Act, which has built-in flexibility for high and low

cost markets.

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As with other multifamily housing programs, loans are subject to a

review conducted in conjunction with the applicable tax credit

administration entity to determine if the proposal is in conformance

with the Agency's subsidy layering requirements under its rural rental

housing direct loan program (see 7 CFR 1944.213). The Agency will not

guarantee a loan which is for more than the minimum amount of

assistance necessary to make the complex financially feasible.

Section 3565.207 Form of Lien

The enabling legislation mandates that loans guaranteed under this

program shall be secured by a first mortgage on the housing and related

facilities for which the loan is made, or be secured by a parity lien

in the case where the loan upon which the Agency guarantee is requested

is not the primary funding source.

Section 3565.208 Maximum Loan Term

The enabling legislation mandates that loans must be completely

amortized by periodic payments for a term not to exceed 40 years. A

fixed rate of interest must be agreed upon by the borrower and the

lender that does not exceed the maximum allowable rate established by

the Administrator.

Section 3565.210 Maximum Interest Rate

The maximum allowable rate will be set in the annual NOFA as a

number of basis points over the 30-year Treasury Bond Rate as published

in the ``Wall Street Journal'' as of the business day previous to the

business day the rate is set. Priority may be given to proposals that

have rates lower than the maximum, with the lowest number of basis

points receiving the highest priority.

Section 3565.211 Interest Credit

The law provides that, for at least 20 percent of the loans made

under this program, the Agency shall provide the borrower with

assistance in the form of interest credits to the extent necessary to

reduce the rate of interest to the Applicable Federal Rate (AFR), as

such term is used in section 42(I)(2)(D) of the Internal Revenue Code

of 1986. For the FY 1997 demonstration program, the AFR was 6.25

percent. The Agency intends to limit use of this authority to no more

than a guarantee of $1.5 million per complex in order to maximize

available budget authority and assist more rural residents. This policy

is also necessary for program management and budgeting of the interest

credit available in any fiscal year.

Section 3565.214 Release of Liability

The legislation imposes a restriction of non-assumability by a

party other than the original borrower when any portion of the

principal obligation or interest remains outstanding with a GRRHP loan.

The borrower may not be relieved of liability with respect to the loan,

notwithstanding the transfer of property for which the loan was made.

Loans guaranteed under this program may be made on a recourse or non-

recourse basis. The lender should make the decision about whether to

make a recourse or non-recourse loan.

Subpart F--Property Requirements

The guidance in the section provides direction for the lender and

the borrower on property requirements and contains the Agency's overall

policy on housing design and standards. Flexibility is provided to meet

needs of the rural communities in which the housing is to be located.

Key policies of this subpart are:

Section 3565.251 Eligible Property

The Agency is required to guarantee loans on units located in rural

areas as defined in 7 CFR 3550.10. Each State Director is responsible

for designating the rural area for his or her state and providing such

information to the public upon request. The definition of a rural area,

in part, is one that is located in a place of 10,000 population or

less; or a place of 20,000 population or less that is not associated

with a Metropolitan Statistical Area. The Agency's direct rural rental

housing program's requirements on prioritizing and designating most

needy places are not applicable to the guarantee program.

Section 3565.252 Housing Types

Complexes may contain modular or manufactured units, that are

attached, detached, semi-detached, row houses, or multifamily

structures. The Agency proposes to guarantee proposals for new

construction or acquisition with rehabilitation of at least $15,000 per

unit. Refinancing of existing housing and indebtedness is not an

authorized purpose. The portion of the guaranteed funds for acquisition

with rehabilitation is limited to 25 percent of the program authority.

The Agency's objective, consistent with the enabling legislation, is to

expand the housing stock. New construction is typically more cost

effective in both the short and long term.

Subpart G--Processing Requirements

This subpart establishes the loan origination, underwriting and

appraisal standards, as well as the allowable fees, processing steps,

guarantee process, and closing requirements. The requirements for

lender loan processing and project servicing, management and

disposition are clearly listed in this subpart. Key policies of this

subpart are:

Section 3565.303 Issuance of Loan Guarantee

In order to reduce the Agency risk and encourage the lender and

borrower to provide the necessary housing as quickly as possible, the

Agency will only issue the loan guarantee when a final certificate of

occupancy and an acceptable level of occupancy has been reached. The

Agency will require the lender, as part of the guarantee package for

the permanent loan, to certify that the appropriate occupancy has been

reached and that the final certificate of occupancy has been issued.

Subpart H--Project Management

This subpart contains the required project management thresholds.

Key policies are:

Section 3565.351 Project Management

The enabling legislation requires the Agency to provide tenant

protection. The Agency currently has regulations for tenant protection

under the direct program and intends to provide tenants in units

financed with a loan guarantee the same protections already contained

in 7 CFR part 1944, subpart L. The borrower must inform tenants in

writing of these rights.

Section 3565.352 Preservation of Affordable Housing

Enabling legislation requires the placement of ``use restrictions''

on the property so that the housing remains available for initial

occupancy by low-and moderate-income households for the original term

of the guaranteed loan. This requirement will be included in a deed

restriction or other instrument acceptable to the Agency.

Subpart I--Servicing Requirements

The minimum requirements for servicing responsibilities are listed

in this subpart. The Agency has divided the servicing into the lender's

responsibilities and the borrower's responsibilities. While the Agency

intends to maintain prudent oversight responsibility for the program,

the rules attempt to balance the need for quality servicing while

providing a reasonable impact on the lender. Key policies of this

subpart are:

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Section 3565.401 Servicing Objectives

The following four servicing objectives provide the foundation for

all of the servicing on the guaranteed loan.

(1) Protecting the interests of tenants,

(2) Preserving the value of the loan and real estate,

(3) Avoiding or limiting potential loss to the lender and Agency,

and

(4) Furthering program objectives.

Subpart J--Assignment, Conveyance and Claims

This subpart reflects the Agency's intent to make this product

compatible with the other products that exist on the secondary market.

The enabling legislation is silent on most of the areas under this

subpart. Therefore, the Agency looked to guarantee programs of other

Federal and government sponsored entities for guidance and models.

Advice and recommendations in this area are welcome. Key policies of

this subpart are:

Section 3565.453 Disposition of the Property

The lender is responsible for liquidation of the security in most

cases prior to filing a claim for payment under the guarantee.

Foreclosure action will be taken by the lender, under state law. The

Agency provides direction in this subpart to the lender in coordinating

the liquidation of the security with the Agency.

Section 3565.455 Alternative Disposition Methods

The Agency authorizes alternative methods for disposition of the

security, such as assignment or conveyance to the Agency, but these

methods may be used at the Agency's sole discretion. At this time, the

Agency would view these methods as unusual for disposition of the

security.

Section 3565.456 Filing a Claim

The Agency will look to the lender to dispose of the property

before filing a final claim for the guaranteed portion of allowable

losses. This is consistent with other guarantee programs and industry

standards.

Also included within this document is an amendment to 7 CFR part

1940, subpart L which establishes the formula for allocation of funds

to Rural Development State Offices.

Paperwork Reduction Act

The reporting requirements contained in this regulation have

received temporary emergency clearance by the Office of Management and

Budget (OMB) under Control Number 0575-0174. However, in accordance

with the Paperwork Reduction Act of 1995, RHS will seek standard OMB

approval of the reporting requirements contained in this regulation and

hereby opens a 60-day public comment period.

On March 28, 1996, President Clinton signed the ``Housing

Opportunity Program Extension Act of 1996.'' One of the provisions of

the Act was the authorization of the section 538 Guaranteed Rural

Rental Housing Program, adding the program to the Housing Act of 1949.

The program has been designed to increase the supply of affordable

multifamily housing through partnerships between RHS and major lending

sources, as well as State and local housing finance agencies and bond

issuers. Qualified lenders will be authorized to originate, underwrite,

and close loans for multifamily housing projects requiring new

construction or acquisition with rehabilitation of at least $15,000 per

unit.

The housing must be available for occupancy only by low or moderate

income families or persons, whose incomes at the time of initial

occupancy do not exceed 115 percent of the median income of the area.

After initial occupancy, a tenant's income may exceed these limits;

however, rents, including utilities, are restricted to no more than 30

percent of the 115 percent of area median income for the term of the

loan.

Units must be located in areas considered eligible as defined in 7

CFR 3550.10.

The Secretary is authorized under section 510(k) of the Housing Act

of 1949 to prescribe regulations to ensure that these federally funded

loans are made to eligible applicants for authorized purposes. The

lender must evaluate the eligibility, cost, benefits, feasibility, and

financial performance of the proposed project. The information

submitted by the lender to the Agency is used by the Agency to manage,

plan, evaluate, and account for Government resources. The reports are

required to ensure the proper and judicious use of public funds.

Estimate of Burden: Public reporting burden for this collection of

information is estimated to average .39 man hours per response.

Respondents: Profit and nonprofit organizations and public bodies.

Estimated Number of Respondents: 50.

Estimated Number of Responses per Respondent: 33.

Estimated Total Annual Burden on Respondents: 644.39 hours.

The subject regulation is published for public review and comment.

Additional copies of the interim rule or copies of this information

collection can be obtained from Tracy Gillin, Regulations and Paperwork

Management Branch, Support Services Division, Rural Development, at

(202) 692-0039.

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

information is necessary for the proper performance of the functions of

RHS, including whether the information will have practical utility; (b)

the accuracy of RHS' estimate of the burden of the proposed collection

of information including the validity of the methodology and

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

of the information to be collected; and (d) ways to minimize the burden

of the collection of information on those who are to respond, including

through the use of appropriate automated, electronic, mechanical, or

other technological collection techniques or other forms of information

technology.

All responses with regard to paperwork burden will be summarized,

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

public record. Comments should be submitted to Tracy Gillin,

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

Agriculture, Rural Development, STOP 0742, 1400 Independence Ave. SW,

Washington, DC 20250-0742.

List of Subjects

7 CFR Part 1940

Administrative practice and procedure, Agriculture, Grant

programs--Housing and community development, Loan programs--

Agriculture, Rural areas.

7 CFR Part 3565

Bankruptcy, Banks, banking Civil rights, Conflict of interests,

Credit, Environmental impact statements, Fair housing, Government

procurement, Guaranteed loans, Hearing and appeal procedures, Housing

standards, Lobbying, Low and moderate income housing, Manufactured

homes, Mortgages, Real property acquisition, Surety bonding.

