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Appendix 1

7 CFR PART 3560--DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS

TABLE OF CONTENTS

Subpart A--General Provisions and Definitions

Sec. Page

3560.1 Applicability and purpose. 20

3560.2 Civil rights. 20

3560.3 Environmental requirements. 21

3560.4 Compliance with other Federal requirements. 21

3560.5 State, local or tribal laws. 22

3560.6 Borrower responsibility and requirements. 22

3560.7 Delegation of responsibility. 22

3560.8 Administrator's exception authority. 22

3560.9 Reviews and appeals. 22

3560.10 Conflict of interest. 23

3560.11 Definitions. 23

3560.12-3560.49 [Reserved] 34

3560.50 OMB control number. 34

Subpart B--Direct Loan and Grant Origination

3560.51 General. 35

3560.52 Program objectives. 35

3560.53 Eligible use of funds. 35

(a) Construct housing. 35

(b) Purchase and rehabilitate buildings 35

(c) Subsequent loans 35

(d) Purchase and improve sites 35

(e) Develop and install necessary systems 35

(f) Landscaping and site development. 36

(g) Tenant-related facilities. 36

(h) Management-related facilities. 36

(i) Purchase and install equipment and appliances. 36

(j) Household furnishings (Section 514/516) 36

(k) Initial operating capital 36

(l) Builder’s profit, overhead and general requirements. 36

(m) Legal, technical and professional services 36

(n) Permit and application fees. 36

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(o) Reimbursement to nonprofit organizations and public bodies 37

(p) Educational programs. 37

(q) Interest and customary charges 37

(r) Purchase housing from interim lender. 37

(s) Uniform Relocation Assistance and Real Property Acquisition

 Act of 1970. 37

(t) Demonstration programs. 37

(u) Conversion of section 502 properties. 37

3560.54 Restrictions on the use of funds. 37

(a) Ineligible use of funds. 37

(b) Obligations incurred before loan approval. 38

3560.55 Applicant eligibility requirements. 39

(a) General. 39

(b) Additional requirement for applicants with prior debt. 39

(c) Additional requirement for nonprofit organizations. 40

(d) Additional requirements for Limited Liability Companies (LLCs). 40

3560.56 Processing section 515 housing proposals. 40

(a) Notice of Funding Availability (NOFA) responses. 40

(b) Preliminary proposal assessment. 41

(c) Scoring and ranking project proposals. 41

(d) Processing initial loan applications. 42

(e) Processing order of initial applications. 43

(f) Other assistance. 43

(g) Proposal withdrawal or rejection. 43

(h) Final applications. 43

(i) Rural cooperative housing proposals. 43

3560.57 Designated places for section 515 housing. 43

(a) Establish a list of designated places 43

(b) Establishing partnership designated place list. 44

(c) Administrator’s discretion. 44

(d) Restrictions on loans in certain designated places. 44

3560.58 Site requirements. 45

(a) Location. 45

(b) Structures located in central business areas. 45

(c) Site development costs and standards. 45

(d) Densities. 45

(e) Flood or mudslide-prone areas. 46
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3560.59 Environmental requirements. 46

3560.60 Design requirements. 46

(a) Standards. 46

(b) Residential design. 46

(c) Economical construction, operation and maintenance. 46

(d) Accessibility. 47

3560.61 Loan security. 48

(a) General. 48

(b) Lien position. 48

(c) Liability. 48

(d) Housing and loan ownership. 48

3560.62 Technical, legal, insurance, and other services. 49

(a) Legal services. 49

(b) Title clearance. 49

(c) Architectural services. 49

(d) Insurance. 49

(e) Surety bonding. 49

3560.63 Loan limits. 49

(a) Determining the security value. 49

(b) Limitation on loan amounts. 50

(c) Equity contribution. 50

(d) Review of assistance from multiple sources. 50

(e) Limits on equity loans. 51

(f) Cost overruns. 51

3560.64 Initial operating capital contribution. 51

3560.65 Reserve account. 52

3560.66 Participation with other funding or financing sources. 52

(a) General requirements. 52

(b) Rental assistance. 52

(c) Security requirements. 53

(d) Reserve requirements. 53

(e) Design requirements. 53

3560.67 Rates and terms for section 515 loans. 54

(a) Interest. 54

(b) Interest credit. 54

(c) Amortization period and term. 54

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3560.68 Permitted return on investment (ROI). 55

(a) Permitted return. 55

(b) Calculation of permitted return. 55

(c) Return on additional investment. 55

(d) Compensation to nonprofit organizations. 55

3560.69 Supplemental requirements for congregate housing and group homes. 55

(a) General. 55

(b) Design criteria. 55

(c) Services. 55

(d) Necessary items. 56

(e) Association with other organizations. 56

(f) Market feasibility documentation. 56

(g) Rental assistance for group homes. 56

3560.70 Supplemental requirements for manufactured housing. 57

(a) Design requirements. 57

(b) Eligible properties. 57

(c) Terms. 57

(d) Security. 57

(e) Special warranty requirements. 57

3560.71 Construction financing. 58

(a) Construction financing plan. 58

(b) Interim financing. 58

(c) Multiple advances. 58

3560.72 Loan closing. 58

(a) Requirements. 58

(b) Cost certification. 59

(c) Notice of cancellation. 60

3560.73 Subsequent loans. 60

(a) Applicability. 60

(b) Application requirements and processing. 60

(c) Amortization and payment period. 60

(d) Equity contribution. 60

(e) Environmental requirements. 60

(f) Design requirements. 60

(g) Architectural services. 60

(h) Restrictive-use requirements. 61

(i) Designation changes from rural to normal. 61

(j) Agency’s discretion. 61
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3560.74 Loan for final payments. 61

(a) Use. 61

(b) Requirements. 61

(c) Term. 61

3560.75 - 3560.99 [Reserved] 61

3560.100 OMB control number. 61

Subpart C--Borrower Management and Operations Responsibilities

3560.101 General. 61

3560.102 Housing project management. 62

(a) General. 62

(b) Management plan. 62

(c) Management plan effective period. 63

(d) Housing projects with compliance violations. 64

(e) Acceptable management agents. 64

(f) Self-management. 64

(g) Identity-of-interest disclosure. 65

(h) Management agreement. 65

(i) Management fees. 65

(j) Management certification. 70

(k) Procurement. 70

(l) Electronic submission of data to Agency. 71

3560.103 Maintaining housing projects. 72

(a) Physical maintenance. 72

(b) Maintenance systems. 75

(c) Capital budgeting and planning. 76

3560.104 Fair housing. 77

(a) General. 77

(b) Affirmative Fair Housing Marketing Plan. 77

(c) Accommodations and communication. 78

(d) Housing sign requirements. 79

3560.105 Insurance and taxes. 80

(a) General. 80

(b) General insurance requirements. 80

(c) Borrower failure or inability to meet insurance requirements. 80

(d) Credits, refunds, or rebates. 81

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(e) Insurance company requirements. 81

(f) Property insurance. 81

(g) Liability insurance. 83

(h) Fidelity coverage. 83

(i) Taxes. 85

3560.106-3560.149 [Reserved] 85

3560.150 OMB control number. 85

Subpart D--Multi-Family Housing Occupancy

3560.151 General. 85

(a) Applicability. 85

(b) Civil rights requirements. 86

3560.152 Tenant eligibility. 86

(a) General requirements. 86

(b) Exception. 86

(c) Requirements for elderly housing, elderly units in mixed housing,

 congregate housing, and group homes. 86

(d) Ineligible tenant waiver. 86

(e) Tenant certification and verification. 87

3560.153 Calculation of household income and assets. 88

3560.154 Tenant selection. 88

(a) Application for occupancy. 88

(b) Additional information 89

(c) Application submission. 89

(d) Selection of eligible applicants. 89

(e) Recordkeeping. 89

(f) Waiting lists. 90

(g) Priorities and preferences for admission. 90

(h) Notices of ineligibility or rejection. 91

(i) Purging waiting list. 91

(j) Criminal activity. 91

3560.155 Assignment of rental units and occupancy policies. 91

(a) General. 91

(b) Rental units accessible to individuals with disabilities. 91

(c) Transfer of existing tenants within a housing project. 92
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(d) Applicant placement. 92

(e) Occupancy policies. 92

(f) Agency concurrence. 92

3560.156 Lease requirements. 92

(a) Agency approval. 92

(b) Lease requirements. 92

(c) Required items and provisions. 93

(d) Prohibited provisions. 96

(e) Housing projects and units receiving HUD assistance. 97

(f) State and local requirements. 97

3560.157 Occupancy rules. 98

(a) General. 98

(b) Requirements. 98

(c) Modification of occupancy rules. 98

(d) Federal, state and local requirements. 98

(e) Pets/Assistance Animals. 98

(f) Tenant organizations. 99

(g) Community rooms. 99

3560.158 Changes in tenant eligibility. 99

(a) General requirements. 99

(b) Tenants no longer eligible. 99

(c) Temporary continuation of tenancy. 99

(d) Surviving and remaining household member. 99

3560.159 Termination of occupancy. 100

(a) Tenants in violation of lease. 100

(b) Lease expiration or tenant eligibility. 101

(c) Other terminations. 101

(d) Criminal activity. 101

3560.160 Tenant grievances. 101

(a) General. 101

(b) Applicability. 102

(c) Borrower responsibilities. 102

(d) Reasons for grievance. 102

(e) Notice of adverse action. 103

(f) Grievances and responses to notice of adverse action. 103

(g) Hearing process. 103

(h) Requirements governing the hearing. 105

(i) Decision. 105

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3560.161-3560.199 [Reserved] 105

3560.200 OMB control number. 105

Subpart E—Rents

3560.201 General. 106

3560.202 Establishing rents and utility allowances. 106

(a) General. 106

(b) Agency approval. 106

(c) Rents. 106

(d) Utility allowances. 107

(e) Funds contributed to reduce rents. 107

(f) Rents for resident manager, caretaker, or owner-occupied unit. 107

(g) LIHTC. 107

3560.203 Tenant contributions. 107

(a) Tenant contributions. 107

(b) Adjustment of tenant contribution. 108

(c) Overage. 108

3560.204 Security deposits and membership fees. 108

(a) General. 108

(b) Allowable amounts. 108

(c) Payment plans. 109

(d) Charges for damage or loss. 109

(e) State and local security deposit requirements. 109

(f) Unclaimed security deposits. 109

3560.205 Rent and utility allowance changes. 109

(a) General. 109

(b) Agency approval. 109

(c) Timing of request for changes. 109

(d) Tenant notification. 110

(e) Approval. 110

(f) Denial of change request. 110

(g) Notice of denial. 110

3560.206 Conversion to Plan II (Interest Credit). 110

3560.207 Annual adjustment factors for Section 8 units. 110

(a) General. 110

(b) Establishing rents in housing with HUD rent assistance. 110

(c) Excess HUD rents. 111
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3560.208 Rents during eviction or failure to recertify. 111

(a) Rents during eviction. 111

(b) Rents when tenants fail to recertify. 111

(c) Unauthorized assistance due to tenant recertification failure. 111

(d) Rents when borrowers fail to recertify tenants. 111

(e) Unauthorized assistance due to borrower recertification

 failure. 111

3560.209 Rent collection. 111

(a) General. 111

(b) Fees for late rent payments. 111

(c) Improperly advanced rents. 112

3560.210 Special note rents (SNRs). 112

3560.211-3560.249 [Reserved] 112

3560.250 OMB control number. 112

Subpart F--Rental Subsidies

3560.251 General. 112

3560.252 Authorized rental subsidies. 112

(a) General. 112

(b) Forms of rental subsidies. 112

(c) Multiple rent subsidies. 113

(d) Agency rental assistance (RA). 113

3560.253 [Reserved] 113

3560.254 Eligibility for rental assistance. 113

(a) Eligible housing. 113

(b) Eligible units. 114

(c) Eligible households. 114

3560.255 Requesting rental assistance. 114

(a) Submitting requests. 114

(b) Denial of requests. 114

3560.256 Rental assistance payments. 115

(a) Borrower submission requirements. 115

(b) Basis of RA requests. 115

(c) Payments to borrowers. 115

(d) Utility payments to tenants. 115

(e) Administrative errors. 115

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3560.257 Assigning rental assistance. 115

(a) Priorities for rental assistance. 115

(b) Continued eligibility. 116

(c) Assignment of rental assistance. 116

(d) Incorrectly assigned rental assistance. 116

3560.258 Terms of agreement. 116

(a) Term of agreement. 116

(b) Replacing expiring obligations. 116

3560.259 Transferring rental assistance. 116

(a) Agency authority. 116

(b) Agency review before transferring rental assistance. 117

(c) Transferring rental assistance for displaced tenants. 117

3560.260 Rental subsidies from non-Agency sources. 117

(a) General. 117

(b) HUD vouchers. 117

(c) Loan proposals using non-Agency rental subsidy. 117

(d) Rental subsidy agreement. 117

3560.261 Improperly advanced rental assistance. 118

3560.262-3560.299 [Reserved] 118

3560.300 OMB control number. 118

Subpart G--Financial Management

3560.301 General. 118

3560.302 Accounting, bookkeeping, budgeting, and financial management 

systems. 118

(a) General. 118

(b) Acceptable methods of accounting. 118

(c) Account requirements. 118

(d) Documentation of separate accountability. 120

(e) Records. 120

(f) Forms generated by automated systems. 120

(g) Farm labor housing. 121

3560.303 Housing project budgets. 121

(a) General requirements. 121

(b) Allowable and unallowable project expenses. 121

(c) Priorities. 125

(d) Agency review and approval. 125
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3560.304 Initial operating capital. 126

(a) Purpose. 126

(b) Authorized uses of initial operating capital. 126

(c) Withdrawal of initial operating capital. 126

3560.305 Return on investment. 127

(a) Borrower’s return on investment. 127

(b) Unpaid return on investment. 127

3560.306 Reserve account. 127

(a) Purpose. 127

(b) Financial management of the reserve account. 127

(c) Funding of the reserve account. 127

(d) Transfer of surplus general operating account funds. 127

(e) Account requirements. 128

(f) Funds invested in securities. 128

(g) Use of the reserve account. 128

(h) Allowable uses. 129

(i) Records. 129

(j) Changes to reserve requirements. 129

(k) Excess reserves. 129

(l) Procurement. 130

3560.307 Reports. 130

(a) Required reports. 130

(b) Quarterly and monthly reports. 130

3650.308 Annual financial reports. 130

(a) General. 130

(b) Engagement requirements. 130

(c) Performance standards. 131

(d) Other financial reports. 131

3560.309 Advancement (loan) of funds to a RRH project by the owner, 

member of the organization, or agent of the owner. 131

3560.310-3560.349 [Reserved] 132

3560.350 OMB control number. 132

Subpart H--Agency Monitoring

3560.351 General. 132

3560.352 Agency monitoring scope, purpose, and borrower responsibilities. 133

(a) Scope of Agency monitoring activities. 133

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(b) Purpose of Agency monitoring activities. 133

(c) Borrower responsibilities. 133

3560.353 Scheduling of on-site monitoring reviews. 134

3560.354 Borrower response to monitoring review notifications. 134

3560.355-3560.399 [Reserved] 134

3560.400 OMB control number. 134

Subpart I--Servicing

3560.401 General. 134

(a) Purpose 134

(b) General servicing policies. 134

(c) Special servicing actions. 135

3560.402 Loan payment processing. 135

(a) Predetermined Amortization Schedule System (PASS)

 requirements. 135

(b) Required conversion to PASS. 135

(c) Exceptions. 135

3560.403 Account servicing. 135

(a) Payment due dates. 135

(b) Payment application order. 135

(c) Late fees. 136

(d) Interest on unpaid overdue principal. 136

3560.404 Final loan payments. 136

(a) Payoff statements. 136

(b) Final payments. 136

(c) Final payment loans. 136

(d) Loan prepayment requests. 136

(e) Payment forms. 137

(f) Release of security instruments. 137

(g) Special circumstances. 137

3560.405 Borrower organizational structure or ownership interest changes. 137

(a) General. 137

(b) Agency requirements. 137

(c) Documentation of organizational structures and ownership

 interests. 138
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3560.406 MFH ownership transfers or sales. 138

(a) General. 138

(b) Agency consent requirements. 138

(c) Consent request requirements. 139

(d) Requirements for ownership transfers or sales. 139

(e) Equity payments. 141

(f) Equity payment funding sources. 142

(g) Restrictive-use requirement. 142

(h) Subsequent loans. 142

(i) Loan assumption interest rates. 142

(j) Loan assumption terms. 143

(k) Processing ownership transfers or sales. 143

(l) Ownership transfers or sales under special rates, terms 143

 and conditions.

