RD Instruction 1940-I

## Title 7 - Agriculture

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## CHAPTER XVIII -- RURAL DEVELOPMENT, DEPARTMENT OF AGRICULTURE

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## Subchapter H - Program Regulations

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## Part 1940 - GENERAL

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## Subpart I - Truth in Lending - Real Estate Settlement Procedures

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## Table of Contents

[Sec.]{.underline} [Page]{.underline}

1940.401 Truth in Lending. 1

\(a\) General. 1

\(b\) Scope. 1

\(c\) Disclosure of the cost and terms of credit. 1

\(d\) Notice of the right to cancel. 3

\(e\) Advertisements. 5

1940.402 - 1940.405 \[Reserved\] 6

1940.406 Real estate settlement procedures. 6

\(a\) General. 6

\(b\) Scope. 6

\(c\) Actions required. 7

1940.407 - 1940.450 \[Reserved\] 8

(1-6-83) SPECIAL PN

RD Instruction 1940-I

PART 1940 - GENERAL

Subpart I - TRUTH IN LENDING - REAL ESTATE SETTLEMENT PROCEDURES

§1940.401 [Truth in lending]{.underline}.

\(a\) [General]{.underline}. This section provides instructions for
compliance with the Truth in Lending Act, as implemented by Regulation Z
of the Federal Reserve System, to assure that individual Rural Housing
(RH) applicants are informed of:

\(1\) The cost and terms of credit, and

\(2\) Their right to cancel certain credit transactions resulting in a
lien or mortgage on their home.

\(b\) [Scope]{.underline}. This section applies to all individuals who
apply for loans, assumptions, or credit sales (hereafter described as
transactions) for household purposes.

\(1\) Special rules for the right to cancel transactions not for
purchase or initial construction of a home broaden the scope of this
section to include individuals who have an ownership interest in, and
reside in as a principal dwelling, property which will be security for a
mortgage, even though they may not execute the promissory note or
assumption agreement. Such persons have the right to receive credit
disclosures and the notice of the right to cancel and may cancel the
transaction.

\(2\) This section does [not]{.underline} apply to:

\(i\) applicants who are corporations, associations, cooperatives,
public bodies, partnerships, or other organizations;

\(ii\) individual applicants for multiple family housing transactions
(rural rental or labor housing), unless for a two-family dwelling in
which the applicant will reside, and other business and commercial type
loans; or

\(iii\) applicants involved in credit transactions primarily for
agricultural purposes.

\(c\) [Disclosure of the cost and terms of credit]{.underline}.

\(1\) [Form and content]{.underline}. Form RD 1940-41, \"Truth in
Lending Disclosure Statement,\" will be used to provide the following
required disclosures:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

DISTRIBUTION: W, S, D, C Loan and Grant Making

General

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(1-6-83) SPECIAL PN

RD Instruction 1940-I

§1940.401 (c) (1) (Con.)

\(i\) Annual percentage rate;

\(ii\) Finance charge;

\(iii\) Amount financed;

\(iv\) Total of payments;

\(v\) Total sale price (required for credit sales only);

\(vi\) Payment schedule;

\(vii\) A separate itemization of the amount financed, if the applicant
requests it. Normally this required disclosure will have been met in
transactions subject to the Real Estate Settlement Procedures Act
(RESPA) by providing the applicant with Form RD 440-58, \"Estimate of
Settlement Costs\";

\(viii\) The lender\'s identity;

\(ix\) Prepayment or late payment penalties;

\(x\) Security interest;

\(xi\) Insurance requirements;

\(xii\) Assumption policy; and

\(xiii\) Referral to other loan documents.

\(2\) [Timing, use of estimates and required redisclosure]{.underline}.

\(i\) In transactions for the purchase or construction of a home subject
to RESPA, Form RD 1940-41. completed using \"good faith\" estimates
based on the best information available, will be delivered or placed in
the mail to the applicant no later than three (3) business days after
receipt of a written application in the County Office.

\(ii\) In transactions not subject to RESPA, such as RH Section 502
transactions for repairs or refinancing or RH Section 504 transactions,
Form RD 1940-41, completed using the actual terms of the transaction,
will be delivered to each applicant (and in transactions which are
subject to cancellation, each non-applicant with the right to cancel) at
the time of loan approval.

\(iii\) In the event of a change in rates and terms between the time of
initial disclosure and closing, whereby the annual

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RD Instruction 1940-I

§ 1940.401(c)(2)(ii) (Con.)

percentage rate varies by more than one-eighth of one percent,
redisclosure must be made. This may be done by entering the changes on
all copies of the initial Form RD 1940-41, or by preparing a new Form RD
1940-41. When required, redisclosure may be made at the time the
transaction is approved or at the time of the change, but the form must
be delivered to the applicant before the signing of the promissory note
or assumption agreement.