Therefore, chapters XVIII and XXXV, title 7, Code of Federal

Regulations are amended as follows:

[[Page 39458]]

CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE

SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT

OF AGRICULTURE

PART 1940--[Amended]

1. The authority citation for part 1940 continues to read as

follows:

Authority: 5 U.S.C. 301, 7 U.S.C. 1989, and 42 U.S.C. 1480.

2. Section 1940.560 is added to read as follows:

Sec. 1940.560 Guarantee Rural Rental Housing Program.

When funding levels are under $100,000,000, all funds will be held

in a National Office reserve and made available administratively in

accordance with the Notice of Funding Availability (NOFA) and program

regulations. When program levels are sufficient for a nationwide

program, funds are allocated based upon the following criteria and

weights.

(a) Amount available for allocations. See Sec. 1940.552(a) of this

subpart.

(b) Basic formula criteria, data source and weight. See

Sec. 1940.552(b) of this subpart .

Each factor will receive a weight respectively of 40%, 40% and 20%.

The criteria used in the basic formula are:

(1) State's percentage of National rural population,

(2) State's percentage of the National number of rural households

between 50 and 115 percent of the area median income, and

(3) State's percentage of National average cost per unit. Data

source for the first two of these criterion are based on the latest

census data available. The third criterion is based on the cost per

unit data using the applicable maximum per unit dollar amount

limitations under section 207(c) of the National Housing Act, which can

be obtained from the Department of Housing and Urban Development. The

percentage representing each criterion is multiplied by the weight

assigned and totaled to arrive at a State factor.

State Factor = (criterion No. 1 x weight of 40%)+ (criterion No. 1

x weight of 40%)+ (criterion No. 1 x weight of 20%)

(c) Basic formula allocation. See Sec. 1940.552(c).

(d) Transition formula. See Sec. 1940.552(d).

(e) Base allocation. See Sec. 1940.552(e). Jurisdictions receiving

administrative allocations do not receive base allocations.

(f) Administrative allocations. See Sec. 1940.552(f). Jurisdictions

receiving formula allocations do not receive administrative

allocations.

(g) Reserve. See Sec. 1940.552(g).

(h) Pooling of funds. See Sec. 1940.552(h).

(i) Availability of the allocation. See Sec. 1940.552(i).

(j) Suballocation by the State Director. See Sec. 1940.552(j).

(k) Other documentation. Not applicable.

CHAPTER XXXV-RURAL HOUSING SERVICE, UNITED STATES DEPARTMENT OF

AGRICULTURE

3. Part 3565 is added to read as follows:

PART 3565--Guaranteed Rural Rental Housing Program

Subpart A--General Provisions

Sec.

3565.1 Purpose.

3565.2 Applicability and authority.

3565.3 Definitions.

3565.4 Availability of assistance.

3565.5 Ranking and selection criteria.

3565.6 Exclusion of tax-exempt debt.

3565.7 Agency environmental requirements.

3565.8 Civil rights.

3565.9 Compliance with federal requirements.

3565.10 Conflict of interest.

3565.11-3565.12 [Reserved]

3565.13 Exception authority.

3565.14 Review and appeals.

3565.15 Oversight and monitoring.

3565.16 [Reserved]

3565.17 Demonstration programs.

3565.18-3565.49 [Reserved]

3565.50 OMB control number.

Subpart B--Guarantee Requirements

3565.51 Eligible loans and advances.

3565.52 Extent of the guarantee.

3565.53 Guarantee fees.

3565.54 Transferability of the guarantee.

3565.55 Participation loans.

3565.56 Suspension or termination of loan guarantee agreement.

3565.57 Modification, extension, reinstatement of loan guarantee.

3565.58-3565.99 [Reserved]

3565.100 OMB control number.

Subpart C--Lender Requirements

3565.101 Responsibility of lenders.

3565.102 Lender eligibility.

3565.103 Approval requirements.

3565.104 Application requirements.

3565.105 Lender compliance.

3565.106 Construction lender requirements.

3565.107 [Reserved]

3565.108 Responsibility for actions of agents and mortgage brokers.

3565.109 Minimum loan prohibition.

3565.110 Insolvency of lender.

3565.111 Lobbying activities.

3565.112-3565.149 [Reserved]

3565.150 OMB control number.

Subpart D--Borrower Eligibility Requirements

3565.151 Eligible borrowers.

3565.152 Control of land.

3565.153 Experience and capacity of borrower.

3565.154 Previous participation in state and federal programs.

3565.155 Identity of interest.

3565.156 Certification of compliance with federal, state, and local

laws and with Agency requirements.

3565.157-3565.199 [Reserved]

3565.200 OMB control number.

Subpart E--Loan Requirements

3565.201 General.

3565.202 Tenant eligibility.

3565.203 Restrictions on rents.

3565.204 Maximum loan amount.

3565.205 Eligible uses of loan proceeds.

3565.206 Ineligible uses of loan proceeds.

3565.207 Form of lien.

3565.208 Maximum loan term.

3565.209 Loan amortization.

3565.210 Maximum interest rate.

3565.211 Interest credit.

3565.212 Multiple guaranteed loans.

3565.213 Geographic distribution.

3565.214 Release of liability.

3565.215 Special conditions.

3565.216-3565.249 [Reserved]

3565.250 OMB control number.

Subpart F--Property Requirements

3565.251 Eligible property.

3565.252 Housing types.

3565.253 Form of ownership.

3565.254 Property standards.

3565.255 Environmental requirements.

3565.256 Architectural services.

3565.257 Procurement actions.

3565.258-3565.299 [Reserved]

3565.300 OMB control number.

Subpart G--Processing Requirements

3565.301 Loan standards.

3565.302 Allowable fees.

3565.303 Issuance of loan guarantee.

3565.304 Lender loan processing responsibilities.

3565.305 Mortgage and closing requirements.

3565.306-3565.349 [Reserved]

3565.350 OMB control number.

Subpart H--Project Management

3565.351 Project management.

3565.352 Preservation of affordable housing.

3565.353 Affirmative fair marketing.

3565.354 Fair housing accommodations.

3565.355 Changes in ownership.

3565.356-3565.399 [Reserved]

3565.400 OMB control number.

Subpart I--Servicing Requirements

3565.401 Servicing objectives.

3565.402 Servicing responsibilities.

3565.403 Special servicing.

3565.404 Transfer of mortgage servicing.

3565.405-3565.449 [Reserved]

3565.450 OMB control number.

[[Page 39459]]

Subpart J--Assignment, Conveyance, and Claims

3565.451 Preclaim requirements.

3565.452 Decision to liquidate.

3565.453 Disposition of the property.

3565.454 [Reserved]

3565.455 Alternative disposition methods.

3565.456 Filing a claim.

3565.457 Determination of claim amount.

3565.458 Withdrawal of claim.

3565.459-3565.499 [Reserved]

3565.500 OMB control number.

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart A--General Provisions

Sec. 3565.1 Purpose.

The purpose of the Guaranteed Rural Rental Housing Program (GRRHP)

is to increase the supply of affordable rural rental housing, through

the use of loan guarantees that encourage partnerships between the

Rural Housing Service, private lenders and public agencies.

Sec. 3565.2 Applicability and authority.

The regulation prescribes the policies, authorizations, and

procedures for the guarantee of multifamily loans under section 538 of

the Housing Act of 1949.

Sec. 3565.3 Definitions.

Administrator. The Administrator of the Rural Housing Service, or

his or her designee.

Agency. The Rural Housing Service, or a successor agency.

Allowable claim amount. The total losses incurred by the lender, as

calculated pursuant to subpart J of this part.

Applicable Federal Rate (AFR). The interest rate set by the federal

government for federal financing programs pursuant to section 42 of the

Internal Revenue Code.

Approved lender. An eligible lender who has been authorized by the

Agency to originate and service guaranteed multifamily loans under the

program.

Assignment. The delivery by a lender to the Agency of the note and

any other security instruments securing the guaranteed loan; and any

and all liens, interest, or claims the lender may have against the

borrower.

Assistance. Financial assistance in the form of a loan guarantee or

interest credit received from the Agency.

Borrower. The individuals or entities responsible for repaying the

loans.

Claim. The presentation to the Agency of a demand for payment for

losses incurred on a loan guaranteed under the program.

Combination construction and permanent loan. The Agency may

guarantee a construction contract which has credit enhancements to

protect the Government's interest. The construction guarantee will be

converted to a permanent guarantee when construction is completed and

the requirements contained in the conditional commitment are met.

Conditional commitment. The written commitment by the Agency to

guarantee a loan subject to the stated terms and conditions.

Correspondent relationship. A contractual relationship between an

approved lender and a non-approved lender or mortgage broker in which

the correspondent performs certain origination, underwriting or

servicing functions for the approved lender.

Default. Failure by a borrower to meet any obligation or term of a

loan, grant, or regulatory agreement, or any program requirement.

Delinquency. Failure to make a timely payment under the terms of

the promissory note or regulatory agreement.

Department of Housing and Urban Development (HUD). A federal agency

which may be a partner in some of the Agency guarantees.

Due diligence. The process of evaluating real estate in the context

of a real estate transaction for the presence of contamination from

release of hazardous substances, petroleum products, or other

environmental hazards and determining what effect, if any, the

contamination has on the regulatory status or security value of the

property.

Eligible borrower. A borrower who meets the requirements of subpart

D of this part.

Eligible lender. A lender who meets the requirements of subpart C

of this part or any successor regulation.

Eligible loan. A loan that meets the requirements of subpart E of

this part or any successor regulation.

Eligible rural area. An eligible rural area is an area which meets

the requirements of part 3550 of this chapter or any successor

regulation.

Fannie Mae. A Federally chartered--publicly owned enterprise

created by Congress to purchase, sell or otherwise facilitate the

purchase or sale of mortgages in the secondary mortgage market.

Federal Home Loan Bank System. A system of member savings and

loans, banks and other lenders whose primary business is the making of

housing loans.

Final claim payment. The amount due to the lender (or the Agency)

after disposition of the collateral is complete and the proceeds from

liquidation, as well as any other claim payments, are applied against

the allowable claim amount.

Foreclosure. The process by which the ownership interest of a

borrower in a mortgaged property is extinguished and the security is

liquidated with the proceeds applied to the loan.

Freddie Mac. A Federally chartered, publicly owned enterprise

created to purchase, sell or otherwise facilitate the purchase or sale

of mortgages in the secondary mortgage market.

GRRHP. Guaranteed Rural Rental Housing Program.

Guarantee fees. The fees paid by the lender to the Agency for the

loan guarantee.