3560.407 Sales or other disposition of security property. 144

(a) General. 144

(b) Request requirements. 144

3560.408 Lease of security property. 144

(a) General. 144

(b) Leases to public housing authorities. 145

(c) Lease of a portion of the security property. 145

(d) Mineral leases. 145

3560.409 Subordinations or junior liens against security property. 145

(a) General. 145

(b) Consent request requirements. 146

(c) Required conditions for subordinations and junior liens. 147

(d) Other liens against a property or other assets. 147

3560.410 Consolidations. 147

(a) General. 147

(b) Loan consolidations. 147

(c) Loan agreement or loan resolution consolidations. 147

3560.411-3560.449 [Reserved] 148

3560.450 OMB control number. 148

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Subpart J--Special Servicing, Enforcement, Liquidation, and Other Actions

3560.451 General. 148

(a) Agency obligations. 148

(b) Relationship to workout agreements. 148

3560.452 Monetary and non-monetary defaults. 148

(a) General. 148

(b) Monetary defaults. 148

(c) Nonmonetary defaults. 149

(d) Default notice. 149

(e) Agency action. 149

3560.453 Workout agreements. 149

(a) General. 149

(b) Workout agreement approval. 150

(c) Workout agreement required content. 150

(d) Workout agreement budgets. 151

(e) Workout agreement terms and cancellations. 151

3560.454 Special servicing actions related to housing operations. 151

(a) Changing rents or revising budgets. 151

(b) Occupancy waivers. 151

(c) Additional rental assistance (RA). 151

(d) Special note rents. 152

(e) Termination of management agreement. 152

3560.455 Special servicing actions related to loan accounts. 152

(a) General. 152

(b) Loan reamortizations. 153

(c) Loan writedowns. 153

3560.456 Liquidation. 154

(a) Before acceleration. 154

(b) Acceleration. 154

(c) Voluntary liquidation. 154

(d) Foreclosure. 155

(e) Acquisition of chattel properties. 155

3560.457 Negotiated debt settlement. 155

(a) Borrower proposals to settle debt. 155

(b) Required information. 155
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(c) Effective date of approval. 155

(d) Appraisal requirement. 155

(e) Disposition of security prior to offer. 155

(f) Final release condition. 156

3560.458 Special property circumstances. 156

(a) Abandonment. 156

(b) Other security. 156

(c) Taking of additional security to protect Agency interests. 156

(d) Due diligence. 156

3560.459 Special borrower circumstances. 156

(a) Deceased borrower, bankruptcy, insolvency, and divorce actions. 156

(b) Membership liability agreements. 157

(c) Security issues in participation loans. 157

3560.460 Double damages. 157

(a) Action to recover assets or income. 157

(b) Amount recoverable. 157

(c) Time limitation. 158

(d) Continued availability of other remedies. 158

3560.461 Enforcement provisions. 158

(a) Equity skimming. 158

(b) Civil monetary penalties. 158

(c) Conditions for renewal extension. 159

3560.462 Money laundering. 159

3560.463 Obstruction of Federal audits. 159

3560.464-3560.499 [Reserved] 159

3560.500 OMB control number. 160

Subpart K--Management and Disposition of Real Estate Owned (REO) Properties

3560.501 General. 160

3560.502 Tenant notifications and assistance. 160

3560.503 Disposition of REO property. 160

3560.504 Sales price and bidding process. 161

3560.505 Agency loans to finance purchases of REO properties. 161

3560.506 Conversion of single family type REO property to MFH use. 162

3560.507-3560.549 [Reserved] 163

3560.550 OMB control number. 163

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Subpart L--Off-Farm Labor Housing

3560.551 General. 164

3560.552 Program objectives. 164

3560.553 Loan and grant purposes. 164

3560.554 Use of funds restrictions. 164

3560.555 Eligibility requirements for off-farm labor housing loans and grants. 165

(a) Eligibility for loans. 165

(b) Eligibility for grants. 165

(c) Limitation 165

3560.556 Application requirements and processing. 165

3560.557 [Reserved] 165

3560.558 Site requirements. 165

3560.559 Design and construction requirements. 165

(a) General. 165

(b) Additional requirements. 165

(c) Davis-Bacon wage requirements. 166

3560.560 Security. 166

3560.561 Technical, legal, insurance and other services. 166

3560.562 Loan and grant limits. 166

(a) Determining the security value. 166

(b) Maximum amount of loan. 166

(c) Maximum amount of grant. 166

3560.563 Initial operating capital. 166

3560.564 Reserve accounts. 166

3560.565 Participation with other funding or financing sources. 167

3560.566 Loan and grant rates and terms. 167

(a) Amortization period. 167

(b) Interest rate. 167

(c) Term of grant agreement. 167

3560.567 Establishing the profit base on initial investment. 167

3560.568 Supplemental requirements for seasonal off-farm labor housing. 167

3560.569 Supplemental requirements for manufactured housing. 167

3560.570 Construction financing. 167

3560.571 Loan and grant closing. 168

3560.572 Subsequent loans. 168

3560.573 Rental assistance. 168
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3560.574 Operating assistance. 168

(a) Project eligibility requirements. 168

(b) Operating assistance limits. 169

(c) Owner responsibilities. 169

3560.575 Rental structure and changes. 170

3560.576 Occupancy restrictions. 170

(a) Restrictions on conditions of occupancy. 170

(b) Eligible households. 170

(c) Tenant eligibility requirements for operating assistance rents. 171

(d) Ineligible tenants. 171

(e) Non-farm laborer tenants. 171

3560.577 Tenant priorities for labor housing. 172

3560.578 Financial management of labor housing. 172

3560.579 Servicing off-farm labor housing. 172

3560.580-3560.599 [Reserved] 172

3560.600 OMB control number. 172

Subpart M--On-Farm Labor Housing 172

3560.601 General. 172

3560.602 Program objectives. 173

3560.603 Loan purposes. 173

3560.604 Restrictions on use of funds. 173

3560.605 Eligibility requirements. 173

3560.606 Application requirements and processing. 174

3560.607 [Reserved] 174

3560.608 Site and construction requirements. 174

(a) General. 174

(b) Permanent units. 174

(c) Seasonal units. 175

(d) Accessibility. 175

3560.609 [Reserved] 175

3560.610 Security. 175

3560.611 Technical, legal, insurance and other services. 175

3560.612 Loan limits. 175

3560.613 [Reserved] 176

3560.614 Reserve accounts. 176

3560.615 Participation with other funding sources. 176

3560.616 Rates and terms. 176

3560.617 [Reserved] 176

3560.618 Supplemental requirements for on-farm labor housing. 176

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3560.619 Supplemental requirements for manufactured housing. 176

3560.620 Construction financing. 176

3560.621 Loan closing. 176

3560.622 Subsequent loans. 176

3560.623 Housing management and operations. 177

3560.624 Occupancy restrictions. 177

3560.625 Maintaining the physical asset. 177

3560.626 Affirmative Fair Housing Marketing Plan. 177

3560.627 Response to resident complaints. 177

3560.628 Establishing and modifying rental charges. 177

3560.629 Security deposits. 177

3560.630 Financial management. 177

3560.631 Agency monitoring. 178

3560.632-3560.649 [Reserved] 178

3560.650 OMB control number. 178

Subpart N--Housing Preservation

3560.651 General. 178

3560.652 Prepayment and restrictive-use categories. 179

3560.653 Prepayment requests. 179

3560.654 Tenant notification requirements. 180

3560.655 Agency requested extension. 182

3560.656 Incentives offers. 182

3560.657 Processing and closing incentive offers. 185

(a) Borrower responsibilities. 185

(b) Waiting lists. 185

(c) Unfunded incentive offers. 185

3560.658 Borrower rejection of the incentive offer. 186

3560.659 Sale or transfer to nonprofit organizations and public bodies. 187

(a) Sales price 187

(b) Marketing to nonprofit organizations and public bodies. 187

(c) Preference for local nonprofit and public bodies. 188

(d) Eligible nonprofit organizations. 188

(e) Requirements for nonprofit organizations and public bodies. 188

(f) Selection priorities. 189

(g) Loans made by the Agency or other sources to nonprofit

 organizations and public bodies. 189

(h) Advances for nonprofit organizations and public bodies. 189

(i) Waiting list. 189

(j) Withdrawal from sales process. 190

(k) When no offer to purchase is received. 190

3560.660 Acceptance of prepayments. 190

3560.661 Sale or transfers. 190

3560.662 Restrictive-use provisions and agreements. 191
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3560.663 Post-payment responsibilities for loans subject to continued restrictive-use 

provisions. 192

3560.664-3560.699 [Reserved] 192

3560.700 OMB control number. 192

Subpart O--Unauthorized Assistance

3560.701 General. 193

3560.702 Unauthorized assistance sources and situations. 193

3560.703 Identification of unauthorized assistance. 193

3560.704 Unauthorized assistance determination notice. 193

3560.705 Recapture of unauthorized assistance. 194

3560.706 Offsets. 195

3560.707 Program participation and corrective actions. 195

3560.708 Unauthorized assistance received by tenants. 195

3560.709 Demand letter. 196

3560.710-3560.749 [Reserved] 197

3560.750 OMB control number. 197

Subpart P--Appraisals

3560.751 General. 197

3560.752 Appraisal use, request, review, and release. 197

(a) Appraisal uses. 197

(b) Appraisal requests. 197

(c) Appraisal review. 198

(d) Release of appraisals. 198

3560.753 Agency appraisal standards and requirements. 198

(a) General. 198

(b) Appraisers. 199

(c) Appraisal report. 199

(d) Highest and best use statement and analysis. 200

(e) Valuation methods and variances. 200

(f) Real estate history. 200

(g) Reserve accounts. 200

(h) Escrow accounts. 200

(i) Rental rates comparison. 200

(j) Description of housing and property rights. 200

(k) Exclusion of rental units from valuation. 200

(l) Non-contiguous sites. 200

3560.754-3560.799 [Reserved] 201

3560.800 OMB control number. 201

(02-24-05) SPECIAL PN

(Revised (02-15-19) PN 521
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7 CFR Part 3560

7 CFR PART 3560 – DIRECT MULTI-FAMILY HOUSING LOANS AND GRANTS

Subpart A--General Provisions and Definitions

§3560.1 Applicability and purpose.

(a) This part sets forth requirements, policies, and procedures for multi-family housing 

(MFH) direct loan and grant programs to serve eligible very-low, low- and moderateincome households. The programs covered by this part are authorized by title V of the 

Housing Act of 1949 and are:

(1) Section 515 Rural Rental Housing, which includes congregate housing, group 

homes, and Rural Cooperative Housing. Section 515 loans may be made to 

finance multi-family units in rural areas as defined in §3560.11.

(2) Sections 514 and 516 Farm Labor Housing loans and grants. Housing under 

these programs may be built in any area with a need and demand for housing for 

farm workers.

(3) Section 521 Rental Assistance. A project-based tenant rent subsidy which 

may be provided to Rural Rental Housing and Farm Labor Housing facilities.

(b) The programs covered by this part provide economically designed and constructed 

rural rental, cooperative, and farm labor housing and related facilities operated and 

managed in an affordable, decent, safe, and sanitary manner.

(c) Internal Agency procedures containing details for Agency processing under these 

regulations can be found in the program handbooks, available in any Rural Development 

office, or from the Rural Development Web site.

§3560.2 Civil rights.

(a) As per the Fair Housing Act, as amended and section 504 of the Rehabilitation Act of 

1973, all actions taken by recipients of loans and grants will be conducted without regard 

to race, color, religion, sex, familial status, national origin, age, or disability. These 

actions include any actions in the sale, rental, or advertising of the dwellings, in the 

provision of brokerage services, or in residential real estate transactions involving Rural 

Housing Service (RHS) assistance. It is unlawful for a borrower or grantee or an agent of 

a borrower or grantee:

(1) To refuse to make reasonable accommodations in rules, policies, practices, or 

services that would provide a person with a disability an opportunity to use or 

continue to use a dwelling unit and all public and common use areas; or

(2) To refuse to provide a reasonable accommodation at the borrower's expense 

that would not cause an undue financial or administrative burden, or to refuse to 

allow an individual with a disability to make reasonable modifications to the unit 

at their own expense with the understanding that the owner may require the tenant 

to return the unit to its original condition when the unit is vacated by the tenant 

making the modifications (see §3560.104(c)).
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(b) Borrowers and grantees must take reasonable steps to ensure that Limited English Proficiency (LEP) 

persons receive the language assistance necessary to afford them meaningful access to USDA programs 

and activities, free of charge. Failure to ensure that LEP persons can effectively participate in or benefit 

from federally-assisted programs and activities may violate the prohibition under Title VI of the Civil 

Rights Act of 1964, 42 U.S.C. 2000d and Title VI regulations against national origin discrimination. 

USDA has issued guidance to clarify the responsibilities of recipients and subrecipients who receive 

financial assistance from USDA and to assist them in fulfilling their responsibilities to LEP persons under 

Title VI of the Civil Rights Act, as amended, and implementing regulations.

(c) Any tenant/member or prospective tenant seeking occupancy in or use of facilities financed by the 

Agency who believes he or she is being discriminated against because of race, color, religion, sex, familial 

status, national origin, or disability may file a complaint in person with, or by mail to the U. S. 

Department of Agriculture's Office of Civil Rights, Room 326-W, Whitten Building, 14th and 

Independence Avenue, Washington, DC 20410. Complaints received by Agency employees must be 

directed to the National Office Civil Rights staff through the State Civil Rights Manager/Coordinator.

(d) Borrowers or grantees that fail to comply with the requirements of federal civil rights requirements are 

subject to sanctions authorized by law. The following are the major civil rights laws affecting multifamily 

housing loan and grant programs:

(1) Equal Credit Opportunity Act (ECOA).

(2) Title VI of the Civil Rights Act of 1964.

(3) Title VIII of the Civil Rights Act of 1968.

(4) Section 504 of the Rehabilitation Act of 1973.

(5) Age Discrimination Act of 1975.

(6) Title IX of the Education Amendments of 1972.

§3560.3 Environmental review requirements.

RHS will consider environmental impacts of proposed housing as equal with economic, social, and 

other factors. By working with applicants, Federal agencies, Indian tribes, state and local governments, interested 

citizens, and organizations, RHS will formulate actions that advance program goals in a manner that protects, 

enhances, and restores environmental quality. Actions taken under this part must comply with the environmental 

review requirements in accordance with 7 CFR part 1970. Servicing actions as defined in § 1970.6 of this title are 

part of financial assistance already provided and do not require additional NEPA review. However, certain postfinancial assistance actions that have the potential to have an effect on the environment, such as lien subordinations, 

sale or lease of Agency-owned real property, or approval of a substantial change in the scope of a project, as defined 

in § 1970.8 of this title, are actions for the purposes of this part. (Revised 04-01-16, SPECIAL PN.)

§3560.4 Compliance with other Federal requirements.

RHS is responsible for ensuring that the application is in compliance with all applicable Federal 

requirements, including the following specific requirements:

(a) Intergovernmental review. 7 CFR part 3015, subpart V, or any successor regulation, including the 

Agency supplemental administrative instruction, RD Instruction 1970-I, 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 any successor regulation.

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(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 40 CFR part 32.

(d) Historic preservation requirements. The provisions of 7 CFR part 1901, subpart F or 

any successor regulation.

(e) Lead-based paint requirements. The applicable provisions of 24 CFR part 35, 

subparts A through D, J, and R, as published by the U.S. Department of Housing and 

Urban Development.

§3560.5 State, local or tribal laws.

Borrowers must comply with all applicable state and local laws, and laws of 

Federally-recognized Indian tribes to the extent they are not inconsistent with this part.

§3560.6 Borrower responsibility and requirements.

(a) Borrower responsibilities and requirements specified in this part may be carried out 

by an individual or entity designated by the borrower to act on behalf of the borrower 

such as a resident manager or management agent. Ultimate accountability to the Agency, 

however, is with the borrower whether or not the borrower designated another person or 

entity to act on the borrower's behalf.

(b) Borrowers who have not executed a loan agreement, and who were not required to 

execute a loan agreement by the regulations in effect at the time of their loan closing are 

exempt from the requirements of subparts D through G of this part, as long as the 

borrower is not in default of any applicable requirement, security instrument, payment, or 

any other agreement with the Agency. Such borrowers must provide evidence of tenant 

income eligibility in accordance with §3560.152(a), except in Farm Labor Housing where 

the tenant is not paying shelter cost.

§3560.7 Delegation of responsibility.

The RHS Administrator may delegate, on an individual or other basis, any decision- making responsibility for Agency programs, unless otherwise noted.

§3560.8 Administrator's exception authority.

The RHS Administrator may make an exception to any provision of this part or 

address any omissions provided that the exception is consistent with the applicable statute, does 

not adversely affect the interest of the Federal Government, and does not adversely affect the 

accomplishment of the purposes of the MFH programs or application of the requirement would 

result in undue hardship on the tenants. Exception requests presented to the RHS Administrator 

must have the concurrence of a Rural Development Leadership Designee or a Deputy 

Administrator for MFH.

§3560.9 Reviews and appeals.

Rural Housing Service decisions may be appealed pursuant to 7 CFR part 11.
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§3560.10 Conflict of interest.

To reduce the potential for employee conflict of interest, all RHS activities will be 

conducted in accordance with 7 CFR part 1900, subpart D.

§3560.11 Definitions.

Unless otherwise noted, terms listed in this part shall be defined as follows: 

Administrator. The head of the Rural Housing Service who reports directly to the Under 

Secretary for Rural Development in the U.S. Department of Agriculture.

Agency. The Rural Housing Service within the Rural Development mission area of the U.S. 

Department of Agriculture.

Amortization. Payment of debt in regular, periodic installments of principal and interest, as 

opposed to interest only payments.

Applicant. An individual, partnership or limited partnership, consumer cooperative, trust, state 

or local public agency, corporation, limited liability company, nonprofit organization, Indian 

tribe, association, or other entity that will be the owner of the project for which an application for 

funding from the Agency is submitted.

Appraisal. As used by the Agency, a written report developed by a qualified appraiser as 

established in subpart P that concludes an opinion of value(s) for a specific real property.

Assistance. Financial assistance in the form of a loan, grant, interest credit, or rental assistance.

Association of farmers. Two or more farmers acting as a single legal entity. Association 

members may include the individual members of farming partnerships or corporations.

Borrower. An individual, partnership or limited partnership, consumer cooperative, trust, state 

or local public agency, corporation, limited liability company, nonprofit organization, Indian 

tribe, 

association, or other entity that has received a loan from the Agency.

Capital Needs Assessment. A Capital Needs Assessment is designed to capture and report on the 

immediate and the long-range capital needs of an individual property. It includes attention to site 

features, mechanical and electrical systems, building exterior and common area systems, and 

dwelling unit interiors.

Caretaker. An individual employed by a borrower or a management agent to handle routine 

interior and exterior maintenance and upkeep of a MFH project.