\(3\) [Special instructions for assumption, reamortization, refinancing
and multiple transactions]{.underline}.

\(i\) Assumptions, within the scope of paragraph (b) of this section, at
new rates and terms or of existing obligations which were for purchase
or initial construction of a residence, require new credit disclosure
before the assumption occurs. Since assumptions are not subject to
RESPA, early disclosure is not required.

\(ii\) Reamortization, as described in 7 CFR part 3550, when the
borrower is in default or delinquent, does not require new credit
disclosure. In all other cases reamortization requires new credit
disclosure. (Revised 01-23-03, SPECIAL PN.)

\(iii\) Refinancing of debts in accordance with 7 CFR part 3550, though
not subject to RESPA or early disclosure, does require credit disclosure
at the time the transaction is approved. (Revised 01-23-03, SPECIAL PN.)

\(iv\) Multiple transactions.

\(A\) When a subsequent loan is financed along with another transaction
and both transactions require credit disclosure, a separate Form RD
1940-41 will be prepared for each transaction.

\(B\) Transactions with multiple advances will be treated as one
transaction for the purpose of credit disclosure, in accordance with the
Forms Manual Insert (FMI) for Form RD 1940-41.

\(d\) [Notice of the right to cancel]{.underline}. The right to cancel
applies only to transactions within the scope of paragraph (b) of this
section, which are [not]{.underline} for purchase, acquisition or
initial construction of [and]{.underline} which result in a mortgage on
an individual\'s principal residence, such as RH

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## (Revision 2)

(01-06-83) SPECIAL PN

RD Instruction 1940-I

§ 1940.401(d) (Con.)

Section 502 transactions for refinancing, repairs or rehabilitation or
RH Section 504 transactions.

\(1\) [Form and content]{.underline}. Form RD 1940-43, \"Notice of Right
to Cancel,\" will be used to notify individuals of their right to cancel
those transactions, within the scope of paragraphs (b) and (d) of this
section, which result in a mortgage on their principal residence
[except]{.underline} when the transaction is for its purchase or initial
construction. This notice will identify the transaction and disclose the
following:

\(i\) The acquisition of a security interest in the individual\'s
principal residence.

\(ii\) The individual\'s right to cancel the transaction.

\(iii\) How to exercise the right to cancel the transaction, with a form
for that purpose.

\(iv\) The effects of cancellation.

\(v\) The date the cancellation period expires.

\(2\) [Timing]{.underline}.

\(i\) Two copies of Form RD 1940-43, and one copy of Form RD 1940-41, in
accordance with the FMI\'s, will be given to each individual entitled to
cancel, not later than loan closing.

\(ii\) Any entitled individual may cancel the transaction until midnight
of the third business day following whichever of the following events
occurs last:

\(A\) The date the transaction is closed.

\(B\) The date Truth in Lending credit disclosures were made.

\(C\) The date notice of the right to cancel was received.

\(3\) [Disbursement of funds]{.underline}. In a transaction subject to
cancellation funds will not be disbursed, other than to a designated
attorney or title insurance company preparatory to closing, until:

\(i\) Forms RD 1940-43 have been given to the appropriate individuals,

\(ii\) The three-day cancellation period has expired, and

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## (Revision 2) 

§1940.401 (d) (3) (Con.) RD Instruction 1940-I

\(iii\) The loan approval official is reasonably assured that the
transaction has not been cancelled. This assurance may be obtained by:

\(A\) Waiting a reasonable period of time after the expiration of the
cancellation period to allow for the delivery of a mailed notice, or

\(B\) Obtaining a written statement from each individual entitled to
cancel that the right has not been exercised.

\(iv\) This delay in disbursing funds may be waived in cases of a
bonafide personal financial emergency, which must be met within the
cancellation period, when the individual submits a signed and dated
statement describing the nature of the emergency and waiving the right
to cancel. Such a statement must be signed by all individuals entitled
to cancel.

\(4\) [Effects of cancellation]{.underline}.

\(i\) When an individual cancels a transaction, the mortgage securing
the transaction becomes void and the borrower will not be liable for any
amount, including any finance charge.

\(ii\) Within twenty (20) calendar days after receipt of a notice of
cancellation the loan approval official will:

\(A\) Notify all interested parties of the cancellation;

\(B\) Return, and/or request the return of any money or property given
to anyone in connection with the transaction; and

\(C\) Take the necessary action to terminate the mortgage.