(1) An initial guarantee fee is due at the time the guarantee is

issued.

(2) An annual guarantee fee is due at the beginning of each year

that the guarantee remains in effect.

Guaranteed loan. Any loan for which the Agency provides a loan

guarantee.

Housing Finance Agency (HFA). A state or local government

instrumentality authorized to issue housing bonds or otherwise provide

financing for housing. Identity of interest. With respect to a project,

an actual or apparent financial interest of any type, that exists or

will exist among the borrower, contractor, lender, syndicator,

management agent, suppliers of materials or services, including

professional services, or vendors (including servicing and property

disposal), in any combination of relationships which may result in an

actual or perceived conflict of interest

Income eligibility. A determination that the income of a tenant at

initial occupancy does not exceed 115 percent of the area median income

as such area median income is defined by HUD or a successor agency.

Interest credit. A subsidy available to eligible borrowers that

reduces the effective interest rate of the loan to the AFR.

Land lease. A written agreement between a landowner and a borrower

for the possession and use of real property for a specified period of

time.

Lease. A contract containing the rights and obligations of a tenant

or cooperative member and a borrower, including the amount of the

monthly occupancy charge and other terms under which the tenant will

occupy the housing.

Lender. A bank or other financial institution, including a housing

finance agency, that originates or services the guaranteed loan.

Lender Agreement. The written agreement between the Agency and the

lender containing the requirements the lender must meet on a continuing

basis to participate in the program.

[[Page 39460]]

Loan. A mechanism by which a lender funds the acquisition and

development of a multifamily project. A loan in this context is secured

by a mortgage executed by the lender and borrower.

Loan guarantee. A pledge to pay part of the loss incurred by a

lender in the event of default by the borrower.

Loan guarantee agreement. The written agreement between the Agency

and the lender containing the terms and conditions of the guarantee

with respect to an individual loan.

Loan participation. A loan made by more than one lender wherein

each lender funds an individual portion of the loan.

Loan-to-value ratio. The amount of the loan divided by the

appraised market value of the project.

Maximum guarantee payment. The maximum payment by the Agency under

the guarantee agreement computed by applying the guarantee percentage

times the allowable claim amount, but not to exceed original principal

amount.

Mortgage. A written instrument evidencing or creating a lien

against real property for the purpose of providing collateral to secure

the repayment of a loan. For program purposes, this may include a deed

of trust or any similar document.

Multifamily project. A project designed with five or more living

units.

NOFA. A ``Notice of Funding Availability'' published in the Federal

Register to inform interested parties of the availability of assistance

and other non-regulatory matters pertinent to the program.

Non-monetary default. A default that does not involve the payment

of money.

Note. Any note, bond, assumption agreement, or other evidence of

indebtedness pertaining to a guaranteed loan.

Office of Inspector General (OIG). The agency of USDA established

under the Inspector General Act.

Payment effective date. For the month payment is due, the day of

the month on which payment will be effectively applied to the account

by the lender, regardless of the date payment is received.

Permanent loan. A loan that becomes effective upon Agency

acceptance of a lender certification of an acceptable minimum level of

occupancy.

Prepayment. The payment of the outstanding balance on a loan prior

to the note's maturity date.

Project. The total number of rental housing units and related

facilities subject to a guaranteed loan that are operated under one

management plan and one Regulatory Agreement.

Program requirements. Any requirements contained in any loan

document, guarantee agreement, statute, regulation, handbook, or

administrative notice.

Promissory Note. See ``Note''.

Qualified alien. For the purposes of this part, qualified alien

refers to any person lawfully admitted into the country who meets the

criteria of 42 U.S.C. 1436a.

Real Estate Owned. Denotes real estate that has been acquired by

the lender or the Agency (often known as ``inventory property'').

Recourse. The lender's right to seek satisfaction from the

borrower's personal financial resources or other resources for monetary

default.

Regulatory Agreement. The agreement that establishes the

relationship among the Agency, the lender, and the borrower; and

contains the borrower's responsibilities with respect to all aspects of

the management and operation of the project.

RHS. The Rural Housing Service within the Rural Development mission

area, or a successor agency, which administers section 538 guarantees.

Rural area. A geographic area as defined in section 520 of the

Housing Act of 1949.

Rural Development. A mission area within USDA which includes RHS,

Rural Utilities Service, and Rural Business-Cooperative Service.

Servicing. The broad scope of activities undertaken to manage the

performance of a loan throughout its term and to assure compliance with

the program requirements.

Single asset ownership. A borrower who owns only one project.

Surplus cash. The borrower's remaining funds at the project's

fiscal year end, after making all required payments, excluding required

reserves and escrows.

Tenant. The individual that holds the right to occupy a unit in

accordance with the terms of a lease executed with the project owner.

U.S. citizen. An individual who resides as a citizen in any of the

50 States, the District of Columbia, the Commonwealth of Puerto Rico,

the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the

Northern Marinas, the Federated States of Micronesia, the Republic of

Palau, or the Republic of the Marshall Islands.

USDA. The United States Department of Agriculture.

Sec. 3565.4 Availability of assistance.

The Agency's authority to enter into commitments, guarantee loans,

or provide interest credits is limited to the extent that

appropriations are available to cover the cost of the assistance. The

Agency will publish a NOFA in the Federal Register to notify interested

parties of the availability of assistance.

Sec. 3565.5 Ranking and selection criteria.

(a) Threshold criteria. Applications for loan guarantee submitted

by lenders must include a loan request for a project that meets all of

the following threshold criteria:

(1) The project must involve an owner and a development team with

qualifications and experience sufficient to carry out development,

management, and ownership responsibilities, and the owner and

development team must not be under investigation or suspension from any

government programs;

(2) The project must involve the financing of a property located in

an eligible rural area;

(3) Demonstrate a readiness, for the project to proceed, including

submission of a complete application for a loan guarantee and evidence

of financing;

(4) Demonstrate market and financial feasibility; and

(5) Include evidence that the credit risk is reasonable, taking

into account conventional lending practices, and factors related to

concentration of risk in a given market and with a given borrower.

(b) Priority projects. The Agency may, at its sole discretion, set

aside assistance for or rank projects that meet important program

goals. Assistance will include both loan guarantees and interest

credits. Priority projects must compete for set-aside funds. The Agency

will announce any assistance set aside and selection criteria in the

NOFA.

Sec. 3565.6 Exclusion of tax-exempt debt.

Consistent with Administration Policy, tax-exempt financing cannot

be used as a source of capital for the guaranteed loan.

Sec. 3565.7 Agency environmental requirements.

The Agency will take into account potential environmental impacts

of proposed projects by working with applicants, other federal

agencies, Indian tribes, State and local governments, and interested

citizens and organizations in order to formulate actions that advance

the program goals in a manner that will protect, enhance, and restore

environmental quality. Actions taken by the Agency under this subpart

are subject to an environmental review conducted in accordance with the

requirements of 7 CFR part 1940, subpart G or any successor

regulations.

[[Page 39461]]

Sec. 3565.8 Civil rights.

(a) All actions taken by the Agency, or on behalf of the Agency, by

a lender or borrower, will be conducted without regard to race, color,

religion, sex, familial status, marital status, national origin, age,

or disability, pursuant to 7 CFR part 15 (1998). This includes any

actions in the sale, rental or advertising of the dwellings; in the

provision of brokerage services; or in making available residential

real estate transactions involving Agency assistance. See the Fair

Housing Act, as amended, 42 U.S.C. 3601-3619 (1994); see also the Equal

Credit Opportunity Act, 42 U.S.C. 1691-1691(f) (1994 and Supp. I,

1995). It is unlawful for a lender or borrower participating in the

program to:

(1) Refuse to make accommodations in rules, policies, practices, or

services if such accommodations are necessary to provide a person with

a disability an opportunity to use or continue to use a dwelling unit

and all public and common use areas; and

(2) Refuse to allow an individual with a disability to make

reasonable modifications to a unit at his or her expense, if such

modifications may be necessary to afford the individual full enjoyment

of the unit.

(b) Any resident or prospective resident seeking occupancy or use

of a unit, property or related facility for which a loan guarantee has

been provided, and who believes that he or she is being discriminated

against may file a complaint with the lender, the Agency or the

Department of Housing and Urban Development. A written complaint should

be sent to the Secretary of Agriculture or of the Department of Housing

and Urban Development in Washington, DC.

(c) Lenders and borrowers that fail to comply with the requirements

of title VIII of the Civil Rights Act of 1968, as amended (the Fair

Housing Act), are liable for those sanctions authorized by law.

Sec. 3565.9 Compliance with federal requirements.

The Agency and the lender are responsible for ensuring that the

application is in compliance with all applicable federal requirements,

including the following specific statutory requirements:

(a) Intergovernmental review. 7 CFR part 3015, subpart V,

``Intergovernmental Review of Department of Agriculture Programs and

Activities'', or successor regulation, including the Agency

supplemental administrative instruction, RD Instruction 1940-J

(available in any Rural Development Office).

(b) National flood insurance. The National Flood Insurance Act of

1968, as amended by the Flood Disaster Protection Act of 1973; the

National Flood Insurance Reform Act of 1994; and 7 CFR part 1806,

subpart B, or successor regulation.

(c) Clean Air Act and Water Pollution Control Act Requirements. For

any contract, all applicable standards, orders or requirements issued

under section 306 of the Clean Air Act; section 508 of the Clean Water

Act; Executive Order 11738; and EPA regulations at part 32, of title

40.

(d) Historic preservation requirements. The provisions of 7 CFR

part 1901, subpart F or successor regulation.

(e) Section 504 of the Rehabilitation Act of 1973; the Fair Housing

Act; and the Americans with Disabilities Act.

(f) Lead-based paint requirements. The provisions of 7 CFR part

1924, subpart A, or successor regulation.

Sec. 3565.10 Conflict of interest.

(a) Objective. It is the objective within the Rural Development

mission area to maintain the highest standards of honesty, integrity,

and impartiality by employees.

(b) Rural Development requirement. To reduce the potential for

employee conflict of interest, all Rural Development activities will be

conducted in accordance with 7 CFR part 1900, subpart D, or successor

regulation by Rural Development employees who:

(1) Are not themselves a beneficiary;

(2) Are not family members or known relatives of any beneficiary;

and

(3) Do not have any business or personal relationship with any

beneficiary or any employee of a beneficiary.