Congregate housing. A housing program authorized by section 515 of the Housing Act of 1949 

which provides housing for elderly persons, individuals with disabilities, and families who 

require some supervision and central services but are otherwise able to care for themselves. 

Such housing does not include any licensed healthcare facility.

Consumer cooperative. A corporation organized under the cooperative laws of a state or 

Federally recognized Indian tribe that will own and operate the housing on a cooperative basis 

solely for the benefit of its members.

(02-24-05) SPECIAL PN

Revised (03-31-22) SPECIAL PN
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Conventional rents for comparable units (CRCU). Market rents for comparable rental units in 

conventional housing located in the same geographic area as a particular Section 514, 515, or

516 project.

Current appraisal. An appraisal with a report date that is no more than 1 year old.

Daily Interest Accrual System (DIAS). A system where interest is charged daily on outstanding 

principal. Level loan payments are made by the borrower. The amount of interest due on any 

date is equal to the unpaid daily interest that has accrued.

Default. Failure by a borrower to meet significant monetary or non-monetary obligations or 

terms of a loan, grant, or other agreement with the Agency which remain unpaid or unperformed 

for more than 30 days after the date such obligation is due or required to be paid or performed, or 

within time periods specified in notices of compliance violations.

Disability. The term disability is considered equivalent to the term handicap. Eligibility 

requirements for fully accessible units are contained in §§3560.154(g)(1)(i) and 3560.155(b). A 

person is considered to have a disability if either of the following two situations occur:

(1) As defined in section 501(b) of the Housing Act of 1949. The person is the head of 

household (or his or her spouse) and is determined to have an impairment which:

(i) Is expected to be of long-continued and indefinite duration;

(ii) Substantially impedes his or her ability to live independently; and

(iii) Is of such a nature that such ability could be improved by more suitable 

housing conditions, or if such person has a developmental disability as defined in 

section 102(7) of the Developmental Disability and Bill of Rights Act (42 U.S.C. 

6001(7)).

(2) As defined in the Fair Housing Act; the Americans with Disabilities Act; and section 

504 of the Rehabilitation Act of 1973. The person has a physical or mental impairment 

which substantially limits one or more of such person's major life activities; a record of 

such impairment; or being regarded as having such an impairment. The term does not 

include current, illegal use of or addiction to a controlled substance. As used in this 

definition, physical or mental impairment includes:

(i) Any physiological disorder or condition, cosmetic disfigurement, or 

anatomical loss affecting one or more of the following body systems: 

neurological; musculoskeletal; special sense organs; respiratory, including 

speech organs; cardiovascular; reproductive; digestive; genito-urinary; 

hemic and lymphatic; skin; and endocrine;

(ii) Any mental or psychological disorder, such as mental retardation, 

organic brain syndrome, emotional or mental illness, and specific learning 

disabilities. The term “physical or mental impairment” includes, but is not 

limited to, such diseases and conditions as orthopedic, visual, speech and 

hearing impairments, cerebral palsy, autism, epilepsy, muscular dystrophy, 

multiple sclerosis, cancer, heart disease, diabetes, Human 

Immunodeficiency Virus infection, mental retardation, emotional illness, 

drug addiction (other than addiction caused by current, illegal use of a 

controlled substance), and alcoholism;
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(iii) Major life activities means functions such as caring for one's self, 

performing manual tasks, walking, seeing, hearing, speaking, breathing, 

learning, and working;

(iv) Has a record of such an impairment means has a history of, or has 

been misclassified as having, a mental or physical impairment that 

substantially limits one or more major life activities;

(v) Is regarded as having an impairment means:

(A) Has a physical or mental impairment that does not 

substantially limit one or more major life activities but that is 

treated by the borrower or management agent as constituting such 

a limitation;

(B) Has a physical or mental impairment that substantially limits 

one or more major life activities only as a result of the attitudes of 

others toward such impairment; or

(C) Has none of the impairments described in this definition but is 

treated by another person as having such an impairment.

Disabled domestic farm laborer. An individual with a disability as separately defined in this 

paragraph and who was a domestic farm laborer at the time of becoming disabled.

Domestic farm laborer. A person who, consistent with the requirements in § 3560.576(b)(2), 

receives a substantial portion of his or her income from farm labor employment (not selfemployed) in the United States, Puerto Rico, or the Virgin Islands and either is a citizen of the 

United States or resides in the United States, Puerto Rico, or the Virgin Islands after being 

legally admitted for permanent residence, or a person legally admitted to the United States and 

authorized to work in agriculture. This definition may include the immediate family members 

residing with such a person.

Due diligence on hazardous substances. Due diligence is the process of inquiring into the 

environmental conditions of real estate, in the context of a real estate transaction to determine the 

presence of contamination from hazardous substances, and to determine the impact such 

contamination may have on the market value of the property.

Elderly household or individual with a handicapped household. A household in which the tenant 

or co-tenant of the household is 62 years old or older or is an individual with a disability. An 

elderly household may include persons younger than 62 years old and the household of an 

individual with a handicap may include persons without disabilities.

Elderly person. A person who is at least 62 years old. The term also means a person with a 

disability as separately defined in this paragraph, regardless of age. 

(02-24-05) SPECIAL PN

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Familial status. One or more individuals (who have not attained the age of 18 years) being 

domiciled with a parent or another person having legal custody of such individual or individuals; 

or the designee of such parent or other person having such custody, with the written permission 

of such parent or other person. The protections afforded against discrimination on the basis of 

familial status shall apply to any person who is pregnant or is in the process of securing legal

custody of any individual who has not attained the age of 18 years. 

Family farm corporation or partnership. A private corporation or partnership involved in 

agricultural production in which at least 90 percent of the stock or interest is owned and 

controlled by persons related by blood, which shall include parents, siblings, and children, or 

law. If more than three separate households are supported by the farming operation, the family 

farm corporation or partnership must be:

(1) Legally organized and authorized to own and operate a farm business within the 

state;

(2) Legally able to carry out the purposes of the loan; and

(3) Prohibited from the sale or transfer of 90 percent of the stock or interest to other than 

family members by either the articles of incorporation, bylaws or by agreement between 

the stockholders or partners and the corporation or partnership.

Farm. A tract or tracts of land, improvements, and other appurtenances that are used or will be 

used in the production of crops, livestock, or aquaculture products for sale in sufficient quantities 

so that the property is recognized as a farm rather than a rural residence. The term “farm” also 

includes the term “ranch.” It may also include land and improvements and facilities used in a 

non-eligible enterprise or the residence that, although physically separate from the farm acreage, 

is ordinarily treated as part of the farm in the local community.

Farmer. A person who is actually involved in day to day on-site operations of a farm and who 

devotes a substantial amount of time to personal participation in the conduct of the operation of a 

“farm.”

Farm labor. Services in connection with cultivating the soil, raising or harvesting any agriculture 

or aquaculture commodity; or in catching, netting, handling, planting, drying, packing, grading, 

storing, or preserving in the unprocessed stage, without respect to the source of employment (but 

not self-employed), any agriculture or aquaculture commodity; or delivering to storage, market, 

or a carrier for transportation to market or to processing any agricultural or aquacultural 

commodity in its unprocessed stage.

Farm labor contractor. A person--other than an agricultural employer, a member of an 

agricultural association, or an employee of an agricultural employer or agricultural association-- who recruits, solicits, hires, employs, furnishes, or transports any year-round or seasonal migrant 

farm laborer for money or other valuable consideration.

Farm labor housing. On-farm or off-farm housing for farm laborers authorized by section 514 

and section 516 of the Housing Act of 1949.

Farm owner. A natural person, persons, or legal entity who are the owners of a “farm” as this 

term is further defined in this section.

Foreclosure. A proceeding in or out of court to extinguish all rights, title, and interest of the 

owners of property in order to sell the property to satisfy a lien against it.
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General overhead. Includes general operation items necessary for the contractor to be in 

business. They may include, but are not limited to the following: tools and minor equipment; 

worker's compensation and employer's liability; unemployment tax; Social Security and 

Medicare; manager's, clerical, and estimator's salaries; pension and bonus plans; main office 

insurance, rental, utilities, miscellaneous expenses; general liability insurance; legal, accounting, 

and data processing; automotive and light truck expense; vehicle expenses; depreciation of 

overhead capital expenditures; and office equipment maintenance.

General requirements. Includes items that are required in the construction contract for the 

contractor to provide for the specific project. They do not include items that pertain to a specific 

trade nor overhead expenses of the contractor's general operation. Items may include, but are not 

limited to, the following: Field supervision; field engineering such as field office, sheds, toilets, 

phone; performance and payment or latent defects bonds; cost certification; building permits; site 

security; temporary utilities; property insurance; and cleaning or rubbish removal.

Grantee. An entity that has received a grant from the Agency.

Group home. Housing that is occupied by elderly persons or individuals with disabilities who 

share living space within a rental unit and in which a resident assistant may be required.

Household. The tenant or co-tenant and the persons or dependents living with a tenant or cotenant, but not including a resident assistant.

Household furnishings. Basic durable items such as stoves, refrigerators, drapes, drapery rods, 

tables, chairs, dressers and beds.

Housing project. A property with two or more affordable, decent, safe and sanitary rental units 

and related facilities operated under one management plan and financed with funds appropriated 

under the authority of sections 515, 514, or 516 of the Housing Act of 1949.

Identity-of-Interest (IOI). A relationship between applicants, borrowers, grantees, management 

agents, or suppliers of materials or services described under, but not limited to, any of the 

following conditions:

(1) There is a financial interest between the applicant, borrower, grantee and a 

management agent or the supplying entity;

(2) One or more of the officers, directors, stockholders or partners of the applicant, 

borrower, or management agent is also an officer, director, stockholder, or partner of the 

supplying entity;

(3) An officer, director, stockholder, or partner of the applicant, borrower, or 

management agent has a 10 percent or more financial interest in the supplying entity;

(4) The supplying entity has or will advance funds to an applicant, borrower, or 

management agent;

(5) The supplying entity provides or pays on behalf of the applicant, borrower, or 

management agent the cost of any materials or services in connection with obligations 

under the management plan or management agreement;

(6) The supplying entity takes stock or a financial interest in the applicant, borrower, or 

management agent as part of the consideration to be paid them; or

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(7) There exists or come into being any side deals, agreements, contracts or

understandings entered into thereby altering, amending, or canceling any of the 

management plan, management agreement documents, organization documents, or other 

legal documents pertaining to the property, except as approved by the Agency.

Indian tribe. The term “Indian tribe” means any Indian tribe, band, group, and nation, including 

Alaskan Indians, Aleuts, and Eskimos, and any Alaskan-Native Village, which is considered an 

eligible recipient under the Indian Self-Determination and Education Assistance Act (Public Law 

93-638) or under the State and Local Fiscal Assistance Act of 1972 (Public Law 92-512).

Interest credit. A form of assistance available to eligible borrowers that reduces the effective 

interest rate of the loan.

Lease. A contract setting forth the rights and obligations of a tenant or cooperative member and 

a property owner, including charges and terms under which a tenant or cooperative member will

occupy or use the housing or related facilities.

Legal or qualified alien. Legal or qualified alien refers to any person lawfully admitted to the 

country who meets the criteria in section 214 of the Housing and Community Development Act 

of 1980, 42 U.S.C. 1436a.

Letter of Priority Entitlement (LOPE). A letter issued by the Agency providing a tenant with 

priority entitlement to rental units in other Agency-financed housing projects for 120 days from 

the date of the LOPE.

Life cycle cost. The life cycle cost has 2 purposes: (1) To determine the expected usable life 

(utility) of a building component or furnishing and (2) to determine which building components 

or furnishings are the most cost efficient over the life of the building. Cost efficient is not to be 

construed to mean the least initial cost.

Life cycle cost analysis. Life cycle cost analysis is the comparison of different materials to 

examine anticipated useful life and the cost of using a specific material or building component. 

The analysis has multiple uses, such as: (1) To conduct a cost efficiency comparison between 

products, (2) for developing component replacement time tables, and (3) for estimating future 

component replacement costs. Life cycle cost analysis can be accomplished through various 

methods, such as; insurance actuary tables or Agency documentation of a component's life 

expectancy. Life cycle cost analysis is conducted by a design professional. For Agency 

financed projects, a life cycle cost analysis is to be conducted for specific components: (1) drives 

and parking, (2) roofing system and roofing material, (3) exterior finishes, and (4) energy source 

items.

Limited Liability Company (LLC). An unincorporated organization of one or more persons or 

entities established in accordance with applicable state laws and whose members may actively 

participate in the organization without being personally liable for the debts, obligations or 

liabilities of the organization.

Limited partnership. An ownership arrangement consisting of general and limited partners; 

general partners manage the business, while limited partners are passive and liable only for their 

own capital contributions.

Loan agreement. A written agreement between the Agency and the borrower that sets forth the 

borrower's responsibilities with respect to Agency financing.
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Low-income household. A household that has an adjusted income that is greater than the Department of 

Housing and Urban Development's (HUD) established very-low income limit, but

that does not exceed the HUD established low-income limit (generally 80 percent of median income 

adjusted for household size for the county where the property is or will be located).

Low-Income Housing Tax Credit (LIHTC). A federal tax credit allowed for investment in qualified lowincome housing administered by the Internal Revenue Service (IRS) under section 42 of the Internal 

Revenue Code.

Management agent. A firm or individual employed or designated by a borrower to act on the borrower's 

behalf in accordance with a written management agreement.

Management agreement. A written agreement between a borrower and an identity-of-interest (IOI) 

management agent or independent fee management agent setting forth the management agent’s 

responsibilities and fees for management services.

Management fee. The compensation provided to a management agent for services provided in 

accordance with an approved management certification, Form RD 3560–13, ‘‘Multi-Family Project 

Borrower’s/Management Agent’s Management Certification.’’

Management plan. A detailed description of the policies and procedures to be followed by the borrower 

in managing a MFH project.

Manufactured housing. Housing, constructed of one or more factory-built sections, which includes the

plumbing, heating, and electrical systems contained therein, which is built to comply with the Federal 

Manufactured Home Construction and Safety Standards (FMHCSS), and which is designed to be used 

with a permanent foundation.

Market area. The geographic or locational delineation of the market for a specific project, including 

outlaying areas that will be impacted by the project, i.e., the area in which alternative, similar properties 

effectively compete with the subject property.

Market rent. The most probable rent that a property should bring in a competitive and open market 

reflecting all conditions and restrictions of the specified lease agreement, including term, rental 

adjustment and revaluation, permitted uses, use restrictions, and expense obligations; the lessee and lessor 

each acting prudently and knowledgeably, and assuming consummation of a lease contract as a specified 

date and the passing of the leasehold from lessor to lessee.

Maximum debt limit. The maximum amount that the Agency will lend or grant for a MFH project based 

on the appraised value or total development cost excluding costs ineligible for payment from loan or grant 

funds, whichever is less, reduced by all funding available to the borrower from sources other than the 

Agency, multiplied by 95, 97, or 102 percent depending upon the applicant entity and their use of the 

low-income housing tax credit, in accordance with §3560.63(b).

Member or co-member. A stockholder or other person who has executed documents or stock pertaining 

to a cooperative housing type of living arrangement and has made a commitment to upholding the 

cooperative concept.

Migrants or migrant agricultural laborer. A person (and the family of such person) who receives a 

substantial portion of his or her income from farm labor employment and who establishes a residence in a 

location on a seasonal or temporary basis, in an attempt to receive farm labor employment at one or more 

locations away from their home base state, excluding day-haul agricultural workers whose travels are 

limited to work areas within one day of their residence.

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Minor. An individual under 18 years of age who is a dependent of a tenant or an individual age 

18 or older who is a full-time student and a dependent of a tenant. 

Moderate-income household. A household that has an adjusted income that is greater than the 

HUD-established low-income limit, but does not exceed the low-income limit by more than 

$5,500. 

Mortgage or Deed of Trust. A form or security instrument or consensual lien on real property. 

Net recovery value. The value realized from the Government's acquisition of security property 

in a default situation after subtracting all costs, actual or anticipated, from acquiring, holding, 

and disposing of the security property.

New construction. A MFH project being constructed to be occupied for the first time.

Nonprofit organization. A private organization that: 

(1) Is organized under state or local laws;

(2) Has no part of its net earnings inuring to the benefit of any member, founder,

contributor, or individual; and

(3) Is approved by the Secretary of Agriculture and considered to be financially

responsible.

Nonprofit organization for section 515 program (Prepayment or Purchase). To be eligible to

purchase properties under the conditions of subpart N of this part, nonprofit organizations may 

not have among their officers or directorate any persons or parties with an identity-of-interest (or

any persons or parties related to any person with identity-of-interest) in loans financed under 

section 515 that have been prepaid or have requested prepayment. 

Nonprofit organization of farm workers. A nonprofit organization, as defined in this section, 

whose membership is composed of at least 51 percent farm workers.

Notice of Funding Availability (NOFA). A “Notice of Funding Availability” issued by the 

Agency to inform interested parties of the availability of assistance and other matters pertinent to

the program. 

Occupancy agreement. A contract establishing the rights and obligations of the cooperative

member and the cooperative, including the amount of the monthly occupancy charge and the 

other terms under which the member will occupy the housing. 

Occupancy charge. The amount of money charged a cooperative member to cover their

proportional share of the cooperative's operating costs and cash requirements. 

Off-farm labor housing. Housing for farm laborers in any location approved by the Agency but 

not on the farm where the laborer works. 

Office of the General Counsel (OGC). The USDA Office of the General Counsel, including the 

Regional Attorney, Associate Regional Attorney, or Assistant Regional Attorney. 

Office of the Inspector General (OIG). The USDA Office of the Inspector General.

On-farm labor housing. Housing for farm laborers located on the farm where they work that is

away from service buildings or in the nearby community. 
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Overage. That portion of a tenant's net tenant contribution that exceeds basic rent up to note 

rent. Full overage is an amount equal to the difference between the note rent for a unit and the 

basic rent.