\(iii\) Once evidence has been presented to the borrower that the
mortgage has been terminated, the borrower must return any funds
advanced by Rural Development to the Rural Development County Office or
surrender any property at his/her residence within twenty (20) calendar
days.

\(e\) [Advertisements]{.underline}. An \"advertisement\" is defined as a
commercial message in any medium that promotes, directly or indirectly,
a credit transaction. Advertisements for credit sales of Government
inventory property, within the scope of paragraph (b) of this section,
are subject to the following requirements.

\(1\) If an advertisement states specific credit terms, it shall state
only those terms that actually are or will be arranged or offered.

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(1-6-83) SPECIAL PN

RD Instruction 1940-I

§1940.401 (e) (Con.)

\(2\) If an advertisement states a rate of finance charge, it shall
state the rate as an \"annual percentage rate,\" using that term.

\(3\) Terms requiring additional disclosures.

\(i\) If any of the following terms is set forth in an advertisement:

\(A\) The amount or percentage of any down payment,

\(B\) The number of payments or period of repayment,

\(C\) The amount of any payment, or

\(D\) The amount of any finance charge,

\(ii\) The advertisement must also state:

\(A\) The amount or percentage of down payment,

\(B\) The terms of repayment, and

\(C\) The \"annual percentage rate\", using that term.

§§1940.402 - 1940.405 \[Reserved\]

§1940.406 [Real estate settlement procedures]{.underline}.

\(a\) [General]{.underline}. This section provides the instructions for
compliance with the Real Estate Settlement Procedures Act (RESPA), as
amended, and Regulation X of the Department of Housing and Urban
Development.

\(b\) [Scope]{.underline}.

\(1\) This section applies to loans and credit sales, including Section
502 Rural Housing, 1-4 family Rural Rental Housing, 1-4 family Labor
Housing, and Farm Ownership involving tracts of less than 25 acres,
whether made to an individual, corporation, partnership, association or
other entity, which meet the following requirements:

\(i\) The proceeds of the loan or the credit extended are used in whole
or in part to finance the purchase and transfer of title of the property
to be mortgaged by the borrower, and

\(ii\) The loan or credit sale is secured by a first lien covering real
estate on which is located a structure

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§1940.406 (c) (1) (ii) (Con.) RD Instruction 1940-I

designed principally for the occupancy of from 1-4 families, or on which
a structure designed principally for the occupancy of from 1-4 families
is to be constructed using proceeds of the loan.

\(2\) Exempt transactions include:

\(i\) Loans for repairs, improvements, or refinancing if the proceeds
are not used to finance the purchase of the property.

\(ii\) Loans to finance the construction of a 1-4 family structure if
the tract of land is already owned by the applicant/borrower.

\(iii\) Assumptions or transfers.

\(c\) [Actions required]{.underline}.

\(1\) The information booklet entitled \"Settlement Costs\" will either
be given to the applicant at the time the completed application is
received, or mailed to the applicant no later than three (3) business
days after receipt of the application in the County Office.

\(i\) Form RD 440-58, \"Estimate of Settlement Costs,\" is to be used to
provide a \"good faith\" statement of estimated closing costs. Form RD
440-58 will be completed by the County Supervisor and mailed or
delivered to the applicant with the Settlement Costs booklet. Costs will
vary between geographic areas; therefore, information supplied on this
form must be based on (A) the County Supervisor\'s best estimate of
charges the borrower will pay for each service in connection with the
transaction, or (B) a range of charges at which such service is
available to the borrower from all providers in the area.

\(ii\) Form RD 440-58 does not replace Truth in Lending forms.
Appropriate forms listed in §1940.401 will be used for Truth in lending
purposes.

\(2\) Form RD 1940-59, \"Settlement Statement,\" will be completed as
indicated in the form and FMI by the designated attorney or title
company for all transactions described in paragraph (b) of this section.
The purpose of this form is to provide a uniform settlement statement
prescribed by RESPA.

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(1-6-83) SPECIAL PN

RD Instruction 1940-1

§1940.406 (c) (2) (Con.)

\(i\) During the business day immediately preceding the date of
settlement, the closing agent, if requested by the applicant, must
permit the applicant to inspect the settlement statement, completed for
those items which are then known to the closing agent.

\(ii\) A copy will be given to both the borrower and seller at the time
of closing or settlement or will be mailed as soon as practicable if the
borrower or seller are not present at closing.

§§1940.407 - 1940.450 \[Reserved\]

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