(c) Rural Development employee responsibility. Rural Development

employees must disclose any known relationship or association with a

lender or borrower or their agents, regardless of whether the

relationship or association is known to others. Rural Development

employees or members of their families may not purchase a Real Estate

Owned property, security property from a borrower, or security property

at a foreclosure sale.

(d) Loan closing agent responsibility. Loan closing agents (or

members of their families) who have been involved with a particular

property are precluded from purchasing such properties.

(e) Lender and borrower responsibility. Lenders, borrowers, and

their agents must identify any known relationship or association with a

Rural Development employee.

Secs. 3565.11-3565.12 [Reserved].

Sec. 3565.13 Exception authority.

An Agency official may request and the Administrator or designee

may make an exception to any requirement or provision, or address any

omission of this part if the Administrator determines that application

of the requirement or provision, or failure to take action, would

adversely affect the government's interest or the program objectives.

Sec. 3565.14 Review and appeals.

Whenever RHS makes a decision that is adverse to a lender or a

borrower, RHS will provide written notice of such adverse decision and

of the right to a USDA National Appeals Division hearing in accordance

with 7 CFR part 11 or successor regulations. The lender or borrower may

request an informal review with the decision maker and the use of

available alternative dispute resolution or mediation programs as a

means of resolution of the adverse decision. Any adverse decision,

whether appealable or non-appealable may also be reviewed by the next

level RHS supervisor. Adverse decisions affecting project tenants or

applicants for tenancy will be handled in accordance with 7 CFR part

1944, subpart L or successor regulations.

Sec. 3565.15 Oversight and monitoring.

The lender, borrower, and all parties involved in any manner with

any guarantee under this program must cooperate fully with all

oversight and monitoring efforts of the Agency, Office of Inspector

General, the U.S. General Accounting Office, and the U.S. Department of

Justice or their representatives including making available any records

concerning this transaction. This includes the annual eligibility audit

and any other oversight or monitoring activities. If the Agency

implements a requirement for an electronic transfer of information, the

lender and borrower must cooperate fully.

Sec. 3565.16 [Reserved]

Sec. 3565.17 Demonstration programs.

To test ways to expand the availability or enhance the

effectiveness of the guarantee program, or for similar purposes, the

Agency may, from time to time, propose demonstration programs that use

loan guarantees or interest credit. Toward this end, the Agency may

enter into special partnerships with lenders, financial intermediaries,

or others to carry out one or more elements

[[Page 39462]]

of a demonstration program. Demonstration programs will be publicized

by notices in the Federal Register.

Secs. 3565.18-3565.49 [Reserved]

Sec. 3565.50 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart B--Guarantee Requirements

Sec. 3565.51 Eligible loans and advances.

Upon approval of an application from an approved lender, the Agency

will commit to providing a guarantee for a permanent loan or a

combination construction and permanent loan, subject to the

availability of funds. The Agency will not guarantee a construction

loan that is not a combination construction and permanent loan.

Sec. 3565.52 Extent of the guarantee.

A guarantee of a permanent loan will be made once the project has

attained a minimum level of acceptable occupancy as determined by the

lender with Agency concurrence. The required occupancy level must be

reached before the commitment for a loan guarantee, including any

extensions, expires. For combination construction and permanent loans,

the Agency will guarantee advances during the construction loan period

(which can not exceed 12 months). The guarantee of construction loan

advances will convert to a permanent loan guarantee once the required

level of occupancy has been reached.

(a) Maximum guarantee amount. The maximum guarantee for a permanent

loan will be 90 percent of the unpaid principal and interest of the

loan. The Agency liability under any guarantee will decrease or

increase, in proportion to any increase or decrease in the amount of

the unpaid portion of the loan, up to the maximum amount specified in

the guarantee document. The Agency will guarantee construction

contracts not to exceed 90 percent of the work in place which have

credit enhancements to protect the Government's guarantee. Acceptable

credit enhancements include:

(1) Surety bonding or performance and payment bonding are the

preferred credit enhancement;

(2) An irrevocable letter of credit acceptable to the Agency; and

(3) A pledge by the lender of acceptable collateral.

(b) Lesser guarantee amount. The Agency may provide a lesser

guarantee based upon its evaluation of the credit quality of the loan.

(c) Cancellation or reduction to the guarantee amount. In cases of

fraud, misrepresentation, abuse, negligence, or failure to follow the

terms of the guarantee or the note, the Agency may cancel the

guarantee.

Sec. 3565.53 Guarantee fees.

As a condition of receiving a loan guarantee, the Agency will

charge the following guarantee fees to the lender.

(a) Initial guarantee fee. The Agency will charge an initial

guarantee fee equal to 100 basis points (1 percent) of the principal

amount of the loan. The fee will be collected at the time of

commitment.

(b) Annual guarantee fee. An annual guarantee fee of at least 50

basis points (one-half percent) of the outstanding principal amount of

the loan will be charged each year or portion of a year that the

guarantee is in effect. Each calendar year, this fee will be collected

in advance, beginning on the first anniversary of the loan.

(c) Surcharge for guarantees on construction advances. The Agency

may, at its sole discretion, charge an additional fee on the portion of

the loan advanced during construction. This fee will be charged in

advance at the start of construction and will be announced in NOFA

before loan approval.

Sec. 3565.54 Transferability of the guarantee.

A lender must receive the Agency's approval prior to any sale or

transfer of the loan guarantee.

Sec. 3565.55 Participation loans.

Loans involving multiple lenders are eligible for a guarantee when

one of the lenders is an approved lender and agrees to act as the lead

lender with responsibility for the loan under the loan guarantee

agreement.

Sec. 3565.56 Suspension or termination of loan guarantee agreement.

A guarantee agreement will terminate when one of the following

actions occurs: (In accordance with subpart H of this part, use

restrictions on the property will remain if the following actions take

place prior to the term of the loan and RHS determines the restrictions

apply.)

(a) Voluntary termination. A lender and borrower voluntarily

request the termination of the loan guarantee.

(b) Agency withdrawal of guarantee. The Agency withdraws the loan

guarantee in the event of fraud, misrepresentation, abuse, negligence,

or failure to meet the program requirements.

(c) Mortgage pay-off. The loan is paid.

(d) Settlement of claim. Final settlement of the claim.

Sec. 3565.57 Modification, extension, reinstatement of loan guarantee.

To protect its interest or further the objectives of the program,

the Agency may, at its sole discretion, modify, extend, or reinstate a

loan guarantee. In making this decision the Agency will consider

potential losses under the program, impact on the tenants and the

public reaction that may be received regarding the action. Further, the

Agency may authorize a guarantee on a new loan that is originated as a

part of a workout agreement.

Secs. 3565.58-3565.99 [Reserved]

Sec. 3565.100 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart C--Lender Requirements

Sec. 3565.101 Responsibility of lenders.

A participating lender must originate and service a guaranteed loan

in accordance with the regulation and program requirements throughout

the life of a loan or guarantee, whichever is less. When it is in the

best interests of the Agency, the Agency may permit the transfer of

servicing from the originating lender to a servicer.

Sec. 3565.102 Lender eligibility.

An eligible lender must be a licensed business entity or HFA in

good standing in the state or states where it conducts business; be

approved by the Agency; and meet at least one of the criteria contained

below. Lenders who are not eligible may participate in the program if

they maintain a correspondent relationship with a lender who is

eligible. An eligible lender must:

(a) Meet the qualifications of, and be approved by, the Secretary

of HUD to make multifamily housing loans that are to be insured under

the National Housing Act;

(b) Meet the qualifications and be approved by Fannie Mae or

Freddie Mac to make multifamily housing loans that are to be sold to

such corporations;

(c) Be a state or local HFA, or a member of the Federal Home Loan

Bank system, with a demonstrated ability to underwrite, originate,

process, close,

[[Page 39463]]

service, manage, and dispose of multifamily housing loans in a prudent

manner;

(d) Be a lender who meets the requirements for Agency approval

contained in this subpart and has a demonstrated ability to underwrite,

originate, process, close, service, manage, and dispose of multifamily

housing loans in a prudent manner; or

(e) Be a lender who meets the following requirements in addition to

the other requirements of this subpart and of subpart I of this part:

(1) Have qualified staff to perform multifamily housing servicing

and asset management;

(2) Have facilities and systems that support servicing and asset

management functions; and

(3) Have documented procedures for carrying out servicing and asset

management responsibilities.

Sec. 3565.103 Approval requirements.

The Agency will establish and maintain a ``list of approved

lenders''. To be an approved lender, eligible lenders must meet the

following requirements and maintain them on a continuing basis at a

level consistent with the nature and size of their portfolio of

guaranteed loans.

(a) Commitment. A lender must have a commitment for a guaranteed

loan or an agreement to purchase a guaranteed loan.

(b) Audited statement. A lender must provide the Agency with an

annual audited financial statement conducted in accordance with

generally accepted government auditing standards.

(c) Previous participation. A lender may not be delinquent on a

federal debt or have an outstanding finding of deficiency in a federal

housing program.

(d) Ongoing requirements. A lender must meet the following

requirements at initial application and on a continuing basis

thereafter:

(1) Overall financial strength, including capital, liquidity, and

loan loss reserves, to have an acceptable level of financial soundness

as determined by a lender rating service (such as Sheshunoff, Inc.); or

to be an approved Fannie Mae, Freddie Mac or HUD Federal Housing

Administration multifamily lender; or, if a state housing finance

agency, to have a top tier rating by a rating agency (such as Standard

and Poor's Corporation);

(2) Bonding and insurance to cover business related losses,

including directors and officers insurance, business income loss

insurance, and bonding to secure cash management operations;

(3) A minimum of two years experience in originating and servicing

multifamily loans;

(4) A positive record of past performance when participating in RHS

or other federal loan programs;

(5) Adequate staffing and training to perform the program

obligations; the head underwriter must have 3 years of experience and

all staff must receive annual multifamily training;

(6) Demonstrated overall financial stability of the business over

the past five years;

(7) Evidence of reasonable and prudent business practices for

management of the program; and

(8) No negative information on Dunn & Bradstreet or similar type

report.

Sec. 3565.104 Application requirements.

Eligible lenders must submit a lender approval application, in a

format prescribed by the Agency. The lender approval application

submission must occur at the time the lender submits its first

application for a loan guarantee, or its first application to purchase

a guaranteed loan. The application must include documentation of lender

compliance with Sec. 3565.103. A non-refundable application fee will be

charged for each review of a lender's application. The amount of the

fee will be announced in NOFA.

Sec. 3565.105 Lender compliance.