Plan I. A type of interest subsidy available to borrowers prior to October 27, 1980. Budgets and 

rental rates developed for Plan I loans are based on a 3 percent loan amortization.

Plan II. A type of interest subsidy available to borrowers operating on a limited profit basis. 

Budgets and rental rates developed for Plan II loans are based on both the loan being amortized 

at the interest rate shown on the promissory note and at a 1 percent subsidized rate.

Predetermined Amortization Schedule System (PASS). A system where loan payments are 

applied based on an amortization schedule.

Prepayment. Payment in full of the outstanding balance on an Agency loan prior to the note's 

originally scheduled maturity date.

Program requirements. All provisions related to MFH contained in the loan document, grant 

agreement, statute, regulation, handbook, or administrative notice.

Promissory note. A legal document containing conditions (interest rate and timing) for 

repayment of indebtedness.

Real estate owned (REO) property. The real estate owned by the Agency acquired through 

voluntary conveyance, foreclosure or other action.

Rehabilitation. Rehabilitation is when the remodeling of a property is of a complex nature 

involving structural repairs or when two or more of the life cycle cost components are included 

in the remodeling of a property.

Related facilities. Facilities in a MFH project that are related to the housing and are in addition 

to rental units, (e.g., community rooms or buildings, cafeterias, dining halls, infirmaries, child 

care facilities, assembly halls, and essential service facilities such as central heating, sewerage, 

lighting systems, clothes washing facilities, trash disposal and safe domestic water supply).

Rent. The amount established as a charge for occupancy in a rental unit of Agency-financed 

MFH. Rents must be established at the same rate for all similar units in the housing project. The 

following terms are used to describe rents for various program purposes.

(1) Note rent is the rental charge established to cover expenses in the housing project's 

approved budget and the required loan payment set at the interest rate shown in the 

promissory note.

(2) Basic rent is the rental charge established to cover expenses in the housing project's 

approved budget and the required loan payment contained in the promissory note reduced 

by the interest credit agreement.

(3) HUD contract rent is the rental charge established for housing receiving projectbased Section 8 rental subsidies in accordance with 24 CFR part 880 or part 884, as 

applicable.

(4) Low-income housing tax credit (LIHTC) rent is the rental charge established in 

accordance with LIHTC requirements.

(02-24-05) SPECIAL PN
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Rental assistance (RA). The portion of the approved shelter cost paid by the Agency to 

compensate a borrower for the difference between the approved shelter cost and the tenant 

contribution when such contribution is less than the basic rent.

Rental assistance units. Dwelling units in a MFH project qualified for rental assistance. There 

are three types of rental assistance 

units.

(1) New construction units are units provided in conjunction with initial loans for 

construction or substantial rehabilitation of the MFH projects.

(2) Replacement units are Agency-funded rental assistance units which replace units with 

expiring rental assistance agreements or which replace Section 8 units which have 

expired under the Section 8 contract.

(3) Servicing units are units provided to an operational MFH project as a part of the 

Agency's general loan servicing or preservation activities.

Repair and replacement. Repair and replacement is the restoration of minor building materials, 

elements, components, equipment and fixtures. Examples include: Painting, carpeting, 

appliances, cabinets, and other fixtures.

Resident assistant. A person residing in a rental unit who is essential to the well-being and care 

of an elderly person or an individual with a disability, but who:

(1) Is not obligated for the tenant's financial support;

(2) Would not be living in the unit except to provide the needed services;

(3) May be a family member, but is not a dependent of the tenant for tax purposes;

(4) Is not subject to the eligibility requirements of a tenant; and

(5) Is not considered a household member in the determination of household income.

Resident or site manager. The individual employed by the borrower and who is responsible for 

the day-to-day operations of the housing.

Retired domestic farm laborer. An individual who is at least 55 years of age and who has spent 

the last 5 years prior to retirement as a domestic farm laborer or spent the majority of the last 10 

years prior to retirement as a domestic farm laborer.

Return on Investment (ROI). The annual amount of profit an owner operating on a limited or 

full profit basis may withdraw from a project, as established in the loan agreement. The amount 

is calculated as a percentage of the owner's investment in the project.

Rural area. Any open country, or any place, town, village, or city which is not (except in the 

cases of Pajaro, in the State of California, and Guadalupe, in the State of Arizona) part of or 

associated with an urban area and which (1) has a population not in excess of 2,500 inhabitants, 

or (2) has a population in excess of 2,500 but not in excess of 10,000 if it is rural in character, or 

(3) has a population in excess of 10,000 but not in excess of 20,000 and (A) is not contained 

within a standard metropolitan statistical area, and (B) has a serious lack of mortgage credit for 

lower and moderate-income families, as determined by the Secretary and the Secretary of 
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Housing and Urban Development. For purposes of this title, any area classified as ‘rural’ or a 

‘rural area’ prior to October 1, 1990, and determined not to be ‘rural’ or a ‘rural area’ as a result 

of data received from or after the 1990 or 2000 decennial census shall continue to be so 

classified until the receipt of data from the decennial census in the year 2010, if such area has a 

population in excess of 10,000 but not in excess of 25,000, is rural in character, and has a serious 

lack of mortgage credit for lower and moderate-income families. Notwithstanding any other 

provision of this section, the city of Plainview, Texas, shall be considered a rural area for 

purposes of this title, and the city of Altus, Oklahoma, shall be considered a rural area for 

purposes of this title until the receipt of data from the decennial census in the year 2000.

Rural Cooperative Housing (RCH). A housing program authorized under section 515 of the 

Housing Act of 1949, in which a consumer cooperative, organized and operating on a nonprofit 

basis, may own and operate a MFH development.

Rural Housing Service (RHS). The Agency within the Rural Development mission area of the 

U.S. Department of Agriculture or its successor agency which administers programs authorized 

by sections 514, 515, 516, and 521 of the Housing Act of 1949, as amended.

Rural Rental Housing (RRH). A housing program authorized by section 515 of the Housing Act 

of 1949 to provide rental housing in rural areas for persons of very-low, low- and moderate 

income.

Seasonal housing. Housing operated on a seasonal basis, typically for migrants or migrant 

agricultural laborers as opposed to year round.

Security deposit. A one-time fee charged a tenant prior to occupancy of a unit to cover possible 

loss or damage to the housing unit caused by the tenant.

Self-employed. A person who meets the IRS definition of self-employed at 26 CFR 1.401-10.

Service agreement. A written agreement between a borrower and a service provider establishing 

the specific service to be provided to a MFH project, the cost of the service, and the length of 

time the service will be provided.

Service plan. A written plan describing how services will be provided to a MFH project and 

which, at a minimum, must specify the services to be provided, the frequency of the services, 

who will provide the services, how tenants will be advised of the availability of services, and the 

staff needed to provide the services.

Service provider. A person who signs a written agreement with a borrower to provide services to 

a MFH project.

Shelter costs. Basic or note rent plus the utility allowance, when used, or the occupancy charge 

plus the utility allowance. If the utility costs are included in the rent, the rent will equal shelter 

costs.

Sources and Uses Comprehensive Evaluation (SAUCE). A computer software program used by 

the Agency to analyze the total funds provided to a MFH project to ensure that the Agency is not 

providing excess assistance.

Special note rent (SNR). A rental rate charged at a Plan II project experiencing vacancies that is 

less than note rent but higher than basic rent.

(02-24-05) SPECIAL PN 
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State consolidated plan. A planning document for an individual state that includes a housing and 

homeless needs assessment; a housing market analysis; a strategic plan for addressing the state's 

housing challenges; an Action Plan that is an annual description of the state's Federal and other 

resources that are expected to be available to address its priority housing needs and how the 

Federal funds will leverage other resources; certifications relating to fair housing, its 

antidisplacement and relocation plan, a drug-free workplace, and other statutory and program 

requirements; and a monitoring plan to ensure that the state is using its Federal funds 

appropriately and effectively.

Tenant or co-tenant. An individual who signs a lease and occupies or will occupy a rental unit in 

a MFH project. The term tenant or co-tenant also refers to a member of cooperative housing 

occupying or planning to occupy a dwelling unit in cooperative housing.

Tenant contribution. The portion of the approved shelter cost paid by the tenant household. The 

proportion of tenant income and adjusted income paid will vary according to the type of subsidy 

provided to the tenant household.

Total development cost (TDC). The cost of constructing, purchasing, improving, altering, or 

repairing MFH and related facilities, buying household furnishings (for sections 514/516 only), 

and purchasing or improving the necessary land, including architectural, engineering, or legal 

fees, and charges and other technical and professional fees and charges, but excluding fees, 

charges, or commissions such as payments to brokers, negotiators, or other persons for the 

referral of prospective applicants or solicitations of loans. Although a developer's fee is part of 

the project's development cost, such fees are not eligible for payment from Agency loan or grant 

funds and are not included in determining the Agency authorized development cost.

Utility allowance. An amount determined by a borrower as the amount to be considered a 

tenant's portion of utility cost in the calculation of a tenant's total shelter cost when utility costs 

are not included in the rent.

Very low-income household. A household that has an adjusted income that does not exceed the 

HUD established very low-income limit (generally 50 percent of median income adjusted for 

household size in the county where the property is or will be located).Workout agreement. An 

agreement between a borrower and the Agency listing actions to be taken over a period of time 

to prevent or correct a compliance violation or to cure a monetary or non-monetary default.

§§3560.12-3560.49 [Reserved]

§3560.50 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.
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Subpart B--Direct Loan and Grant Origination

§3560.51 General.

This subpart contains the Agency's loan origination requirements for multi-family 

housing (MFH) direct loans for Rural Rental Housing, Rural Cooperative Housing, and Farm 

Labor Housing. Additional requirements for farm labor housing loans and grants are contained 

in subpart L of this part for Off-Farm Labor Housing and subpart M of this part for On-Farm 

Labor Housing.

§3560.52 Program objectives.

The Agency uses appropriated funds to finance the construction, rehabilitation of 

program properties, or purchase and rehabilitation of MFH and related facilities to serve eligible 

persons in rural areas. The Agency encourages the use of such financing in conjunction with 

funding or financing from other sources.

§3560.53 Eligible use of funds.

Funds may be used for the following purposes.

(a) Construct housing. Funds may be used to construct MFH.

(b) Purchase and rehabilitate buildings. Funds may be used to purchase and rehabilitate 

buildings that have not been previously financed by the Agency.

(1) Rehabilitation must meet the definition of either moderate or substantial 

rehabilitation as defined in 7 CFR part 1924, subpart A.

(2) The building to be rehabilitated must be structurally sound and the 

improvements to the building must be necessary to meet the requirements of 

decent, safe, and sanitary living units.

(3) The total development cost (TDC) for the purchase and rehabilitation of 

existing buildings must not be more than the estimated TDC for construction of a 

similar type and unit size property in the same area.

(c) Subsequent loans. Funds may be used to provide subsequent loans in accordance 

with the provisions of §3560.73.

(d) Purchase and improve sites. Funds may be used to purchase and improve the site on 

which MFH will be located, provided that the amount of loan funds used to purchase the 

site does not exceed the appraised market value of the site immediately prior to purchase.

(e) Develop and install necessary systems. Funds may be used to install streets, a water 

supply, sewage disposal, heating and cooling systems, electric, gas, solar, or other power 

sources for lighting and other features necessary for the housing. If such facilities are 

located off-site, loan funds may only be used if the following additional requirements are 

met:

(1) The loan applicant will hold title to the facility or have a legal right to use the 

facility in the form of an easement or other instrument acceptable to the Agency 

for a period of at least 50 percent longer than the term of the loan or grant and the 

title or right is transferable to any subsequent owner of the housing.

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(2) The facilities will either be provided for the exclusive use of the proposed 

housing project, or Agency funds are limited to the prorated part of the total cost 

of the facility according to the use and benefit to the MFH project. If entities 

other than the housing project financed by the Agency use the facilities on a 

reimbursable fee basis, the loan applicant must agree, in writing, to apply any fees 

collected in excess of operating expenses to their Agency loan account as an extra 

loan payment.

(f) Landscaping and site development. Funds may be used to provide landscaping and 

site development related to a MFH project such as lighting, walks, fences, parking areas, 

and driveways.

(g) Tenant-related facilities. Funds may be used to develop tenant-related facilities 

appropriate to the size, economics, and prospective tenants of a MFH project, such as a 

community room, development of space for education and training purposes for tenants, 

central laundry facility, outdoor seating, space for passive recreation, tot lots, and a small 

emergency care infirmary. In congregate housing and group homes, funds may be used 

for central cooking and dining areas.

(h) Management-related facilities. Funds may be used to develop management-related 

facilities appropriate to the size and economics of a MFH project such as a maintenance 

workshop, storage facilities, office, and living quarters for a resident manager and other 

personnel.

(i) Purchase and install equipment and appliances. Funds may be used to purchase and 

install equipment and appliances affixed to the property as customary and appropriate for 

the area in which the housing is located.

(j) Household furnishings (Section 514/516). For farm labor housing sections 514 and 

516 only, funds may be used to purchase household furnishings.

(k) Initial operating capital. Loan funds equal to 2 percent of total development cost or 

appraised value, whichever is less, may be used by a state or political subdivision thereof, 

Indian tribe, consumer cooperative, or any public or private nonprofit borrower who is 

not receiving low-income housing tax credits (LIHTC), to make the initial operating 

capital contribution required by §3560.64. Other borrowers must use their own resources 

to make the required initial operating capital contribution and may not use loan funds for 

that purpose.

(l) Builder's profit, overhead and general requirements. Subject to the following limits, 

funds may be used for builder's profit, overhead and general requirements.

(1) Up to 10 percent of the construction contract may be used for builder's profit.

(2) Up to 4 percent of the construction contract may be used for general overhead.

(3) Up to 7 percent of the construction contract may be used for general 

requirements.

(m) Legal, technical and professional services. Funds may be used for the costs of legal, 

technical, and professional services related to the borrower's MFH project, including 

appraisals, environmental documentation, and construction plans and specifications.

(n) Permit and application fees. Funds may be used for required MFH permits and 

application fees.
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(o) Reimbursement to nonprofit organizations and public bodies. Funds may be used to 

reimburse a nonprofit organization or public body for up to 2 percent of total 

development costs for section 515, or up to 4 percent of total development costs for offfarm labor housing, for costs that are reasonable and typical for the area, including:

(1) Development and packaging of a loan application and a MFH proposal; and

(2) Legal, technical, and professional fees incurred in the formation of the loan 

application and MFH proposal; or

(3) Technical assistance from another nonprofit organization to assist in the 

organization's formation and in the development and packaging of a loan 

application and MFH proposal.

(p) Educational programs. Funds may be used for educational programs related to 

owning and managing a cooperative housing project for the board of directors of a 

housing cooperative during the first year of the housing operation. Such funds will be 

available from the initial operating account. The amount of the funds disbursed will be 

subject to Agency approval and availability of financial resources from the project.

(q) Interest and customary charges. Funds may be used for interest accrued and 

customary charges necessary to obtain interim financing.

(r) Purchase housing from an interim lender. Funds may be used to purchase MFH from 

an interim lender that holds fee simple title to Agency-financed housing upon which 

construction commenced and a letter of commitment had been issued by the Agency but 

the original applicant for whom funds were obligated will not or cannot continue with 

construction of the housing. In order for the purchase to take place, there must be no 

outstanding unpaid obligations in connection with the housing.

(s) Uniform Relocation Assistance and Real Property Acquisition Act of 1970. Funds 

may be used for necessary costs incurred to comply with the Uniform Relocation 

Assistance and Real Property Acquisition Act of 1970.

(t) Demonstration programs. With the RHS Administrator's approval, funds may be used 

to construct demonstration housing involving innovative units and systems which do not 

meet existing published standards, rules, regulations, or policies but meet the intent of 

providing affordable, decent, safe, and sanitary rural housing, and are consistent with the 

requirements of Title V of the Housing Act of 1949.

(u) Conversion of section 502 properties. In accordance with §3560.506, loan funds may 

be used to finance the conversion of real estate owned units originally financed under 

Section 502 of the Housing Act of 1949, to MFH authorized by section 515 of the 

Housing Act of 1949.

§3560.54 Restrictions on the use of funds.

(a) Ineligible uses of funds. Funds may not be used for:

(1) Housing intended to serve temporary and transient residents, with the 

exception of housing to serve migrant farm workers in accordance with 

§3560.554;

(02-24-05) SPECIAL PN 

Revised (04-01-16) SPECIAL PN
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(2) Special care facilities or institutional-type homes;

(3) Facilities which are not in compliance with the design requirements specified 

in §3560.60;

(4) Any costs associated with space in a housing project that is leased for 

commercial use or any commercial facilities except essential service-type 

facilities when otherwise not conveniently available;

(5) Specialized equipment for training and therapy;

(6) Operating capital for a central dining facility or any items which do not 

become affixed to the real estate security with the exception of household 

furnishings for farm labor housing units financed under sections 514 and 516;

(7) Compensation to a loan applicant for value of land contributed in excess of 

the equity contribution requirements in §3560.63 (c);

(8) Refinancing of an applicant's debt except when the debt involves interim 

financing or when refinancing is necessary to obtain a release of an existing lien 

on land owned by a nonprofit organization;

(9) Payment of any fee, charge, or commission to a broker or anyone else as a 

developer's fee or for referral of a prospective loan applicant or solicitation of a 

loan;

(10) Payment to any officer, director, trustee, stockholder, member, or agent of 

an applicant; or

(11) Purchasing land for a site in excess of what is needed, except when:

(i) The applicant cannot acquire an alternate site or cannot acquire the 

needed land as a separate parcel;

(ii) The applicant agrees to sell the excess land as soon as practical and to 

apply the proceeds to the loan; and

(iii) Program site density requirements are met in accordance with the site 

requirements established under §3560.58.

(b) Obligations incurred before loan approval. Funds may not be used for expenses

incurred by an applicant prior to approval except when all the following conditions are 

met:

(1) The debts were incurred for eligible purposes;

(2) Contracts, materials, construction, and any land purchased meet Agency 

standards and requirements;

(3) Payment of the debts will remove any attached liens and any basis for liens 

that may attach to the property on account of such debts; and

(4) The completion of environmental review requirements in accordance with 7 

CFR part 1970. (Revised 04-01-16, SPECIAL PN.)
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§3560.55 Applicant eligibility requirements.

Applicants for off-farm labor housing loans and grants should also refer to §3560.555, 

and applicants for on-farm labor housing loans should refer to §3560.605.

(a) General. To be eligible for Agency assistance, applicants must meet the following 

requirements:

(1) Be a U.S. citizen or qualified alien(s); a corporation; a state or local public 

Agency; an Indian tribe as defined in §3560.11; or a limited liability company 

(LLC), nonprofit organization, consumer cooperative, trust, partnership, or 

limited partnership in which the principals are U.S. citizens or qualified aliens;

(2) Be unable to obtain similar credit elsewhere at rates that would allow for rents 

within the payment ability of eligible residents;

(3) Possess the legal and financial capacity to carry out the obligations required 

for the loan or grant;

(4) Be able to maintain, manage, and operate the housing for its intended purpose 

and in accordance with all Agency requirements;

(5) With the exception of applicants who are a nonprofit organization, housing 

cooperative or public body, be able to provide the borrower contribution from 

their own resources (this contribution must be in the form of cash, or land, or a 

combination thereof);

(6) Have or be able to obtain a minimum of 2 percent of the total development 

costs for use as initial operating capital (for nonprofit organizations, cooperatives, 

or public bodies, this amount may be financed through Agency funds); and

(7) Not be suspended, debarred, or excluded based on the “List of Parties

Excluded from Federal Procurement and Nonprocurement Programs.” The list is 

available to Federal agencies from the U.S. Government Printing Office. Non- federal parties should contact the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, (202) 512-1800.

(8) Not delinquent on Federal debt or a Federal judgment debtor, with the 

exception of those debtors described in §3560.55 (b).

(b) Additional requirement for applicants with prior debt. If an applicant or the 

managing general partner of a borrower, as well as any affiliated entity having a 10 

percent or more ownership interest, has a prior or existing Agency debt, the following 

additional requirements must be met.

(1) The applicant must be in compliance with any existing loan or grant 

agreements and with all legal and regulatory requirements or must have an 

Agency-approved workout agreement and be in compliance with the provisions of 

the workout agreement. The Agency may require that applicants with monetary 

or non-monetary deficiencies be in compliance with an Agency-approved 

workout agreement for a minimum of 6 consecutive months before becoming 

eligible for further assistance.

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(2) The applicant must be in compliance with the Title VI of the Civil Rights Act 

of 1964, section 504 of the Rehabilitation Act of 1973, and all other applicable 

civil rights laws.

(c) Additional requirements for nonprofit organizations. In addition to the eligibility 

requirements of paragraphs (a) and (b) of this section, nonprofit organizations must meet 

the following criteria:

(1) The applicant must have received a tax-exempt ruling from the IRS 

designating the applicant as a 501(c)(3) or 501(c)(4) organization.

(2) The applicant must have in its charter the provision of affordable housing.

(3) No part of the applicant's earnings may benefit any of its members, founders, 

or contributors.

(4) The applicant must be legally organized under state and local law.

(5) In the case of off-farm labor housing loans and grants, nonprofit organizations 

must be “broad-based” nonprofit organizations (refer to §3560.555(a)(1)).

(d) Additional requirements for limited partnerships. In addition to the applicant 

eligibility requirements of paragraphs (a) and (b) of this section, limited partnership loan 

applicants must meet the following criteria:

(1) The general partners must be able to meet the borrower contribution 

requirements if the partnership is not able to do so at the time of loan request.

(2) The general partners must maintain a minimum 5 percent financial interest in 

the residuals or refinancing proceeds in accordance with the partnership 

organizational documents.

(3) The partnership must agree that new general partners can be brought into the 

organization only with the prior written consent of the Agency.

(e) Additional requirements for Limited Liability Companies (LLCs). In addition to the 

applicant eligibility requirements of paragraphs (a) and (b) of this section, LLC loan 

applicants must meet the following criteria:

(1) One member who holds at least a 5 percent financial interest in the LLC must 

be designated the authorized agent to act on the LLC's behalf to bind the LLC and 

carry out the management functions of the LLC.

(2) No new members may be brought into the organization without prior consent 

of the Agency.

(3) The members must commit to meet the equity contribution requirements if 

the LLC is not able to do so at the time of loan request.

§3560.56 Processing section 515 housing proposals.

Processing requirements for farm labor housing proposals are found in subpart L of 

this part for Off-Farm and subpart M of this part for On-Farm.

(a) Notice of Funding Availability (NOFA) responses. 
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(1) The Agency will publish an annual NOFA with deadlines and other 

information related to submission of new construction MFH proposals, including 

expansion of existing MFH in designated places selected in accordance with 

§3560.57.

(2) To be eligible for funding consideration, MFH proposals must be submitted in 

accordance with the NOFA and must provide information requested in the NOFA 

for the Agency to score and rank the proposals.

(3) MFH proposals needing rental subsidies must include requests for Agency 

rental assistance or a description of any non-Agency rental subsidy to be used 

with the proposal and must provide information required by §3560.260 (c).

(4) The Agency will consider housing proposals requesting rental assistance in 

rank order to the extent rental assistance is available. When there is no rental 

assistance available, the Agency will consider only those housing proposals in 

rank order that do not require rental assistance.

(b) Preliminary proposal assessment. The Agency will make a preliminary assessment 

of the application using the following criteria and will reject those applications which do 

not meet all of these criteria:

(1) The proposal was received by the submission deadline specified in the 

NOFA,

(2) The proposal is complete as specified in the NOFA,

(3) The proposal is for an authorized purpose, and

(4) The applicant meets Agency eligibility requirements.

(c) Scoring and ranking project proposals. The Agency will score and rank each housing 

proposal that meets the criteria of paragraph (b) of this section.

(1) The following criteria will be used to score housing proposals as more 

completely established in the NOFA:

(i) The presence and extent of leveraged assistance in the proposal for the 

units that will serve tenants meeting Agency income limits at basic rents 

comparable to what the rent would be if the Agency provided full 

financing.

(ii) The proposal will provide rental units in a colonia, tribal land, Rural 

Economic Area Partnership (REAP) community, Enterprise Zone or 

Empowerment Community (EZ/EC) or in a place identified in the state 

Consolidated Plan or a state needs assessment as a high need community 

for MFH.

(iii) The proposal supports Agency initiatives announced in the NOFA.

(iv) The proposal uses a donated site which meets the following 

conditions:

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(A) The site is donated by a state, unit of local government, public 

body or a nonprofit organization;

(B) The site is suitable for the housing proposals and meets 

Agency requirements;

(C) Site development costs do not exceed what they would be to 

purchase and develop an alternative site;

(D) The overall cost of the MFH is reduced by the donation of the 

site; and

(E) A return on investment is not paid to the borrower for the value 

of the donated site nor is the value of the site considered as part of 

the borrower's contribution.

(2) The Agency will rank housing proposals based on their scoring.

(i) When proposals have an equal score, preference will be given to Indian 

tribes as defined in §3560.11 and local nonprofit organizations or public 

bodies whose principal purposes include low-income housing that meet 

the conditions of §3560.55(c) and the following conditions.

(A) Is exempt from Federal income taxes under section 501(c)(3) 

or 501(c)(4) of the Internal Revenue code;

(B) Is not wholly or partially owned or controlled by a for-profit 

or limited-profit type entity;

(C) Whose members, or the entity, do not share an identity of 

interest with a for-profit or limited-profit type entity;

(D) Is not co-venturing with another entity; and

(E) The entity or its members will not be receiving any direct or 

indirect benefits pursuant to LIHTC.

(ii) A drawing will be held in the event of a tie score, first for proposals 

from applicants who meet the conditions of paragraph (c)(2)(i) of this 

section and next for proposals from applicants for which paragraph 

(c)(2)(i) of this section is not applicable. Each proposal will be numbered 

in the order in which it is drawn.

(3) The Agency will request initial loan applications from parties who submitted 

the housing proposals with the highest ranking, taking into consideration available 

funds. The Agency will notify non-selected parties with the reasons for their nonselection, and the process that may be used to seek a review of the non-selection 

decision.

(d) Processing initial loan applications. The Agency will review all initial loan 

applications submitted in accordance with Agency requirements to further evaluate the 

eligibility and feasibility of the housing proposals. This determination will include:

(1) A review of the preliminary plans and cost estimates,
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(2) A market feasibility review,

(3) An Agency site visit to gather preliminary environmental information and 

determine that the proposed site meets the site requirements of §3560.58,

(4) A review of the Affirmative Fair Housing Marketing Plan,

(5) An analysis of current credit reports,

(6) A review of Civil Rights Impact Analysis in accordance with 7 CFR part 

2006, subpart P, and

(7) Completion of environmental review requirements in accordance with 7 CFR 

part 1970. (Revised 04-01-16, SPECIAL PN.)

(e) Processing order of initial loan applications. The Agency will process initial loan 

applications in rank order, taking into account available funds. If any initial loan 

applications are withdrawn, rejected, or delayed for a period of time that will not permit 

funding in the current funding cycle, the Agency will process, in rank order, the next 

initial loan application as funding levels permit.

(f) Other assistance. During each stage of loan application processing, loan applicants 

must notify the Agency of all other assistance, including other Federal Government 

assistance proposed or approved for use in connection with the loan application.

(g) Proposal withdrawal or rejection. An applicant may withdraw a housing proposal, an 

initial loan application, or a final loan application at any time during the Agency review 

process with a written request. The Agency may reject a housing proposal, an initial loan 

application, or a final loan application at any time during the Agency review process 

when an applicant fails to provide information requested by the Agency within the time 

frame specified by the Agency.

(h) Final applications. Applicants, with initial loan applications that are selected by the 

Agency for further processing, must submit a final application, with any additional 

information requested by the Agency, to confirm and document a housing proposal's 

eligibility and feasibility, including an affirmative fair housing marketing plan. The 

Agency will notify applicants with initial loan applications that are not selected for 

further processing of their non-selection, the reasons for their non-selection, and the 

process that may be used to seek a review of the non-selection decision.

(i) Rural cooperative housing proposals. Rural cooperative housing loan proposals will 

be solicited through a NOFA and will be assessed and processed in the same manner 

described in paragraphs (a) through (h) of this section.

§3560.57 Designated places for section 515 housing.

(a) Establish a list of designated places. The Agency will establish a list of designated 

places from which loan proposals will be accepted. The list is updated each fiscal year 

and is available when the NOFA is published. The NOFA provides information on 

obtaining the list. This list will be developed from a list of rural places which the Agency 

identifies as having the greatest need for multifamily housing based on the following 

factors:

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(1) Qualification as a rural area as defined in §3560.11,

(2) Lack of mortgage credit, and

(3) Demonstrated need for MFH based on:

(i) The incidence of poverty,

(ii) The existence of substandard housing,

(iii) The lack of affordable housing, and

(iv) The following high need areas:

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

plan or needs assessment report,

(B) Indian reservations or communities located within the 

boundaries of tribal allotted or trust land, and

(C) EZ/EC or REAP communities.

(b) Establishing partnership designated place list. The Agency, in states with an active 

leveraging program and formal partnership agreement with the state agency, may 

establish a partnership designated place list consisting of places identified by the 

partnership as high need areas based on criteria consistent with the Agency's and the 

state's authorizing statutes. The partnership agreement and partnership designated place 

list must have the concurrence of the Administrator.

(c) Administrator's discretion. The Administrator may add to the list of designated 

places any place that is determined to have a compelling need for MFH, for example, a 

place that has had a substantial increase in population not reflected in the most recent 

census data, or a place that has experienced a loss of affordable housing because of a 

natural disaster.

(d) Restrictions on loans in certain designated places.

(1) Initial loan applications will not be requested and final loan applications will 

not be closed for housing proposals in designated places where any of the 

following conditions exist:

(i) The Agency has selected another MFH proposal in the designated place 

for processing.

(ii) A previously funded Agency, the U.S. Department of Housing and 

Urban Development (HUD), low-income housing tax credit or other 

similar assisted MFH in the designated place has not been completed or 

has not reached projected occupancy levels.

(iii) Existing assisted MFH in the designated place is experiencing high 

vacancy levels.

(iv) A special note rent or other loan servicing tool is pending or 

in effect for other assisted housing in the designated place, or
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(v) The need in the market area is for additional rental assistance and not

additional rental units.

(2) Exceptions to the provisions in §3560.57(d)(1) may be made:

(i) When a group home is proposed for persons with disabilities in an area 

where the existing MFH is insufficient or unavailable for their needs; or

(ii) There is a compelling need for additional MFH, for example when the 

units that have been approved or are under development represent only a 

small portion of the total units needed in the community.

§3560.58 Site requirements.

(a) Location. 

(1) New construction section 515 loans will be made only in designated places 

selected by the Agency in accordance with the requirements of §3560.57.

(2) Agency-financed MFH must be located in residential areas as part of 

established rural communities, except as permitted in §3560.58(b), and for farm 

labor housing units financed under sections 514 and 516, which may be 

developed in any area where a need for farm labor housing exists.

(3) Communities in which Agency-financed MFH is located must have adequate 

facilities and services to support the needs of tenants.

(4) Housing complexes will not be located in areas where there are undesirable 

influences such as high activity railroad tracks; adjacent to or near industrial sites; 

bordering sites or structures which are not decent, safe, or sanitary; or bordering 

sites which have potential environmental concerns such as processing plants. 

Sites which are not an integral part of a residential community and do not have 

reasonable access, either by location or terrain, to essential community facilities 

such as water, sewerage removal, schools, shopping, employment opportunities, 

medical facilities, may not be acceptable. Consistent with Federal law and

Departmental Regulation, the Agency must conduct an environmental assessment 

and a civil rights impact analysis before a site can be accepted. Sites may be 

determined by the Agency to be unacceptable if any of the adverse conditions 

described in this paragraph exist.

(b) Structures located in central business areas. The Agency will consider financing 

construction or the purchase and substantial rehabilitation of an existing structure located 

in the central business area of a rural community. With prior consent from the Agency, a 

portion of such a structure may be designated for commercial use on a lease basis. RHS 

funds may not be used to finance any cost associated with the commercial space.

(c) Site development costs and standards. The cost of site development must be less than 

or comparable to the cost of site development at other available sites in the community 

and the site must be developed in accordance with 7 CFR part 1924, subpart C and any 

applicable standards imposed by a state or local government.

(d) Densities. Allowable site densities will be determined based on the following 

criteria:

(02-24-05) SPECIAL PN

Revised (04-01-16) SPECIAL PN
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(1) Compatibility and consistency with the community in which the MFH is 

located;

(2) Impact on the total development costs; and

(3) Size sufficient to accommodate necessary site features.

(e) Flood or mudslide-prone areas. 

(1) The Agency will not approve sites subject to 100-year floods when nonfloodplain sites exist. The environmental review process will assess the 

availability of a reasonable site outside the 100-year floodplain.

(2) Sites located within the 100 year floodplain are not eligible for federal 

financial assistance unless flood insurance is available through the National Flood 

Insurance Program (NFIP). The Agency will complete Federal Emergency 

Management Agency (FEMA) Form 81-93, Standard Flood Hazard 

Determination, to document the site's location in relation to the floodplain and the 

availability of insurance under NFIP.

§3560.59 Environmental review requirements.

Under the National Environmental Policy Act, the Agency is required to assess the 

potential impact of the proposed action on protected environmental resources. Measures to avoid 

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

design. Therefore, a site cannot be approved until the Agency has completed the environmental 

review requirements in accordance with 7 CFR part 1970. Likewise, the applicant should be 

informed that the environmental review must be completed and approved before the Agency can 

make a commitment of resources to the project. (Revised 04-01-16, SPECIAL PN.)

§3560.60 Design requirements.

(a) Standards. All Agency-financed MFH will be constructed in accordance with 7 CFR 

part 1924, subpart A and will consist of two or more rental units plus appropriate related 

facilities. Single family structures may be used for group homes and cooperative 

housing. Also, manufactured homes may be used to create MFH and single family 

housing originally financed through section 502 of the Housing Act of 1949 may be 

converted to MFH. Maintenance requirements are listed in §3560.103(a)(3).

(b) Residential design. All MFH must be residential in character, except as provided for 

in §3560.58(b), and must meet the needs of eligible residents.

(c) Economical construction, operation and maintenance. Taking into consideration life- cycle costs, all housing must be economical to construct, operate, and maintain and must 

not be of elaborate design or materials.

(1) Economical construction means construction that results in housing of at least 

average quality with amenities that are reasonable and customary for the 

community and necessary to appropriately serve tenants.
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(2) Economical operating and maintenance means housing with operational and 

maintenance costs that allow a basic rent structure less than or consistent with 

conventional rents for comparable units in the community or in a similar 

community except that when determined necessary by the Agency to allow for 

decent, safe and sanitary housing to be provided in market areas where 

conventional rents are not sufficient to cover necessary operating, maintenance, 

and reserve costs. Basic rents may be allowed to exceed comparable rents for 

conventional units, but in no case may the rent exceed 150% of the comparable 

rent for conventional unit rent level.