A lender will remain an approved lender unless terminated by the

Agency. To maintain approval, the lender must comply with the following

requirements.

(a) Maintain eligibility in accordance with Sec. Sec. 3565.102 and

3565.103;

(b) Comply with all applicable statutes, regulations, and

procedures;

(c) Inform the Agency of any material change in the lender's

staffing, policies and procedures, or corporate structure;

(d) Cooperate fully with all program or Agency monitoring and

auditing policies and procedures, including the Agency's annual audit

of approved lenders; and

(e) Maintain active participation in the multifamily guaranteed

loan program by initiating a new loan guarantee or holding a loan

guaranteed under this program.

Sec. 3565.106 Construction lender requirements.

A lender making a construction loan, as part of a combination

construction and permanent loan, must demonstrate an ability to

originate and service construction loans, in addition to meeting the

other requirements of this subpart.

Sec. 3565.107 [Reserved].

Sec. 3565.108 Responsibility for actions of agents and mortgage

brokers.

An approved lender is responsible for the actions of its agents and

mortgage brokers.

Sec. 3565.109 Minimum loan prohibition.

A lender must not establish a minimum loan amount for loans under

this program.

Sec. 3565.110 Insolvency of lender.

The Agency may require a lender to transfer a guaranteed loan or

loans to another approved lender prior to a determination of insolvency

by the lender. If the lender fails to transfer a loan when required,

the guarantee will be considered null and void.

Sec. 3565.111 Lobbying activities.

An approved lender must comply with RD Instruction 1940-Q

(available in any Rural Development Office) regarding lobbying

activities.

Secs. 3565.112-3565.149 [Reserved]

Sec. 3565.150 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart D--Borrower Eligibility Requirements

Sec. 3565.151 Eligible borrowers.

Guaranteed loans must be made to an eligible borrower whose

intention is to provide and maintain rural rental housing. The

ownership entity must be a valid entity in good standing under the laws

of the jurisdiction in which it is organized. Eligible borrowers shall

include individuals, corporations, state or local public agencies or an

instrumentality thereof, partnerships, limited liability companies,

trusts, Indian tribes, or any organization deemed eligible by the

Agency. Eligible borrowers must be U.S. citizens or permanent legal

residents; a U.S. owned corporation, or a limited liability company, or

partnership in which the principals are U.S. citizens or permanent

legal residents.

Sec. 3565.152 Control of land.

At time of application, the lender must have evidence of site

control by the borrower (option to purchase, lease, deed or other

evidence acceptable to the Agency). At the time of loan closing, the

lender's closing docket must provide documentary evidence that the

borrower

[[Page 39464]]

owns or has a long-term lease on the land on which the housing is or

will be located. The form of ownership or the leasehold agreement must

meet Agency requirements. Notwithstanding any investment in the site,

the site may not be accepted based on the Agency's environmental

assessment.

Sec. 3565.153 Experience and capacity of borrower.

At the time of application, the lender must certify that the

borrower:

(a) Has the ability and experience to construct or rehabilitate

multifamily housing that meets the requirements established by the

Agency, the lender and the loan agreement;

(b) Has the legal and financial capacity to meet all of the

obligations of the loan; and

(c) Has the ability and experience to meet the property management

requirements established by the Agency, the lender, and the loan

agreement.

Sec. 3565.154 Previous participation in state and federal programs.

Loans to borrowers who are delinquent on a federal debt may not be

guaranteed. Furthermore, borrowers or principals thereof who have

defaulted on state or local government loans will not be eligible for a

guarantee unless the Agency determines that the default was beyond the

borrower's control, and that the identifiable reasons for the default

no longer exist. At the time of application, the lender must obtain

from the borrower a certification that the borrower is not under any

state or federal order suspending or debarring participation in state

or federal loan programs and that the borrower is not delinquent on any

non-tax obligation to the United States.

Sec. 3565.155 Identity of interest.

At the time of application, the lender must certify that it has

disclosed any and all identity of interest relationships and

preexisting conditions with respect to its relationships and that of

the borrower, or that no identity of interest relationships exists.

Identity of interest relationships include any financial or other

relationship that exists or will exist between a lender, borrower,

management agent, supplier, or any agent of any of these entities, that

could influence, give the appearance of influencing or have the

potential to influence the actions of the parties in carrying out their

responsibilities under the program. Disclosure will be in a form and

manner established by the Agency.

Sec. 3565.156 Certification of compliance with federal, state, and

local laws and with Agency requirements.

At the time of application, the lender must obtain from the

borrower a certification of compliance with all applicable federal,

state, and local laws, and with Agency requirements regarding

discrimination and equal opportunity in housing, including title VIII

of the Civil Rights Act of 1968, and the Fair Housing Amendments Act of

1988. The borrower must also certify that it is not the subject of any

federal, state, or local sanction or punitive action.

Secs. 3565.157-3565.199 [Reserved]

Sec. 3565.200 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart E--Loan Requirements

Sec. 3565.201 General.

To be eligible for a guarantee, a loan must comply with the

provisions of this subpart and be originated by an approved lender.

Sec. 3565.202 Tenant eligibility.

(a) Limits on income of tenants. The housing units subject to a

guaranteed loan must be available for occupancy only by low or

moderate-income families or individuals whose incomes at the time of

initial occupancy do not exceed 115 percent of the area median income.

After initial occupancy, a tenant's income may exceed these limits.

(b) Citizenship status. A tenant must be a United States citizen or

a noncitizen who is a qualified alien as defined in Sec. 3565.3.

Sec. 3565.203 Restrictions on rents.

The rent for any individual housing unit, including any tenant-paid

utilities, must not exceed an amount equal to 30 percent of 115 percent

of area median income, adjusted for family size. In addition, on an

annual basis, the average rent for a project, taking into account all

individual unit rents, must not exceed 30 percent of 100 percent of

area median income, adjusted for family size.

Sec. 3565.204 Maximum loan amount.

(a) Section 207(c) limits and exceptions. For that part of the

property that is attributable to dwelling use, the principal obligation

of each guaranteed loan must not exceed the applicable maximum per-unit

limitations under section 207(c) of the National Housing Act.

(b) Loan-to-value limits. (1) In the case of a borrower that is a

nonprofit organization or an agency or body of any State, local or

tribal government, each guaranteed loan must involve a principal

obligation that does not exceed the lesser of 97 percent of:

(i) The development costs of the housing and related facilities, or

(ii) The lender's determination of value not to exceed the

appraised value of the housing and facilities.

(2) In the case of a borrower that is a for-profit entity or other

entity not referred to in paragraph (b)(1) of this section, each

guaranteed loan must involve a principal obligation that does not

exceed the lesser of 90 percent of:

(i) The development costs of the housing and related facilities, or

(ii) The lender's determination of value not to exceed the

appraised value of the housing and facilities.

(3) To protect the interest of the Agency or to further the

objectives of the program, the Agency may establish lower loan-to-value

limits or further restrict the statutory maximum limits based upon its

evaluation of the credit quality of the loan.

(c) Necessary assistance review. (1) A lender requesting a loan

guarantee must review all loans to determine the appropriate amount of

assistance necessary to complete and maintain the project. The lender

shall recommend to the Agency an adjustment in the loan amount if

appropriate as a result of this review.

(2) Where the project financing combines a guaranteed loan with

Low-Income Housing Tax Credits or other Federal assistance, the project

must conform to the policies regarding necessary assistance in 7 CFR

part 1944, subpart E or successor provision.

Sec. 3565.205 Eligible uses of loan proceeds.

Eligible uses of loan proceeds must conform with standards and

conditions for housing and facilities contained in 7 CFR part 1924,

subpart A or successor provision, except that the Agency, at its sole

discretion, may approve, in advance, a higher level of amenities,

construction, and fees for projects proposed for a guaranteed loan

provided the costs and features are reasonable and customary for

similar housing in the market area.

(a) Use of loan proceeds. The proceeds of a guaranteed loan may be

used for the following purposes relating to the project.

[[Page 39465]]

(1) New construction costs of the project;

(2) Moderate or substantial rehabilitation of buildings and

acquisition costs when related to the rehabilitation of a building as

described in paragraph (b) of this section;

(3) Acquisition of existing buildings, when approved by the Agency,

for projects that serve a special housing need;

(4) Acquisition and improvement of land on which housing will be

located;

(5) Development of on-site and off-site improvements essential to

the use of the property;

(6) Development of related facilities such as community space,

recreation, storage or maintenance structures, except that any high

cost recreational facility, such as swimming pools and exercise clubs

or similar facilities, must be specifically approved in advance by the

Agency;

(7) Construction of on-site management or maintenance offices and

living quarters for operating personnel for the property being

financed;

(8) Purchase and installation of appliances and certain approved

decorating items, such as window blinds, shades, or wallpaper;

(9) Development of the surrounding grounds, including parking,

signs, landscaping and fencing;

(10) Costs associated with commercial space provided that:

(i) The project is designed primarily for residential use;

(ii) The commercial use consists of essential tenant service type

facilities, such as laundry rooms, that are not otherwise conveniently

available;

(iii) The commercial space does not exceed 10 percent of the gross

floor area of the residential units and common areas, unless a higher

level is specifically approved in writing by the Agency; and

(iv) The commercial activity is compatible with the use of the

project and that the income is not more than 10 percent of the total

annual operating income of the project.

(11) Costs for feasibility determination, loan application fees,

appraisals, environmental documentation, professional fees or other

fees determined by the Agency to be necessary to the development of the

project;

(12) Technical assistance to and by non-profit entities to assist

in the formation, development, and packaging of a project, or formation

or incorporation of a borrower entity;

(13) Education programs for a board of directors, both before and

after incorporation of a cooperative that will serve as the borrower;

(14) Construction interest accrued on the construction loan;

(15) Relocation assistance in the case of rehabilitation projects;

(16) Developers' fees; and

(17) Repaying applicant debts in the following cases:

(i) When the Agency authorizes in writing in advance the use of

loan funds to pay debts for work, materials, land purchase, or other

fees and charges before the loan is closed; or

(ii) When the Agency concurs in writing with a determination by the

lender that costs for work, fees and charges incurred prior to loan

application are integral to development of the guarantee application

and project.

(b) Rehabilitation requirements. Rehabilitation work must be

classified as either moderate or substantial as defined in exhibit K of

7 CFR part 1924, subpart A or a successor document. In all cases, the

building or project must be structurally sound, and improvements must

be necessary to meet the requirements of decent, safe, and sanitary

living units. Applications must include a structural analysis, along

with plans and specifications describing the type and amount of planned

rehabilitation. The project as rehabilitated must meet the applicable

development standards contained in 7 CFR part 1924, subpart A or a

successor regulation, as well as any applicable historic preservation

requirements. All proposed rehabilitation projects are subject to an

environmental review completed in accordance with 7 CFR part 1940,

subpart G or a successor regulation.