(3) In meeting the Agency objective of economical construction, operation and 

maintenance, housing proposals must:

(i) Contain costs without jeopardizing the quality and marketability of the 

housing;

(ii) Employ life-cycle cost analyses acceptable to the Agency to 

determine the types of materials which will reduce overall costs by 

lowering operation and maintenance costs, even though their initial costs 

may be higher; and

(iii) Provide assurances that costs will be reduced when the Agency 

determines that housing costs are not economical. If assurances cannot be 

provided, funding may be withdrawn.

(4) The housing proposal will give maximum consideration to energy 

conservation measures and practices.

(d) Accessibility. All housing will meet the following accessibility requirements.

(1) For new construction of MFH, at least 5 percent of the units (but not less than 

one) must be constructed as fully accessible units to persons with disabilities. The 

Uniform Federal Accessibility Standards (UFAS) will be followed. Individual 

copies of these standards are available from the Architectural and Transportation

Barriers Compliance Board, 1331 F Street, NW, Suite 1000, Washington, DC 

20004-1111, Telephone: (202) 272-0080, TTY: (202) 272-0082, e-mail address: 

info@access-board.gov. When calculating how many accessible units are 

required, always round up to the next whole number to ensure the 5 percent 

requirement is met.

(2) For existing properties that do not have fully accessible units, the 5 percent 

requirement will apply when making substantial alterations as defined by UFAS. 

The UFAS defines substantial alteration as “alteration to any building or facility is 

to be considered substantial if the total cost for a twelve month period amounts to 

50 percent or more of the full and fair cash value of the building * * *” UFAS 

further defines full and fair cash value as “the assessed valuation of a building or 

facility as recorded in the assessor's office of the municipality and as equalized at 

one hundred percent (100%) valuation, or the replacement cost, or the fair market 

value.” The 5 percent rule will also apply to repair or renovation work on a single 

unit. For instance, if a unit is damaged by fire and extensive repair is necessary, 

to the extent possible the unit is to be converted to a fully accessible unit.

(02-24-05) SPECIAL PN 
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(3) The variety of bedroom quantities of fully accessible units will be comparable 

to the variety of bedroom quantities of units which are not fully accessible. 

Borrowers will not, however, be required to exceed the 5 percent requirement 

simply to have an accessible unit of each bedroom quantity. In addition, 

accessible units should be distributed throughout the complex so not to 

concentrate the units in one location.

(4) All MFH must meet:

(i) The accessibility requirements as contained in section 504 of the 

Rehabilitation Act of 1973;

(ii) The requirements of the Fair Housing Amendments Act of 1988;

(iii) The requirements of the Americans with Disabilities Act of 1990, as 

applicable; and

(iv) All other Federal, State, and local requirements. When architectural 

standards differ, the most stringent standard will be followed.

§3560.61 Loan security.

(a) General. Each loan made by the Agency will be secured in a manner that adequately 

protects the financial interest of the Federal Government throughout the period of the 

loan.

(b) Lien position. 

(1) The Agency will seek a first or parity lien position on Agency-financed 

property in all instances. The Agency may accept a junior lien position if the 

Federal Government's interests are adequately secured.

(2) The Agency will seek a first or parity lien on revenue from rent; Agency, 

HUD, state or private rental subsidy payments; chattels; assignments; and 

operating and reserve accounts. The Agency will accept a junior lien position if 

the Federal Government's interests are adequately secured.

(c) Liability. Personal liability will be required of all individual borrowers. Personal 

liability will not be required for the members or stockholders of any corporation or trust 

or any partners in a limited partnership.

(d) Housing and land ownership. Applicants must own the MFH and related land for 

which the loan is being requested, or become the owner when the loan is closed or have a 

leasehold interest in the land. If an applicant is not the owner of the housing and the 

related land, the following conditions must be met prior to or at loan closing.

(1) A recorded mortgage on the improvements is given as collateral.

(2) The amount of the loan against the collateral does not exceed its estimated 

security value.

(3) The unexpired term of the lease on the date of loan closing is at least 50 

percent longer than the term of the loan and rent charged for the lease does not 

exceed the rate being paid for similar leases in the area.
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(4) The applicant's leasehold interest is not subject to summary foreclosure or 

cancellation.

(5) The lease permits:

(i) The Agency to foreclose the mortgage and to transfer the lease;

(ii) The Agency to bid at a foreclosure sale or to accept voluntary 

conveyance of the security in lieu of foreclosure;

(iii) The Agency to occupy the property, sublet the property, or sell the 

leasehold for cash or credit if the leasehold is acquired through 

foreclosure, if the Agency accepts voluntary conveyance in lieu of 

foreclosure, or if the borrower abandons the property; and

(iv) The applicant, in the event of default or inability to continue with the 

lease and the loan, to transfer the leasehold subject to the mortgage to a 

transferee that will assume the property ownership obligations.

§3560.62 Technical, legal, insurance, and other services.

(a) Legal services. Applicants must have written contracts for any legal services that are 

to be paid out of Agency loan funds.

(b) Title clearance. Applicants must obtain title clearance in accordance with the 

provisions of 7 CFR part 1927, subpart B applicable to title clearance, which would 

include title insurance or title opinion, unless the loan applicant is leasing the property or 

is an organization or an individual with special title or loan closing problems, in which

case title clearance and related legal services will be obtained in accordance with 

procedures approved by the Agency.

(c) Architectural services. Applicants must obtain a written contract for architectural 

services in accordance with the provisions of 7 CFR part 1924, subpart A.

(d) Insurance. Applicants must have property and liability coverage at loan closing as 

well as flood insurance, if needed. Fidelity coverage must be in force as soon as there are 

assets within the organization and it must be obtained before any loan funds or interim 

financing funds are made available to the borrower. At a minimum, applicants must meet 

the property, liability, flood, and fidelity insurance requirements in §3560.105.

(e) Surety bonding. Applicants must comply with the surety bonding provisions of 7 

CFR part 1924, subpart A.

§3560.63 Loan limits.

(a) Determining the security value. The security value for an Agency loan is the lesser 

of the total development cost (exclusive of any developer's fee as provided by paragraph 

(d)(2) of this section) or the housing project's security value as determined by an 

appraisal conducted in accordance with subpart P of this part, minus any prior or parity 

liens on the housing project. For purposes of determining security value:

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(1) Total development cost must be calculated excluding costs not considered 

allowable under §3560.54(a), and excluding costs related to compliance with the 

Uniform Relocation Assistance and Real Property Acquisition Act of 1970.

(2) The appraisal, which will determine the market value, subject to restricted 

rents, will be obtained by the Agency and conducted in accordance with subpart P 

of this part.

(b) Limitations on loan amounts. The Agency will not make any loans without adequate 

security. The following limitations will be set on loan amounts:

(1) For all loan applicants who will receive benefits from the low-income housing 

tax credit program, the amount of Agency financing for the housing will not 

exceed 95 percent of the security value available for the Agency loan.

(2) For all loan applicants who will not receive low-income housing tax credit 

benefits and who are comprised solely of nonprofit organizations, consumer 

cooperatives, or state or local public 

agencies, the amount of the loan will be limited to the security value available for 

the Agency loan, plus the 2 percent initial operating capital and any necessary 

relocation costs incurred.

(3) For all other loan applicants who will not receive low-income housing tax 

credit benefits, the loan amount will be limited to no more than 97 percent of the 

security value available for the Agency loan.

(c) Equity contribution. Loan applicants, with the exception of nonprofit organizations, 

consumer cooperatives, or state or local public agencies who will not be receiving tax 

credits, must make an equity contribution from their own resources.

(1) Loan applicants who will receive benefits from the low-income housing tax 

credit program must make an equity contribution in the amount of 5 percent of the 

Agency loan. The maximum Agency loan will be determined in accordance with 

§3560.63(b).

(2) Loan applicants who will not receive benefits from the low-income housing 

tax credit program and are not nonprofit organizations, consumer cooperatives, or 

state or local public agencies must make an equity contribution in the amount of 3 

percent of the Agency loan. The maximum Agency loan will be determined in 

accordance with §3560.63(b).

(d) Review of assistance from multiple sources. The Agency will analyze Federal 

Government and other assistance provided to any MFH project to establish the maximum 

loan amount and to assure that the assistance is not more than the minimum necessary to

make the housing affordable, decent, safe, and sanitary to potential tenants.

(1) Determining minimum assistance. For purposes of determining minimum 

assistance, the total amount paid for builder's profit, overhead, and general 

requirements may not exceed 21 percent of the construction contract. Unless 

specified differently in a Memorandum of Understanding between the Agency 

and the state agency that allocates low-income housing tax credits, limits will be 

those specified in §3560.53(l).
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(2) Developer's fee. While, in accordance with §3560.54(a)(9), payment of a 

developer's fee is not an eligible use of Agency loan funds, the Agency will 

include in total development costs a developer's fee paid from other sources when 

analyzing the Federal Government assistance to the housing. The Agency may 

recognize a developer's fee paid from other sources on construction or 

rehabilitation of up to 15 percent of the total development costs authorized for 

low-income housing tax credit purposes, or by another Federal Government 

program. Likewise for transfer proposals that include acquisition costs, the 

developer's fee on the acquisition cost may be recognized up to 8 percent of the 

acquisition costs only when authorized under a Federal Government program 

providing assistance. The developer's fee is not included in determining the 

Agency's maximum debt limit and loan amount. 

(e) Limits on equity loans. For equity loans to avert prepayment, the amount of the 

Agency equity loan will be limited to no more than the difference between 90 percent of 

market value of the property when appraised as conventional unsubsidized MFH and all 

current unpaid balances. For information on appraisal issues, refer to subpart P of this 

part.

(f) Cost overruns. 

(1) All applicants must agree in writing to provide funds at no cost to the housing 

and without pledging the housing as security to pay any cost for completing 

planned construction after the maximum debt limit is reached.

(2) After loan approval, the Agency will only approve cost increases for housing 

proposals involving new construction or major rehabilitation when the additional 

costs will not cause the limits specified in §3560.53(l) or the maximum debt limit 

to be exceeded and the cost increases were caused by:

(i) Unforeseen factors that are determined by the Agency to be beyond the 

borrower's control;

(ii) Design changes required by the Agency, state, or the local 

government; or

(iii) Financing changes approved by the Agency.

§3560.64 Initial operating capital contribution.

Borrowers are required to make an initial operating capital contribution to the general 

operating account in the amount of at least 2 percent of the total development cost or appraised 

value, whichever is less.

(a) Borrowers that are nonprofit organizations, consumer cooperatives, or state or local 

public agencies and are not receiving low-income housing tax credits, may use loan funds 

for their initial operating capital contribution. All other borrowers must fund the initial 

operating capital contribution from their own resources.

(02-24-05) SPECIAL PN 

Revised (03-31-22) SPECIAL PN
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(b) Borrowers must provide to the Agency for approval a list of materials and equipment to be 

funded from the general operating account for initial operating expenses. As specified in 

§3560.304(b), initial operating capital may be used only to pay for approved budgeted expenses. 

If total initial operating expenses exceed 2 percent, the additional amount must be paid by the 

borrower from its own resources, except that borrowers meeting the provisions of §3560.64(a) 

who do not have sufficient resources for this purpose may request Agency assistance. 

Withdrawals from the reserve account will not be approved for such expenses.

(c) Borrowers must provide the Agency with documentation of their initial operating capital 

contribution deposited into the general operating account prior to the start of construction or loan 

closing, whichever comes first, and such funds thereafter, may only be used for authorized

budgeted purposes.

(d) If the conditions specified in §3560.304(c) are met, funds contributed as initial operating 

capital may be returned to the borrower.

§3560.65 Reserve account.

(a) For new construction, to meet major capital expenses of a housing project, applicants must 

establish and fund a reserve account that meets the requirements of §3560.306. The applicant 

must agree to make monthly contributions to the reserve account pursuant to reserve account 

analysis which sets forth how the reserve account funds will meet the capital needs of the 

property over an acceptable 20 year period. The reserve account analysis is based on either a 

Capital Needs Assessment or life cycle cost analysis, provided and acceptable to Rural 

Development by the applicant. Adjustments may be made to the contribution amount at 5 or 10-

year intervals, either through an updated Capital Needs Assessment or as part of the original life 

cycle cost analysis. The cost of conducting either a Capital Needs Assessment or life cost 

analysis will be paid for by the applicant. The cost of the initial Capital Needs Assessment or life 

cost analysis may be included in the loan financing.

(b) For ownership transfers or sales, the requirements of §3560.406 (d) (5) will be met.

(c) For other existing properties, at a minimum the borrower must agree to make monthly 

contributions to the reserve account at the rate of 1 percent annually of the amount of total 

development cost until the reserve account equals 10 percent of the total development cost.

(d) The agency may establish an escrow account for the collection and disbursement of reserve 

account funds.

§3560.66 Participation with other funding or financing sources.

(a) General requirements. The Agency encourages the use of funding or financing from other 

sources in conjunction with Agency loans. When the Agency is not the sole source of financing 

for MFH, the following conditions must be met.

(1) The Agency will enter into a participation (or intercreditor) agreement with the other 

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

(2) The rental units that will serve tenants eligible for housing under the Agency's income 

standards must meet Agency standards and the number of units that will serve the 

Agency's tenants are at least equal to the units financed by the Agency.
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(3) All rental units must be operated and managed in compliance with the 

requirements of the Agency and the other sources. To the extent these 

requirements overlap, the most stringent requirement must be met. The Agency 

may negotiate the resolution of overlapping requirements on a case-by-case basis; 

however, at a minimum, Agency requirements must be met.

(4) If the number of units subject to the LIHTC rent and income restrictions is 

greater than the number of units projected to receive Agency rental assistance 

(RA) or similar tenant subsidy, the market feasibility documentation must clearly 

reflect a need and demand by LIHTC income-eligible households financially able 

to afford the projected rents without such a subsidy for the units not receiving RA 

or similar tenant subsidy.

(b) Rental assistance. The Agency may provide rental assistance with MFH loans 

participating with other sources of funding under the following conditions:

(1) The Agency's loan equals at least 25 percent of the housing's total 

development cost.

(2) The rental assistance is provided only to those rental units where the basic 

rents do not exceed what basic rents would have been had the Agency provided 

full financing.

(3) The provisions of subpart F of this part are met.

(c) Security requirements. The security requirements of 3560.61 must be met for all 

Agency-financed MFH participating with other sources of funding.

(d) Reserve requirements. Reserve account requirements will be determined on a case- by-case basis, taking into consideration the reserve requirements of the other participating 

lenders, so that the aggregate fully funded reserve account is consistent with the 

requirements of §3560.65. Reserve requirements and procedures for reserve account 

withdrawals must be agreed upon by all lenders and included in the intercreditor or 

participation agreement.

(e) Design requirements. Housing and related facilities must be planned and constructed 

in accordance with 7 CFR 1924, subparts A and C. If housing includes non-Agency 

financed common facilities, the following conditions must be met:

(1) The non-Agency-financed common facility's operating and maintenance costs 

must be paid through collection of a user fee from residents who use the facility,

(2) The non-Agency-financed common facility must be designed and operated 

with appropriate safeguards for the health and safety of tenants, and

(3) The facility must be fully available and accessible to all tenants.

(02-24-05) SPECIAL PN 

Revised (02-26-13) PN 460
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§3560.67 Rates and terms for section 515 loans.

Rates and terms for farm labor housing loans are found in subpart L of this part for 

Off-Farm and subpart M of this part for On-Farm.

(a) Interest. Loans will be closed at the lower of the interest rate in effect at the time of 

loan approval or the interest rate that is in effect at time of loan closing.

(b) Interest credit. The Agency will provide interest credit to subsidize the interest on 

the Agency loan to a payment rate of 1 percent for all of the Agency's initial and 

subsequent loans.

(c) Amortization period and term. 

(1) Except for manufactured housing, loans will be amortized over a period not to 

exceed the lesser of the economic life of the housing being financed or 50 years 

and paid over a term not to exceed 30 years from the date of loan. The Agency 

may make a loan to the borrower to finance the final payment of a loan in 

accordance with §3560.74.

(2) Loans for manufactured housing will be amortized and paid over a term not to 

exceed 30 years as specified in §3560.70(c).
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§3560.68 Permitted return on investment (ROI).

(a) Permitted return. Borrowers operating on a limited profit basis will be permitted a 

return not to exceed 8 percent of their required initial investment determined at the time 

of loan approval in accordance with §3560.63(c).

(b) Calculation of permitted return. The permitted return will be based on the borrower's 

contributions from their own resources, which, when added to the Agency loan amount 

and all sources of funding or financing, do not exceed the security value of the MFH 

project as specified in §3560.63(a).

(1) Proceeds received by the borrower from the syndication of low-income 

housing tax credit and contributed to the MFH project may be considered funds 

from the borrower's own resources for the portion of the proceeds which exceeds:

(i) The allowable developer's fee determined by the state agency 

administering the low-income housing tax credit, and

(ii) The borrower's expected contribution to the transaction, as determined 

by the state agency administering the low-income housing tax credit.

(2) A building site contributed by the borrower will be appraised by the Agency to 

determine its market value. A return may not be allowed on the amount above the 

equity contribution required by §3560.63(c) if the market value as determined by 

the Agency, when added to the loan and grant amounts from all sources, exceeds 

the security value of the MFH project as specified in §3560.63(a).

(c) Return on additional investment. The initial investment may exceed the equity 

contribution required by §3560.63(c) and a return allowed on the investment if the 

additional return does not increase basic rents and rental assistance costs above what 

basic rents and rental assistance costs would have been with the Agency financing 95 or 

97 percent of the total development cost.

(d) Compensation to nonprofit organizations. Although nonprofit organizations are not 

eligible to take a return on investment, with prior Agency approval, cooperatives and 

nonprofit organizations may use housing project funds to pay asset management expenses 

directly attributable to ownership responsibilities, as described in §3560.303(b)(1)(ii).

§3560.69 Supplemental requirements for congregate housing and group homes.

(a) General. Congregate housing and group homes must be planned and developed in 

accordance with 7 CFR part 1924, subparts A and C.

(b) Design criteria. Congregate housing and group homes must be designed to 

accommodate all special services that will be provided.

(c) Services. Congregate housing and group home loan applicants, as part of their loan 

request, must submit a plan to make affordable services available to residents to assist the 

residents in living independently. The plan must address the availability of this

assistance from service providers throughout the term of the loan.

(1) For congregate housing, the resident services plan must address how the 

following services will be provided or made available:

(i) One cooked meal per day, seven days per week;
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(ii) Transportation to and from the property;

(iii) Assistance in housekeeping;

(iv) Personal services;

(v) Recreational and social activities; and

(vi) Access to medical services.

(2) For group homes, the resident services plan must address how access to the 

following services will be provided or made available:

(i) A common kitchen in which to prepare meals;

(ii) Transportation;

(iii) Nearby recreational and social activities which may be coordinated by 

the resident assistant, if applicable; and

(iv) Medical services as necessary.

(d) Necessary items. Borrowers must ensure items such as tables, chairs, and cookware 

necessary to furnish common areas are made available to congregate housing or group 

homes. The 2 percent initial operating capital may be used to purchase these items.

(e) Association with other organizations. Congregate housing and group homes may 

coordinate services or training with another organization, such as a workshop for the 

developmentally disabled. However, the housing facility must be a separate entity and 

not dependent on the other organization.

(f) Market feasibility documentation. Market feasibility documentation for congregate 

housing and group homes is subject to the following requirements:

(1) Must address the need for housing with services and include information 

concerning alternative service providers;

(2) Must contain demographic information pertaining to the population that is to 

be served by the congregate housing or group home project; and

(3) May consider an expanded market area that includes nondesignated places, but 

the facility must be located in a designated place.

(g) Rental assistance for group homes. A unit in a group home consists of a space 

occupied by a specific tenant household, which may be an apartment unit, a bedroom, or 

a part of a bedroom. Agency rental assistance will be made available to tenants sharing a 

unit so long as the total rent for the unit does not exceed conventional rents for 

comparable units in the area or a similar area.

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§3560.70 Supplemental requirements for manufactured housing.

(a) Design requirements. Manufactured housing must meet the requirements of 7 CFR 

part 1924, subpart A applicable to manufactured housing.

(b) Eligible properties. The manufactured housing must include two or more housing 

units. The applicant will become the first owner purchasing the manufactured homes for 

purposes other than resale. The following exceptions may be made to this provision:

(1) A housing proposal may include the purchase of the real property with 

existing manufactured housing which will be redeveloped with the placement of 

new manufactured homes.

(2) A housing proposal may include the rehabilitation of existing manufactured 

housing only if the units to be rehabilitated are currently financed by the Agency. 

The proposal will include the results of the applicant's consultation with the 

manufacturer to determine if the proposed rehabilitation work will affect the 

structural integrity of the unit and, if so, the statement will include an explanation 

as to how.

(c) Terms. The maximum loan amount will be determined in accordance with the 

requirements of §3560.63. The amortization period and term of loans for manufactured 

housing will not exceed the lesser of the economic life of the housing being financed or 

30 years.

(d) Security. A mortgage or deed of trust will be taken on the entire property purchased 

or improved with the loan. The encumbered property must be covered under a standard 

real estate title insurance policy or attorney's title opinion that identifies the housing as 

real property and insures or indemnifies against any loss if the manufactured home is 

determined not to be part of the real property. The property must be taxed as real estate 

by the jurisdiction where the housing is located if such taxation is permitted under 

applicable law when the loan is closed.

(e) Special warranty requirements. The general contractor or dealer-contractor, as 

applicable, must provide a warranty in accordance with the provisions of 7 CFR part 

1924, subpart A.

(1) The warranty must establish that the manufactured homes, foundations, 

positioning and anchoring of the units to their permanent foundations, and all 

contracted improvements, are constructed in conformity with applicable approved 

plans and specifications.

(2) The warranty must include provisions that the manufactured homes sustained 

no hidden damage during transportation and, for double-wide units, that the 

sections were properly joined and sealed.

(3) The general contractor or dealer contractor must warrant that the 

manufacturer's warranty is in addition to and does not diminish or limit all other 

warranties, rights, and remedies that the borrower or lender may have.

(4) The seller of the manufactured homes must deliver to the borrower the 

manufacturer's warranty with an additional copy for RHS. The warranty must 

identify the units by serial number.

(02-24-05) SPECIAL PN

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§3560.71 Construction financing.

(a) Construction financing plan. Prior to loan approval, applicants must submit to the 

Agency for its concurrence a plan for the construction financing and securing of the loan.

(b) Interim financing. Interim financing is required by the Agency for any construction, 

except as noted in paragraph (c) of this section.

(1) The Agency reserves the right to review and approve the interim financing 

arrangements proposed by the applicant.

(2) When interim financing is used, the Agency will obligate the funds and 

provide an interim financing letter to the lender that will confirm the procedures 

and conditions for the construction financing. The take-out loan will be closed 

and the interim lender paid off when the conditions of the interim financing letter 

have been met.

(3) The applicable provisions of 7 CFR part 1924, subpart A will be used to 

monitor the construction.

(4) An environmental review in accordance with 7 CFR part 1970 must be 

completed prior to issuance of the interim financing letter. (Revised 04-01-16, 

SPECIAL PN.)

(c) Multiple advances. When interim financing is not available or when it is in the best 

interest of the Federal Government, the Agency may provide for multiple advances of the 

funds to cover the cost of construction.

(1) The Agency will review and approve the multiple advances proposed by the 

borrower.

(2) When multiple advances are used, the Agency will close the loan prior to any 

advancement of funds and the relevant provisions of 7 CFR part 1924, subpart A 

will be used to monitor the construction.

(3) The loan check will be handled in accordance with 7 CFR part 1902, subpart 

A.

§3560.72 Loan closing.

(a) Requirements. Loans will be closed in accordance with 7 CFR part 1927, subpart B 

and any state supplements. In all cases, the borrower must:

(1) Provide evidence that an Agency-approved accounting system is in place;

(2) Execute a restrictive-use contract acceptable to the Agency that establishes the 

borrower's obligation to operate the housing for program purposes for the term of 

the Agency loan;

(i) For all section 514 loans, except as provided in §3560.621, made 

pursuant to a contract entered into on or after the effective date of this 

regulation, the following language will be included in the mortgage
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and deed of trust: “The borrower and any successors in interest agree to use the 

housing for the purpose of housing people eligible for occupancy as provided in 

sections 514 and 516 of title V of the Housing Act of 1949, and Rural Housing 

Service regulations then in effect. The restrictions are applicable for a term of 20 

years from the date on which the last loan was closed. No eligible person 

occupying the housing will be required to vacate nor any eligible person denied 

occupancy for housing prior to the close of such period because of a prohibited 

change in the use of the housing. A tenant or person wishing to occupy the 

housing may seek enforcement of this provision as well as the Government.”

(ii) All other loans are subject to restrictive-use provisions as outlined in subpart 

N of this part.

(3) Provide evidence that construction financing arrangements are adequate when interim 

financing is going to be used;

(4) Provide evidence that all the funds from other sources as proposed in the application 

are available and that there have been no changes in the Sources and Uses

Comprehensive Evaluation (SAUCE).

(5) Provide evidence of the title to all security required by the Agency;

(6) Provide a certification that all construction in the case of interim financing has been 

or, in the case of multiple advances, will be paid;

(7) Provide, in the case of interim financing, a dated and signed statement from the 

owner's architect certifying to substantial completion of the housing project;

(8) Provide a certification that all construction in the case of interim financing has been

or, in the case of multiple advances, will be in accordance with the plans and 

specifications concurred in by the Agency;

(9) Provide evidence, if applicable, that the conditions of the interim financing letter have 

been met; and

(10) Attend a pre-occupancy conference with the Agency.

(b) Cost certification. In all cases, the borrower must report actual construction costs. Whenever 

the Leadership Designee determines it appropriate, and in all situations where there is an identity 

of interest as defined in 7 CFR 1924.4 (i), the borrower, contractor and any subcontractor, 

material supplier, or equipment lessor having an identity of interest must each provide 

certification as to the actual cost of the work performed in connection with the construction 

contract in accordance with 7 CFR part 1924, subpart A. The construction costs must also be 

audited in accordance with Governmental Auditing Standards, by a Certified Public Accountant 

(CPA). In some cases, the Agency will contract directly with a CPA for the cost certification. 

Funds that were included in the loan for cost certification and which are ultimately not needed 

because Agency contracts for the cost certification will be returned on the loan. Agency 

personnel will utilize exhibit M of 7 CFR part 1924, subpart A to assist in the evaluation of the 

cost certification process.

(c) Notification of loan cancellation. Loans may be canceled after approval and before loan 

closing. The Agency will notify all parties of the cancellation and the reasons for the cancellation 

in accordance with 7 CFR part 1927, subpart B.

(02-24-05) SPECIAL PN 

Revised (03-31-22) SPECIAL PN
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§3560.73 Subsequent loans.

(a) Applicability. The Agency may make a subsequent loan to a borrower to complete, 

improve, repair, or make modifications to MFH initially financed by the Agency or for 

equity for preservation purposes. Loan requests to add units to comply with accessibility 

requirements may be processed as a subsequent loan; however, loan requests to add units 

to meet market demand will be processed as an initial loan request and must compete 

under the NOFA.

(b) Application requirements and processing. Upon receipt of a subsequent loan request, 

the Agency will inform the applicant what information is required based on the nature 

and purpose of the loan request. Subsequent loan requests do not have to compete for 

funding against initial loan proposals.

(c) Amortization and payment period. Subsequent loans will be amortized over a period

not to exceed the lesser of the economic life of the housing being financed or 50 years 

and paid over a term not to exceed the lesser of the economic life of the housing or 30 

years from the date of the loan.

(d) Equity contribution. Applicants for subsequent loans must make contributions on the 

loans in the same proportion as outlined in §3560.63(c). Loan applicants will not be 

given consideration for any increased equity value that the property may have since the 

initial loan.

(1) Excess initial investment on an initial loan may be credited toward the 

required investment on a subsequent loan.

(2) An initial operating capital contribution to the general operating account as 

described in §3560.64 is required for a subsequent loan approved under the 

conditions set in §3560.63(f) to complete housing construction but is not required 

for a subsequent loan to repair or improve existing housing.

(e) Environmental review requirements. Actions taken under this part must comply with 

the environmental review requirements in accordance with 7 CFR part 1970. (Revised 

04-01-16, SPECIAL PN.)

(f) Design requirements. All improvements, repairs, and modifications will be in 

accordance with 7 CFR part 1924, subparts A and C.

(g) Architectural services. The applicant must obtain architectural services when any of 

the following conditions exist:

(1) Enclosed space is being added,

(2) When required by state law, and

(3) When the Agency determines that the work being proposed requires 

architectural services.

(h) Restrictive-use requirements. Subsequent loans are subject to restrictive-use 

provisions as outlined in §3560.662(a) and borrowers must execute a restrictive-use 

contract in accordance with §3560.72(a)(2).
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(i) Designation changes from rural to nonrural. If the designation of an area changes 

from rural to nonrural after the initial loan is made, a subsequent loan may be made only 

to make necessary improvements and repairs to the property or for equity when needed to 

avert prepayment.

(j) Agency's discretion. The Administrator may approve a subsequent loan in a place 

that is not on the list of designated places as a servicing action, for example, to replace 

units destroyed by a natural disaster.

§3560.74 Loan for final payments.

(a) Use. The Agency may finance final payments for borrowers holding existing loans 

for which the Agency approved an amortization period that exceeded the term of the 

loan.

(b) Requirements. The Agency may finance final payments if documentation regarding 

the market area shows that a need for low-income rental housing still exists for that area 

and one of the following conditions has been met.

(1) It is more cost efficient and serves the tenant base more effectively to maintain 

existing MFH than to build another property in the same location; or

(2) The MFH has been maintained to such an extent that it can be expected to 

continue providing affordable, decent, safe and sanitary housing for 20 years 

beyond the date of the loan to finance a final payment; and

(3) Funds are available.

(c) Term. The term of Agency loans to finance final payments will not exceed 20 years 

from the date of the initial loan final payment.

§§3560.75-3560.99 [Reserved]

§3560.100 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart C--Borrower Management and Operations Responsibilities

§3560.101 General.

This subpart sets forth borrower obligations regarding management and operations of 

multi-family housing (MFH) projects financed by the Agency. As noted in §3560.6, the 

borrower requirements listed in this subpart must be complied with by the borrower. The 

borrower may designate in writing a person to act as the borrower's authorized agent.
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§3560.102 Housing project management.

(a) General. Borrowers hold final responsibility for housing project management and must 

ensure that operations comply with the terms of all loan or grant documents, Agency 

requirements and applicable local, state and Federal laws and ordinances. 

Project operations shall be conducted to meet the actual needs and necessary expenses of the 

property or for any other purpose authorized under Agency regulations. Any party not meeting

these responsibilities may be subject to penalties. It is expected that only typical and reasonable 

expenses be incurred for the services rendered. Consequently, methods to inflate, duplicate, 

obscure, or failure to disclose the true nature and cost of work performed for the services 

rendered will cause the Agency to deny budget requests for the services or issue a demand for 

recovery and reimbursement for unauthorized actions.

(b) Management plan. Borrowers must develop and maintain a management plan for each 

housing project covered by their loan or grant. The management plan must establish the systems 

and procedures necessary to ensure that housing project operations comply with Agency 

requirements in this part. The management plan should describe whether administrative expenses 

are to be paid from management agent fees or project operations, including a task list of charges 

covered by the fee as outlined in paragraph (i)(3)(i)(A) of this section. The management plan 

must meet the standards set out in this part.

(1) At a minimum, management plans must address the following items:

(i) Maintenance systems, including procedures for routine maintenance, capital 

item repair and replacement, and effective energy conservation practices;

(ii) Personnel policies, job descriptions, staffing plans, training procedures for 

on-site staff. The Borrower will include specific duties and responsibilities of 

each property manager, site manager and caretaker;

(iii) Front-line management functions to be performed by off-site staff;

(iv) Plans and procedures for providing supplemental services including laundry, 

vending, and security;

(v) Plans for accounting, record keeping and meeting Agency reporting 

requirements;

(vi) Procurement procedures;

(vii) Rent and occupancy charge collection procedures, and procedures for 

requesting and implementing changes in rents, utility allowances, or occupancy 

charges;

(viii) Plans and procedures for marketing rental units and maintaining 

compliance with the Affirmative Fair Housing Marketing Plan in accordance 

with §3560.104;

(ix) Unit leases and leasing policies and procedures, including procedures for 

maintaining and purging waiting lists, determining applicant eligibility, certifying 

and recertifying income, tenant selection, and occupancy policies such as security 

deposit amounts, occupancy rules, termination of leases or occupancy

agreements and eviction;

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(x) Plans for allowing tenant participation in property operations and for 

fostering tenant relationships with management;

(xi) Procedures for applicant and tenant appeals; and

(xii) Describe how management will make known to tenants and 

applicants that management will provide reasonable accommodations 

under the Fair Housing Act, section 504 of the Rehabilitation Act of 1973, 

and regulations implemented there under at the borrower's expense unless 

to do so would cause an undue financial or administrative burden, how 

such requests are to be made, and who within management will have the 

authority to approve or disapprove a request for an accommodation.

(2) Loan or grant applicants must submit a management plan before the Agency 

will give final approval to the loan or grant application. The plan must address 

the required items identified in paragraph (b)(1) of this section in sufficient detail 

to enable the Agency to monitor housing project performance.

(c) Management plan effective period. A management plan remains in effect as long as 

it accurately reflects housing project operations and the housing project is in compliance 

with the Agency requirements.

(1) Borrowers must submit an updated management plan to the Agency if 

operations change or are no longer consistent with the management plan on file 

with the Agency.

(2) When there are no changes in operations, borrowers must submit a 

certification to the Agency every 3 years stating that operations are consistent 

with the management plan and the plan is adequate to assure compliance with the 

loan and grant documents and Agency requirements or applicable local, state and 

Federal laws.

(3) If the Agency determines that operations are in compliance with Agency 

requirements, loan or grant agreements, or applicable local, state, and Federal 

laws, but are not consistent with the management plan, the Agency will require 

the borrower to:

(i) Revise the management plan to accurately reflect housing operations;

(ii) Take actions to ensure the management plan is followed; or

(iii) Advise the Agency in writing of the action taken.

(4) When a housing project is being transferred from one borrower to another, the 

transferee must submit a management plan that addresses the required items 

identified in paragraph (b)(1) of this section in sufficient detail to enable the 

Agency to give final approval of the transfer.

(d) Housing projects with compliance violations. Upon receiving notice of compliance 

violations in accordance with §3560.354, borrowers must submit to the Agency:

(1) Revisions to the management plan establishing the changes in housing 

operations that will be made to restore compliance;

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(2) If the borrower determines the compliance violations were due to a failure to 

follow the management plan, the borrower must certify to the Agency that the 

management plan is adequate to assure compliance with the applicable 

requirements of this part and submit a written description of the actions they will 

take to ensure the management plan is followed; or

(3) If the Agency discovers continued discrepancies between a management plan 

and housing project operations or compliance violations, the Agency may require

the borrower to install a different management agent acceptable to the Agency as 

described in paragraph (e) of this section.

(e) Acceptable management agents. Borrowers must obtain Agency approval of the 

agent proposed to manage a housing project prior to entering into any formal agreement 

with the agent and prior to allowing the agent to assume responsibility for housing project 

operations. Borrowers that plan to self-manage a housing project also must receive 

Agency approval before assuming responsibility for housing operations. 