Sec. 3565.206 Ineligible uses of loan proceeds.

Loan proceeds must not be used for the following:

(a) Specialized equipment for training and therapy;

(b) Housing in military impact areas;

(c) Housing that serves primarily temporary and transient

residents;

(d) Nursing homes, special care facilities and institutional type

homes that require licensing as a medical care facility;

(e) Operating capital for central dining facilities or for any

items not affixed to the real estate, such as special portable

equipment, furnishings, kitchen ware, dining ware, eating utensils,

movable tables and chairs, etc.;

(f) Payment of fees, salaries and commissions or compensation to

borrowers (except developers' fees); or

(g) Refinancing of an outstanding debt, except in the case of an

existing guaranteed loan where the Agency determines that the

refinancing is in the government's interest or furthers the objectives

of the program. The term and amount of any loan for refinancing must

not exceed the maximum loan amount or term limits.

Sec. 3565.207 Form of lien.

The loan originated by the lender for a guarantee must be secured

by a first lien against the property.

Sec. 3565.208 Maximum loan term.

(a) Statutory term limit. The lender may set the term of the loan,

but in no instance may the term of a guaranteed loan exceed the lesser

of 40 years or the remaining economic life of the project.

(b) Prepayment of loans. A guaranteed loan may be prepaid in whole

or in part at the determination of the lender, and upon the lender's

written notice to the Agency at least 30 days prior to the expected

date of prepayment. The Agency will not pay any lockout or prepayment

penalty assessed by the lender. The lender must certify the following

in the notice of prepayment:

(1) The lease documents used by the borrower or its agent prohibit

the abrogation of tenant leases in the event of prepayment; and

(2) The borrower has notified tenants of the request to prepay the

loan, including notice of the prohibition against abrogation of the

lease and the policy and procedure for handling complaints regarding

compliance with the long-term use restriction as contained in subpart H

of this part.

Sec. 3565.209 Loan amortization.

Each guaranteed loan must contain provisions for the complete

amortization of the loan by periodic payments. The Agency will not

guarantee a loan that comes due before expiration of its full

amortization period, such as a balloon loan.

Sec. 3565.210 Maximum interest rate.

The interest rate for a guaranteed loan must not exceed the maximum

allowable rate specified by the Agency in NOFA. Such rate must be fixed

over the term of the loan.

Sec. 3565.211 Interest credit.

(a) Limitation. For at least 20 percent of the loans made during

each fiscal year, the Agency will provide assistance in the form of

interest credit, to the extent necessary to reduce the agreed-upon rate

of interest to the AFR as such term is used in section 42(I)(2)(D) of

the Internal Revenue Code of 1986, 26 U.S.C. 7805, Sec. 1.42-1T.

(b) Selection criteria. The Agency will select projects to receive

interest credits using any of such criteria as the Agency

[[Page 39466]]

may establish for priority projects as contained in subpart A of this

part.

Sec. 3565.212 Multiple guaranteed loans.

The Agency may guarantee more than one loan on any project if all

guaranteed loans, in the aggregate, comply with these regulations,

including without limitation:

(a) In the aggregate, loans do not exceed the maximum guaranteed

loan amount and loan-to-value limits, as contained in Sec. 3565.204;

(b) In the aggregate, loans are all to be secured equally by a

first lien as the Agency may, at its sole discretion, determine

necessary to ensure repayment of the loans; and

(c) If different lenders originate the loans, each lender has

executed an intercreditor agreement in form and substance acceptable to

the Agency; and

(d) The loans do no contain tax exempt financing.

Sec. 3565.213 Geographic distribution.

The Agency may refuse to guarantee a loan in an area where there is

undue risk due to a concentration in the market of properties subject

to a Agency guaranteed loan. The Agency will consider the credit

quality of the loan and overall market conditions in making a

determination of undue risk. If any of the Agency guaranteed loans in

the market are experiencing vacancy rates in excess of 15% and the

vacancy is due to market conditions, the Agency will invoke this

provision and not guarantee the loan.

Sec. 3565.214 Release of liability.

Notwithstanding the transfer of the property for which the loan was

made, borrowers may not be relieved of liability for a guaranteed loan

if any portion of the principal or interest or any protective advance

made on behalf of the borrower is outstanding.

Sec. 3565.215 Special conditions.

(a) Use of third party funds. As a condition of receiving a

guaranteed loan, the Agency, or the lender if designated by the Agency,

must review the terms and conditions of any secondary financing or

funding of projects, including loans, capital grants or rental

assistance.

(b) Recourse. If required by the lender, loans guaranteed under

this program may be made on a recourse or nonrecourse basis, or with

any personal or special borrower guarantees on collateralization.

Sec. Sec. 3565.216-3565.249 [Reserved]

Sec. 3565.250 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart F--Property Requirements

Sec. 3565.251 Eligible property.

To be eligible for a guaranteed loan, a property must be used

primarily for residential dwelling purposes and must meet the following

requirements or the requirements of this subpart:

(a) Property location. All the property must be located in a rural

area.

(b) Minimum size of development. The property must consist of at

least five rental dwelling units.

(c) Non-contiguous sites. For a loan secured by two or more non-

contiguous parcels of land, all sites must meet each of the following

requirements:

(1) Located in one market area;

(2) Managed under one management plan with one loan agreement or

resolution for all of the sites; and

(3) Consist of single asset ownership.

(d) Compliance with Statutes. All properties must comply with the

applicable requirements in section 504 of the Rehabilitation Act of

1973, the Fair Housing Act, the Americans with Disabilities Act, and

other applicable statutes.

Sec. 3565.252 Housing types.

The property may include new construction or substantially

rehabilitated existing structures. The units may be attached, detached,

semi-detached, row houses, modular or manufactured houses, or

multifamily structures. Manufactured housing must meet Agency

requirements contained in 7 CFR part 1924, subpart A or a successor

regulation. The Agency proposes to guarantee proposals for new

construction or acquisition with rehabilitation of at least $15,000 per

unit. The portion of the guaranteed funds for acquisition with

rehabilitation is limited to 25 percent of the program authority.

Sec. 3565.253 Form of ownership.

The property must be owned in fee simple or be subject to a ground

lease or other legal right in land acceptable to the Agency.

Sec. 3565.254 Property standards.

(a) Housing quality and site and neighborhood standards. The

property must meet the site and neighborhood requirements established

by the state or locality, and those standards contained under 7 CFR

part 1924, subparts A and C or any successor regulations.

(b) Third party assessments. As part of the application for a

guaranteed loan, the lender must provide documentation of qualified

third parties' assessments of the property's physical condition and any

environmental conditions or hazards which may have a bearing on the

market value of the property. These assessments must include:

(1) An acceptable property appraisal.

(2) A Phase I Environmental Site Assessment (American Society of

Testing and Materials).

(3) A Standard Flood Hazard Determination.

(4) In the case of the purchase of an existing structure,

rehabilitation or refinancing, a physical needs assessment.

Sec. 3565.255 Environmental requirements.

Under the National Environmental Policy Act, the Agency is required

to assess the potential impact of the proposed actions on protected

environmental resources. Measures to avoid or at least mitigate adverse

impacts to protected resources may require a change in site or project

design. A site will not be approved until the Agency has completed the

environmental review in accordance with 7 CFR part 1940, subpart G or

successor regulation.

Sec. 3565.256 Architectural services.

Architectural services must be provided for the project in

accordance with 7 CFR part 1924, subpart A or successor regulation,

including plan certifications.

Sec. 3565.257 Procurement actions.

All construction procurement actions, whether by sealed bid or by

negotiation, must be conducted in a manner that provides maximum open

and free competition.

Secs. 3565.258-3565.299 [Reserved]

Sec. 3565.300 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart G--Processing Requirements

Sec. 3565.301 Loan standards.

An approved lender must originate and underwrite the loan and

appraise the subject property in accordance with prudent lending

practices and Agency criteria addressing the following factors:

(a) Borrower qualifications and creditworthiness;

[[Page 39467]]

(b) Property, vacancy, market vacancy or collection loss;

(c) Rental concessions and rent levels;

(d) Tenant demand and housing supply;

(e) Property operating and maintenance expense;

(f) Property requirements as contained in subpart F of this part;

(g) Debt coverage ratio;

(h) Operating and long-term capital requirements;

(i) Loan-to-value ratio;

(j) Return on borrower equity; and

(k) Estimated long-term marketability of the project.

Sec. 3565.302 Allowable fees.

(a) Lender fees. The lender is authorized to charge reasonable and

necessary fees in connection with a borrower's application for a

guaranteed loan.

(b) Agency fees. The Agency will charge one or more types of fees

deemed appropriate as reimbursement for reasonable and necessary costs

incurred in connection with applications received from lenders for

monitoring or annual renewal fees. These fees will be published in

NOFA. Agency fees may include, but are not limited to the following:

(1) Site Assessment and Market Analysis or preliminary feasibility

fee. A fee for review of an application for a determination of

preliminary feasibility.

(2) Application fee. A fee submitted in conjunction with the

application for a loan guarantee.

(3) Inspection fee. A fee for inspection of the property in

conjunction with a loan guarantee.

(4) Transfer fee. A fee in connection with a request for approval

of a transfer of physical assets or a change in the composition of the

ownership entity.

(5) Extension or reopening fees. A fee to extend the guarantee

commitment or to reopen an application when a commitment has expired.

Sec. 3565.303 Issuance of loan guarantee.

(a) Preliminary feasibility review. During the initial processing

of a loan, the lender may request a preliminary feasibility review by

the Agency when required loan documentation is submitted.

(b) Conditional commitment to guarantee a loan. The Agency will

issue a conditional commitment to guarantee a loan. This commitment

will be good for such time frame as the Agency deems appropriate based

on project requirements. The commitment to guarantee a loan, will

specify any conditions necessary to obtain a determination by the

Agency that all program requirements have been met. A conditional

commitment can be issued, subject to the availability of funds, after:

(1) Completion by the Agency of an environmental review in

accordance with 7 CFR part 1940, subpart G or successor regulation, and

the National Environmental Policy Act; and

(2) Selection of the proposed project for funding by the Agency in

accordance with ranking and selection criteria.

(c) Guarantee during construction. For combination construction and

permanent loans, the Agency will issue an initial guarantee to an

approved construction lender.

(1) This guarantee will be subject to the limits contained in

subpart B of this part and in the loan closing documentation.

(2) In all cases, the lender must obtain a payment and performance

bond covering contract work or acceptable credit enhancement as

discussed in Sec. 3565.52(a).

(3) The lender must verify amounts expended prior to each payment

for completed work and certify that an independent inspector has

inspected the property and found it to be in conformance with Agency

standards. The lender must provide verification that all subcontractors

have been paid and no liens have been filed against the property.

(d) Permanent loan guarantee. The guarantee on the permanent loan

will be issued once the following items have been submitted to and

approved by the Agency.

(1) An updated appraisal of the project as built;

(2) A certificate of substantial completion;

(3) A certificate of occupancy or similar evidence of local

approval ;

(4) A final inspection conducted by a qualified Agency

representative;

(5) A final cost certification in a form acceptable to the Agency;

(6) A submission to the Agency of the complete closing docket;

(7) A certification by the lender that the project has reached an

acceptable minimum level occupancy;

(8) A recordable, executed regulatory agreement.

(9) The Lender certifies that it has approved the borrower's

management plan and assures that the borrower is in compliance with

Agency standards regarding property management, contained in subparts E

and F of this part;

(10) Necessary information to complete an updated necessary

assistance review by the Agency; and

(11) Compliance with all conditions contained in the conditional

commitment for guarantee.

(e) Modification of guarantee amount after commitment. The Agency

may modify the guarantee amount or decline to issue a loan guarantee

when a lender fails to honor obligations or to fulfill representations

made under the guarantee commitment.

Sec. 3565.304 Lender loan processing responsibilities.

(a) Application. The lender will be responsible for submitting an

application for a loan guarantee in a format prescribed by the Agency.

Lenders may submit an application at the feasibility stage or when they

request a conditional commitment.

(b) Project servicing, management and disposition. Unless otherwise

permitted by the Agency, the originating lender must perform all loan

functions during the period of the guarantee. These functions include

servicing, asset management, and, if necessary, property disposition.

The lender must maintain and service the loan in accordance with the

provisions of subpart I of this part and Agency servicing procedures.

Sec. 3565.305 Mortgage and closing requirements.

It is the lender's responsibility to ensure that the loan closing

statement and required loan documents are in a form acceptable to the

Agency and included in the closing docket. The lender is responsible

for resolving any underwriting and loan closing deficiencies that are

found. The Agency's review of the lender's loan closing documentation

does not constitute a waiver of fraud, misrepresentation, or failure of

judgment by the lender.

Sec. 3565.306-3565.349 [Reserved]

Sec. 3565.350 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart H--Project Management

Sec. 3565.351 Project management.

As a condition of the guarantee, the lender must certify annually

to the Agency that the borrower is in compliance with the regulatory

agreement and program requirements with respect to all aspects of

project management.

(a) Regulatory agreement. A regulatory agreement between the

borrower and lender which will be filed in the real estate records of

the

[[Page 39468]]

appropriate jurisdiction must be executed at the time of loan closing

and contain the following covenants:

(1) That it is binding upon the borrower and any of its successors

and assigns, as well as upon the lender and any of its successors and

assigns, for the duration of the guaranteed loan;

(2) That the borrower makes all payments due under the note and to

the required escrow and reserve accounts;

(3) That the borrower maintains the project as affordable housing

in accordance with the purposes and for the duration defined in the

statute;

(4) That the borrower maintains the project in good physical and

financial condition at all times;

(5) That the borrower obtains and maintains property insurance and

any other insurance coverage required to protect the security;

(6) That the borrower maintains complete project books and

financial records, and provides the Agency and the lender with an

annual audited financial statement after the end of each fiscal year;

(7) That the borrower makes project books and records available for

review by the Office of Inspector General, Rural Development staff,

General Accounting Office, and the Department of Justice, or their

representatives or successors upon appropriate notification;

(8) That the borrower prepares and complies with the Affirmative

Fair Housing Marketing Plan and all other Fair Housing requirements;

(9) That the borrower operates as a single asset ownership entity,

unless otherwise approved by the Agency;

(10) That the borrower complies with applicable federal, state and

local laws; and

(11) That the borrower provides management satisfactory to the

lender and to the Agency and complies with an approved management plan

for the project.

(b) Management plan. The lender must approve the borrower's

management plan and assure that the borrower is in compliance with

Agency standards regarding property management, including the

requirements contained in subparts E and F of this part.

(c) Tenant protection and grievance procedures. Tenants in

properties subject to a guaranteed loan are entitled to the grievance

and appeal rights contained in 7 CFR part 1944, subpart L or successor

regulation. The borrower must inform tenants in writing of these

rights.

(d) Financial management--(1) Borrower reporting requirements. At a

minimum, the lender must obtain, on an annual basis, an audited annual

financial statement conducted in accordance with generally accepted

government auditing standards.

(2) Lender reporting requirements. The lender must review the

financial reports to assure that the property is in sound fiscal

condition and the borrower is in compliance with financial

requirements. The lender must report findings to the Agency as follows:

(i) Annual reports. The lender must submit to the Agency a copy of

the annual financial audit of the project and must report on the nature

and status of any findings. To the extent that outstanding findings or

issues remain, the lender must submit to the Agency a copy of a plan of

action for any unresolved findings.

(ii) Monthly reports. The lender must submit monthly reports to the

Agency on all loans that are either in default, delinquent, or not in

compliance with program requirements. This report must provide

information on the financial condition of each loan, the physical

condition of the property, the amount of delinquency, any other non-

compliance with program requirements and the proposed actions and

timetable to resolve the delinquency, default or non-compliance.

(3) Reserve releases. The lender is responsible for approving or

disapproving all borrower requests for release of funds from the

reserve and escrow accounts. Security deposit accounts will not be

considered a reserve or escrow account.

(4) Insurance requirements. At loan closing, the borrower will

provide the lender with documentary evidence that Agency insurance

requirements have been met. The borrower must maintain insurance in

accordance with Agency requirements until the loan is repaid and the

lender must be named as the insurance policy's beneficiary. The lender

must obtain insurance on the secured property if the borrower is unable

or unwilling to do so and charge the cost as an advance.

(5) Distribution of surplus cash. Prior to the distribution of

surplus cash to the owner, the lender must certify that the property is

in good financial and physical condition and in compliance with the

regulatory agreement. Such compliance includes payment of outstanding

obligations, debt service, and required funding of reserve and escrow

accounts.

(e) Physical maintenance. The lender must annually inspect the

property to ensure that it is in compliance with state and local codes

and program requirements. The lender must certify to the Agency that a

property is in such compliance, or report to the Agency on any non-

compliance items and proposed actions and timetable for resolution.

Failure to provide responsive corrective action can result in reduction

or cancellation of the guarantee by the Agency.

Sec. 3565.352 Preservation of affordable housing.

(a) Original purpose. During the period of the guarantee, owners

are prohibited from using the housing or related facilities for any

purpose other than an approved program purpose.

(b) Use restriction. For the original term of the guaranteed loan,

the housing must remain available for occupancy by low and moderate

income households, in accordance with subpart E of this part. This

requirement will be included in a deed restriction or other instrument

acceptable to the Agency. The restriction will apply unless the housing

is acquired by foreclosure or an instrument in lieu of foreclosure, or

the Agency waives the applicability of this requirement after

determining that each of the following three circumstances exist.

(1) There is no longer a need for low-and moderate-income housing

in the market area in which the housing is located;

(2) Housing opportunities for low-income households and minorities

will not be reduced as a result of the waiver; and

(3) Additional federal assistance will not be necessary as a result

of the waiver.

Sec. 3565.353 Affirmative fair housing marketing.

As a condition of the guarantee, the lender must ensure that the

lender and borrower are in compliance with the approved Affirmative

Fair Housing Marketing Plan. This plan must be reviewed annually by the

lender to ensure that the borrower remains in compliance and to

recommend modifications, as necessary.

Sec. 3565.354 Fair housing accommodations.

The lender must ensure that the borrower is in compliance with the

applicable fair housing laws in the development of the property, the

selection of applicants for housing, and ongoing management. See

subpart A of this part.

Sec. 3565.355 Changes in ownership.

Any change in ownership, in whole or in part, must be approved by

the lender and the

Agency before such change takes effect.

[[Page 39469]]

Secs. 3565.356-3565.399 [Reserved]

Sec. 3565.400 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart I--Servicing Requirements

Sec. 3565.401 Servicing objectives.

The participating lender is responsible for servicing the

guaranteed loan throughout the term of the loan or guarantee, whichever

is less. In all cases, the lender remains responsible for liquidation

of the property in accordance with the Loan Note Agreement, unless

otherwise determined by the Agency. A lender-servicing plan must be

designed and implemented to achieve the following objectives.

(a) To preserve the value of the loan and the real estate;

(b) To avoid a loss to the lender or the Agency and to limit

exposure to potential loss;

(c) To protect the interests of the tenants; and

(d) To further program objectives.

Sec. 3565.402 Servicing responsibilities.

The lender must service the loan in accordance with this subpart

and perform the services contained in this section in a reasonable and

prudent manner. The lender is responsible for the actions of its agents

and representatives.

(a) Funds management. The lender must have a funds management

system to receive and process borrower payments, including the

following.

(1) All principal and interest (P&I) funds and guarantee fees

collected and deposited into the appropriate custodial accounts.

(2) Payments to custodial escrow accounts for taxes and insurance

premiums, assessments that might impair the security (such as ground

rent), and reserve accounts for repair and capital improvement of the

property.

(b) Asset management. The lender must ensure that the property

securing the guaranteed loan remains in good physical and financial

condition, in accordance with project management requirements contained

in subpart H of this part.

(c) Management of delinquencies and defaults. Each month the lender

must report to the Agency any delinquencies and defaults in accordance

with subpart H of this part.

Sec. 3565.403 Special servicing.

Special servicing must be initiated when regular servicing actions

are insufficient to resolve borrower default or property deficiencies.

(a) Responsibility of lender. It is the lender's responsibility

during special servicing to make a special effort to ensure that

maintenance of the property meets Agency requirements and the tenants'

rights are protected, until such time that the property is liquidated

by the lender, the loan is paid in full, or the loan is assigned to the

Agency. The lender must update the Agency monthly until the default is

cured or a claim is filed. The lender must maintain adequate records of

any and all efforts to cure the default or to foreclose.

(b) Initiating special servicing. When special servicing is

initiated, the lender must submit for Agency review a special servicing

plan that includes proposed actions to cure the deficiencies and a

timeframe for completion. The special servicing plan will specify the

proposed terms of any workout agreement recommended by the lender. The

lender must obtain Agency approval of the terms of any workout

agreement with the borrower. The workout agreement may include a loan

modification, transfer of physical assets, or partial payment of claim

and reamortization of the loan. Failure to comply with terms contained

in the executed workout agreement will be considered a default of the

guaranteed loan.

(1) Loan modification. The borrower and lender may agree to a loan

modification when such action will improve the financial viability of

the project and its operations, and when a circumstance exists that is

beyond the borrower's control. The Agency must approve in advance any

loan modification that extends the life of the loan or requires an

increase in the amount of the guarantee. All changes must be within the

requirements of section 538 of the Housing Act of 1949.

(2) Change in ownership and transfer of physical assets. A default

or delinquency may be resolved by a change of the ownership entity in

whole or in part. The Agency must approve all changes in ownership

prior to the effective date of the transfer, and may require additional

resources from the lender or borrower to resolve project deficiencies.

A change in the ownership entity, including a transfer of physical

assets, will not relieve the original borrower of liability for the

loan, pursuant to the provisions regarding release of liability

contained in subpart E of this part.

(3) Partial payment of claims. The lender may request a partial

payment of claim as a result of a loss experienced by the lender as a

means to work out a troubled loan. The Agency will accept such claim if

it determines that it is in the best interest of the government. In

applying the partial payment, the lender must assign the obligation

covered by the partial payment to the Agency, and, if required by the

Agency, reamortize the obligation using the amount of the remaining

obligation over an agreed-upon term.

(c) Claims processing. In the event of a loss, the lender must

submit claims under the guarantee in accordance with subpart J of this

part. Prior to submitting a claim, the lender must exhaust all

possibilities of collection on the loan.

(d) Displacement prevention. The actions of the lender must not

harm the property's tenants through displacement.

Sec. 3565.404 Transfer of mortgage servicing.

Transfer of servicing is prohibited unless the Agency determines

that circumstances warrant such action, the proposed lender is an

eligible lender approved by the Agency, and the transfer of servicing

is approved by the Agency in advance.

Sec. Sec. 3565.405-3565.449 [Reserved]

Sec. 3565.450 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Subpart J-Assignment, Conveyance, and Claims

Sec. 3565.451 Preclaim requirements.

(a) Lender certifications. After borrower default and before filing

a claim or assignment of the loan to the Agency, the lender must make

every reasonable and prudent effort to resolve the default. The lender

must provide the Agency with an accounting of all proposed and actual

actions taken to cure the default. The lender must certify that all

reasonable efforts to cure the default have been exhausted. Where the

lender fails to comply with the terms of the loan guarantee agreement

and the corresponding regulations and guidance with regard to

liquidating the property, the Agency, at its option, may take

possession of the security collateral and dispose of the property.

(b) Due diligence by lender. For all loan servicing actions where a

market, net recovery or liquidation value determination is required,

guaranteed lenders shall perform due diligence in

[[Page 39470]]

conjunction with the appraisal and submit it to the Agency for review.

The Phase I Environmental Site Assessment published by the American

Society of Testing and Materials is considered an acceptable format for

due diligence.

(c) Environmental review. The Agency is required to complete an

environmental review under the National Environmental Policy Act, in

accordance with 7 CFR part 1940, subpart G or a successor regulation,

prior to disposition of inventory property, if title is held by the

Agency, and prior to any authorization to the guaranteed lender to

foreclose and dispose of property, and for any other servicing action

requiring Agency approval or consent.

Sec. 3565.452 Decision to liquidate.

A decision to liquidate shall be made when it is determined that

the default cannot be cured through actions contained in Sec. 3565.403

of subpart I or it has been determined that it is in the best interest

of the Agency and the lender to liquidate.

Sec. 3565.453 Disposition of the property.

(a) Liquidation plan. The lender will, within 30 days after a

decision to liquidate, submit to the Agency in writing its proposed

detailed plan of liquidation. Upon approval by the Agency of the

liquidation plan, the lender will proceed to liquidate. At a minimum,

this plan must contain the following information:

(1) Such proof as the Agency requires to establish the lender's

ownership of the guaranteed loan promissory note and related security

instruments and a copy of the payment ledger if available which

reflects the current loan balance and accrued interest to date and the

method of computing the interest.

(2) A full and complete list of all collateral including any

personal and corporate guarantees.

(3) The recommended liquidation methods for making the maximum

collection possible on the indebtedness and the justification for such

methods, including recommended actions for:

(i) Acquiring and disposing of all collateral;

(ii) Collecting from guarantors;

(iii) Obtaining an appraisal of the collateral;

(iv) Setting the proposed date of foreclosure; and

(v) Setting the proposed date of liquidation.

(4) Necessary steps for protection of the tenants and preservation

of the collateral.

(5) Copies of the borrower's latest available financial statements.

(6) Copies of the guarantor's latest available financial

statements.

(7) An itemized list of estimated liquidation expenses expected to

be incurred along with justification for each expense.

(8) A schedule to periodically report to the Agency on the progress

of liquidation.

(9) Estimated protective advance amounts with justification.

(b) Filing an estimated loss claim. Upon Agency concurrence in the

liquidation plan and when the lender owns any or all of the guaranteed

portion of the loan, the Agency may, in accordance with program

guidance, pay an estimated loss payment based on an Agency determined

percentage of the approved estimate of the loss. The estimated loss

payment will be based in the liquidation value of the collateral. If

such payment is made, it will be applied to the outstanding principal

balance owed on the guaranteed debt. The lender will discontinue

interest accrual on the defaulted loan in accordance with Agency

procedures.

(c) Property disposition. Once the liquidation plan has Agency

approval, the lender must make every effort to liquidate the property

in a manner that will yield the highest market value consistent with

the protections afforded to tenants contained in 7 CFR part 1944,

subpart L or successor regulation. This liquidation process must be

completed within 9 months from the lender's decision to liquidate,

unless otherwise approved by the Agency.

(d) Transmitting payments and proceeds to the Agency. When the

Agency is the holder of a portion of the guaranteed loan, the lender

will transmit to the Agency its pro rata share of any payments received

from the borrower, liquidation, or other proceeds.

Sec. 3565.454 [Reserved].

Sec. 3565.455 Alternative disposition methods.

The Agency, in its sole discretion, may choose to obtain an

assignment of the loan from the lender or conveyance of title obtained

by the lender through foreclosure or a deed-in-lieu of foreclosure.

(a) Assignment. In the case of an assignment of the loan, the

assignment of the security instruments or the security must be in

written and recordable form. Completion of the assignment will occur

once the following transactions are completed to the Agency's

satisfaction.

(1) Conveyance to the Agency of all the lender's rights and

interests arising under the loan.

(2) Assignment to the Agency of all claims against the borrower or

others arising out of the loan transactions, including:

(i) All collateral agreements affecting financing, construction,

use or operation of the property; and

(ii) All insurance or surety bonds, or other guarantees, and all

claims under them.

(3) Certification that the collateral has been evaluated for the

presence of contamination from the release of hazardous substances,

petroleum products or other environmental hazards which may adversely

impact the market value of the property and the results of that

evaluation.

(b) Conveyance of title. In the case of a conveyance of title to

the property, the lender must inform the Agency in advance of how it

plans to acquire title and a timetable for doing so. The Agency will

accept the conveyance upon receipt of an assignment to the Agency of

all claims of the lender against the property and assignment of the

lender's rights to any operating funds and any reserves or escrows

established for the maintenance of the property or the payment of

property taxes and insurance.

Sec. 3565.456 Filing a claim.

Once the lender has disposed of the property or the Agency has

agreed to accept an assignment of the loan or conveyance of title to

the property, the lender may file a claim for the guaranteed portion of

allowable losses. All claim amounts must be calculated in accordance

with this subpart and be approved by the Agency.

Sec. 3565.457 Determination of claim amount.

(a) Maximum guarantee payment. The maximum guarantee payment will

not exceed the amount of guarantee percentage as contained in the

guarantee agreement (but in no event more than 90%) times the allowable

loss amount.

(b) Date of loss. The date of loss is the earliest of the date on

which the property is foreclosed or acquired or the proposed date of

foreclosure or acquisition in the liquidation plan, unless an

alternative date is approved by the Agency. Where the Agency chooses to

accept an assignment of the loan or conveyance of title, the date of

loss will be the date on which the Agency accepts assignment of the

loan or conveyance of title.

(c) Allowable claim amount. The allowable claim amount must be

calculated by:

(1) Adding to the unpaid principal and interest on the date of

loss, an amount approved by the Agency for

[[Page 39471]]

payments made by the lender for amounts due and owing on the property,

including:

(i) Property taxes and other protective advances as approved by the

Agency;

(ii) Water and sewer charges and other special assessments that are

liens prior to the guaranteed loan;

(iii) Insurance on the property;

(iv) Loan guarantee fees paid after default; and

(v) Reasonable liquidation expenses.

(2) And by deducting the following items:

(i) Any amount received by the lender on the account of the

guaranteed loan after the date of default;

(ii) Any net income received by the lender from the secured

property after the date of default; and

(iii) Any cash items retained by the lender, except any amount

representing a balance of the guaranteed loan not advanced to the

borrower. Any loan amount not advanced will be applied by the lender to

reduce the outstanding principal on the loan.

(d) Lender certification. The lender must certify that all

possibilities of collection have been exhausted and that all of the

items specified in paragraph (c) of this section have been identified

and reported to the Agency as a condition for payment of claim.

Sec. 3565.458 Withdrawal of claim.

If the lender provides timely written notice to the Agency of

withdrawal of the claim, the guarantee will continue as if the default

had not occurred if the borrower cures the default prior to foreclosure

or prior to acceptance of a deed-in-lieu of foreclosure.

Sec. Sec. 3565.459-3565.499 [Reserved]

Sec. 3565.500 OMB control number.

According to the Paperwork Reduction Act of 1995, no party is

required to respond to a collection of information unless it displays a

valid OMB control number. The valid OMB control number for this

information collection is 0575-0174.

Dated: July 16, 1998.

Inga Smulkstys

Acting Under Secretary Rural Development.

[FR Doc. 98-19558 Filed 7-21-98; 8:45 am]

BILLING CODE 3410-XV-P