(1) Borrowers must submit a written request for Agency approval of the proposed 

management agent at least 45 days prior to the date the agent is to assume 

responsibility for operations. This request must include a profile of the proposed 

management agent that provides sufficient information to allow the Agency to 

evaluate whether the agent is acceptable.

(2) The Agency will deny approval of any proposed management agent that 

cannot provide evidence of at least two years of experience and satisfactory 

performance in directing and overseeing the management of similar federallyassisted MFH.

(3) The Agency may issue approval of a management agent that does not meet the 

requirements of §3560.102(e)(2) if the management agent can provide evidence 

that indicates the ability to successfully manage a MFH project in accordance 

with Agency requirements.

(4) If a borrower enters into an agreement with a management agent or begins to 

self-manage prior to receiving Agency approval, the Agency will place the 

borrower in non-monetary default status and will require the borrower to 

immediately terminate the contract with the management agent.

(f) Self-management. Borrowers may self-manage a housing project but must receive 

Agency approval before assuming responsibility for housing operations. Borrowers that 

plan to self-manage must meet all requirements of §3560.102, except for paragraph (h) of 

this section.

(g) Identity-of-interest disclosure. Borrowers and management agents must disclose to

the Agency all identity-of-interest relationships which they have with firms and must 

receive Agency approval to use such firms prior to entering into any contractual 

relationships with such entities that involve Agency funds.

(1) This disclosure must include any identity-of-interest relationships between:

(i) The borrower and the management agent;
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(ii) The borrower or management agent and the providers of supplies and 

services to the housing project; 

(iii) The borrower or the management agent and employees of anyone listed in 

paragraphs (g)(1)(i) and (ii) of this section.

(iv) Any borrower’s entity control, or interest held or possessed by a person’s 

spouse, parent, child, grandchild, or sibling or other relation by blood or marriage 

is attributed to that person for the determination under this paragraph (g)(1).

(2) Failure to disclose such relationships may subject the borrower, the management 

agent, and the other firms or employees found to have an identity of interest relationship 

to suspension, debarment, or other remedies available to the Agency.

(3) After disclosure of an identity-of-interest relationship:

(i) The borrower, management agent, and supplier of goods and services must 

provide documentation proving that use of identity-of-interest firms is in the best

interest of the housing project;

(ii) Any supplier of goods and services must certify in writing to the Agency that 

the individual or organization has a viable, on-going trade or business qualified 

and licensed, if appropriate, to do the work for which a contract is being 

proposed;

(iii) The borrower, management agent, and supplier of goods and services must 

agree, in writing, that all records related to the housing project will be made 

available to the Agency, Office of the Inspector General (OIG), General 

Accountability Office (GAO), or a representative of the Agency, upon request; 

and

(iv) The Agency will deny the use of an identity-of-interest firm when the 

Agency determines such use is not in the best interest of the Federal Government 

or the tenants.

(h) Management agreement. Borrowers contracting with a management agent must execute a 

management agreement that establishes:

(1) The management agent's responsibility to comply with Agency requirements and 

local, state, and Federal laws;

(2) That the management fee is payable out of the housing project's general operating 

account consistent with the requirements of paragraph (i) of this section; and

(3) The Agency's authority to terminate the agreement for failure to operate the housing 

project in accordance with Agency requirements or local, state, or Federal laws.

(i) Management fees. Management fees will be an allowable expense to be paid from the 

housing project’s general operating account only if the fee is approved by the Agency as a 

reasonable cost to the housing project and documented on the management certification. 

Management fees must be developed in accordance with the following:

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(1) The management fee may compensate the management entity for the following costs 

and services:

(i) Supervision by the management agent and its staff (time, knowledge, 

and expertise) of overall operations and capital improvements of the site.

(ii) Hiring, supervision, and termination of on-site staff. 

(iii) General maintenance of project books and records (general ledger, 

accounts payable and receivable, payroll, etc.). Preparation and 

distribution of payroll for all on-site employees, including the costs of 

preparing and submitting all appropriate tax reports and deposits, 

unemployment and workers’ compensation reports, and other IRS- or 

state-required reports. 

(iv) In-house training provided to onsite staff by the management 

company. 

(v) Preparation and submission of proposed annual budgets and 

negotiation of approval with the Agency. 

(vi) Preparation and distribution of the Agency forms and routine financial 

reports to borrowers. 

(vii) Preparation and distribution of required year-end reports to the 

Agency.

(viii) Preparation of requests for reserve withdrawals, rent increases, or 

other required adjustments. 

(ix) Arranging for preparation by outside contractors of utility allowance 

analysis. 

(x) Preparation and implementation of Affirmative Fair Housing 

Marketing Plans as well as general marketing plans and efforts. 

(xi) Review of tenant certifications and submission of monthly rental 

assistance requests, and overage. Submission of payments where required. 

(xii) Preparation, approval, and distribution of operating disbursements; 

oversight of project receipts; and reconciliation of deposits. 

(xiii) Overhead of management agent, including: 

(A) Establish, maintain, and control an accounting system 

sufficient to carry out accounting supervision responsibilities.

(B) Maintain agent office arrangements, staff, equipment, 

furniture, and services necessary to communicate effectively with 

the properties, to include consultation and support to site-staff, the 

Agency and with the borrowers. 

(C) Postage expenses unrelated to site operation.
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(D) Expense of telephone and facsimile communication, unrelated 

to site operations. 

(E) Direct costs of insurance (fidelity bonds covering central office 

staff, computer and data coverage, general liability, etc.) directly 

related to protection of the funds and records of the borrower. 

Insurance coverage for agent’s office and operations (Property, 

Auto, Liability, Errors and Omissions, Casualty, Workers 

Compensation, etc.). 

(F) Central office staff training and ongoing certifications. 

(G) Maintenance of all required profession and business licenses 

and permits. (This does not include project site office permits or 

licenses.) 

(H) Travel of agent staff to the properties for on-site inspection, 

training, or supervision activities. 

(I) Agent bookkeeping for their own business. 

(xiv) Attendance at meetings (including travel) with tenants, owners, and 

the Agency or other governmental agency.

(xv) Development, preparation, and revision of management plans, 

agreements, and management certifications. 

(xvi) Directing the investment of project funds into required accounts. 

(xvii) Maintenance of bank accounts and monthly reconciliations. 

(xviii) Preparation, request for, and disbursement of borrower’s initial 

operating capital (for new projects) as well as administration of annual 

owner’s return on investment. 

(xix) Account maintenance, settlement, and disbursement of security 

deposits. 

(xx) Working with auditors for initial Agency annual financial reports. 

(xxi) Storage of records, to include electronic records, and adherence to 

records retention requirements. 

(xxii) Assist on-site staff with tenant relations and problems. Provide 

assistance to on-site staff in severe actions (eviction, death, insurance loss, 

etc.). 

(xxiii) Oversight of general and preventive maintenance procedures and 

policies.

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(xxiv) Development and oversight of asset replacement plans.

(xxv) Oversight of preparation of section 504 reviews, development of plans, and 

implementation of improvements necessary to comply with plans and section 504 

requirements.

(2) Management fees may consist of a base per occupied revenue producing unit fee and 

add-on fees for specific housing project characteristics. Management entities may be 

eligible to receive the full base per occupied unit fee for any month or part of a month 

during which the unit is occupied. 

(i) Periodically, the Agency will develop a range of base per occupied unit fees 

that will be paid in each state. The Agency will develop the fees based on a 

review of housing industry data. The final base for occupied unit fees for each 

state will be made available to all borrowers.

(ii) Periodically, the Agency will develop the amount and qualifications to 

receive add-on fees. The final set of qualifications will be made available to all 

borrowers.

(3) Management plans and agreements must describe if administrative expenses are to be 

paid from the management fee or paid for as a project cost. 

(i) A task list should be used to identify which services are included in the 

management fee, which services are included in project operations, and which 

are pro-rated along with the methodology used to pro-rating of expenses between 

management agent fees and project operations. Some property responsibilities are 

completed at the property and some offsite. Agent responsibilities may be 

performed at the property, the management office, or at some other location.

(ii) Disputes may arise as to who performs certain services. The management 

plan and job descriptions should normally provide sufficient clarity to avoid or 

resolve any such disputes; however, sometimes clarifications and supporting 

materials may be required to resolve disputes. The decision must be made based 

on the most complete evaluation of the facts presented.

(j) Management certification. 

(1) As a condition of approval of project management, including borrowers who selfmanage, borrower and management agents must execute an Agencyapproved 

certification certifying that:

(i) Borrowers and management agent agree to operate the housing project in 

accordance with the management plan;

(ii) Borrowers and the management agent will comply with Agency 

requirements, loan or grant agreements, applicable local, State, Tribal, and 

Federal laws and ordinances, and contract obligations, will certify that no 

payments have been made to anyone in return for awarding the management 

contract to the management agent, and will agree that such payments will not be 

made in the future;

(iii) Borrowers and the management agent will comply with Agency notices or 

other policy directives that relate to the management of the housing project;
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(j) Management certification. 

(1) As a condition of approval of project management, including borrowers who 

self-manage, borrower and management agents must execute an 

Agencyapproved certification certifying that:

(i) Borrowers and management agent agree to operate the housing project 

in accordance with the management plan;

(ii) Borrowers and the management agent will comply with Agency 

requirements, loan or grant agreements, applicable local, State, Tribal, and 

Federal laws and ordinances, and contract obligations, will certify that no 

payments have been made to anyone in return for awarding the 

management contract to the management agent, and will agree that such 

payments will not be made in the future;

(iii) Borrowers and the management agent will comply with Agency 

notices or other policy directives that relate to the management of the 

housing project;
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(iv) Management agreement between the borrower and management agent 

complies with the requirements of this section;

(v) Allowable management fees are assessed and paid out of the housing 

projects’ general operating account. Borrowers and management agents 

will comply with Agency requirements regarding management fees as 

specified in paragraph (i) of this section, and allocation of management 

costs between the management fee and the housing project financial 

accounts specified in § 3560.302(c)(3);

(vi) The borrower and the management agent will not purchase goods and 

services from entities that have an identity-of-interest (IOI) with the 

borrower or the management agent until the IOI relationship has been 

disclosed to the Agency according to paragraph (g) of this section, not 

denied by the Agency under paragraph (d)(3) of this section, and it has 

been determined that the costs are as low as or lower than arms-length, 

open-market purchases; and

(vii) The borrower and the management agent agree that all records related 

to the housing project are the property of the housing project and that the 

Agency, OIG, or GAO may inspect the housing records and the records of 

the borrower, management agent, and suppliers of goods and services 

having an IOI with the borrower or with a management agent acting as an 

agent of the borrower upon demand.

(2) A certification will be executed each time new management is proposed 

and/or a management agreement is executed or renewed. Any amendment to a 

management certification must be approved by the Agency and the borrower.

(k) Procurement. The borrower and the agents of the borrower must obtain contracts, 

materials, supplies, utilities, and services at a reasonable cost and seek the most 

advantageous terms to the housing project. Any discounts, rebates, fees, proceeds, or 

commissions obtainable with respect to purchases, service contracts, or other transactions 

must be credited to the housing project.

(l) Electronic Submission of Data to Agency. For properties with eight or more housing 

units, the Agency may specify that borrowers submit information required by this part 

electronically.

§3560.103 Maintaining housing projects.

(a) Physical maintenance. 

(1) The purposes of physical maintenance are the following:

(i) Provide decent, safe, and sanitary housing; and

(ii) Maintain the security of the property.

(2) Borrowers are responsible for the long-term, cost-effective preservation of the 

housing project.

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(3) At all times, borrowers must maintain housing projects in compliance with 

local, state and federal laws and regulations and according to the following 

Agency requirements for affordable, decent, safe, and sanitary housing. Agency 

design requirements are discussed in §3560.60. The Agency acknowledges that 

property maintenance is an ongoing process and will not penalize borrowers for 

less than 100 percent compliance as long as it is evident that the borrower is 

striving to achieve the standards listed in this paragraph. In addition, the Agency 

understands that although its multifamily housing portfolio is relatively 

homogeneous, no one standard is appropriate for all properties.

(i) Utilities. The housing project must have an adequate and safe water 

supply, a functional and safe waste disposal system, and must be free of 

hazardous waste material.

(ii) Drainage and erosion control. The housing project must have drainage 

that effectively protects the housing project from water damage from 

standing water and erosion. Units, basements, and crawl spaces must be 

free of water seepage.

(iii) Landscaping and grounds. The housing project must be landscaped 

attractively. Lawns, plants and shrubs must be maintained and must allow 

air to windows, vents, and sills. Recreation areas must be maintained in a 

safe and clean manner and trash collection areas must be adequately sized, 

screened, and maintained. 

(iv) Drives, parking services and walks. The housing project must have 

drives, parking lots, and walks that are free of holes and deterioration. 

Walks with changes in height between slabs of approximately \1/2\ inch or 

greater will be considered unacceptable.

(v) Exterior signage. All signs at the housing project, including those 

related to the housing project name, buildings, parking spaces, unit 

numbers and other informational directions must be visible and well-kept. 

Sign requirements must conform to §3560.104(d).

(vi) Fences and retaining walls. The housing project must have fence lines 

that are free of trash, weeds, vines, and other vegetation. Fences must be 

free of holes and damaged or loose sections. The bases of all retaining 

walls must be erosion free and drainage weep holes must be cleaned out to 

prevent excessive pressure behind the retaining wall.

(vii) Debris and graffiti. The housing project, including common areas, 

must be free of trash, litter, and debris. Public walkways, walls of 

buildings and common areas must be free of raffiti.

(viii) Lighting. The housing project must have functional exterior lighting

and functional interior lighting in common areas which permits safe access 

and security.

(ix) Foundation. The housing project must have a foundation that is free 

of evidence of structural failure, such as uneven settlement indicated by 

horizontal cracks or severe bowing of the foundation wall. Structural 

members must not have evidence of rot or insect or rodent infestation.
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(x) Exterior walls and siding. The housing project must have walls that 

are free from deterioration which allows elements to infiltrate the 

structure, eaves, gables, and window trim that are free from deterioration, 

exterior wall coverings that are intact, securely attached, and in good 

condition. Brick veneers must be free of missing mortar or bricks.

(xi) Roofs, flashing, and gutters. The housing project must have gutters 

and downspouts, where appropriate for climatic conditions, that are 

securely attached, clean, and finished or painted properly with splash 

blocks or extenders that direct water flow away from the building. The 

housing project must have a roof that is free of leaks, defective covering, 

curled or missing shingles and which is not sagging or buckling. Fascia 

and soffits must be intact.

(xii) Windows, doors, and exterior structures. The housing project must 

have screens that are free of tears, breaks and rips and windows that are 

unbroken. Window thermopane seals must be unbroken and caulking on 

the exterior of windows and doors must be continuous and free of cracks. 

Doors must be weather tight, free of holes, and provide security with 

functional locks. Porches, balconies, and exterior stairs must be free of 

broken, missing, or rotting components.

(xiii) Common area accessibility. The housing project must have 

accessible, designated handicapped parking spaces with handicapped 

space signs properly posted. Common areas must be accessible through 

walks, ramps, porches, and thresholds. The laundry room must have 

accessible appliances and mailboxes must be at an accessible level. 

Elevators or mechanical lifts must be functional and kept in good repair.

(xiv) Common area signage. The following must be posted in a 

conspicuous place in a common area: “Justice for All” poster, HUD equal 

housing opportunity poster including the Spanish version if there are 

Hispanic Limited English Proficiency tenants or applicants, current 

affirmative fair housing marketing plan, the tenant grievance and appeal 

procedure, housing project occupancy rules, office hours and phone 

number, and emergency hours and phone number.

(xv) Flooring. If a housing project has carpeting, the carpet must be clean, 

without excessive wear, and seams that are secure and stretched properly. 

If the housing project has resilient flooring, the flooring must be clean, 

unstained, free of tears and breaks, and seams that are secure.

(xvi) Walls, floors, and ceilings. The housing project must have walls, 

floors, and ceilings that are free of holes, evidence of current water leaks, 

and free of material that appears in danger of falling. The housing project 

must have wallboard joints that are secure and free of cracks.

(xvii) Doors and windows. The housing project must have doors that are 

free of holes, secure, unbroken and easily operable hardware, deadbolt 

locks which are in place and secure, and, if doors are metal, free of rust. 

The housing project must have windows which are easily operated, free of 

bent blinds or torn curtains, and window interiors must be free of evidence 

of moisture damage.
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(xviii) Electrical, air conditioning and heating. The housing project must 

have heating and cooling units that are free of bare wires and which are 

functioning properly, including thermostats. The housing project must not 

have uncovered outlets or other evident safety hazards, switches which 

work improperly, or light fixtures which are broken and inoperable.

(xix) Water heaters. The housing project must have water heaters which 

are operating properly, free of leaks, supply adequate hot water, and are 

fitted with temperature and pressure relief valves.

(xx) Smoke alarms. The housing project must have smoke alarms which 

are properly located according to local code and which operate properly.

(xxi) Emergency call system. If a housing project has an emergency call 

system, the switches must be located in the bathroom and bedroom, 

furnished with a pull cord, with the down position set to “ON”, and must 

operate properly.

(xxii) Insect or vermin infestation. The housing project must have all 

units free of visible signs of insects or rodents and must be free of signs of 

insect or rodent damage.

(xxiii) Range and range hood. The housing project must have range units 

in which all elements are operable, electrical connections are secure and 

insulated, doors and drawers which are secure, control knobs and handles 

which are in place and secure, and housing which is sound and the finish 

is free of chips, damage, or signs of rust. The range hood fan and light 

must be operable.

(xxiv) Refrigerator. The housing project must have refrigerators in which 

the cooler and freezer are operating properly, the shelves and door 

containers are secure and free of rust, door gaskets are in good condition 

and functioning properly, and the housing is sound and the finish is free of 

chips, damage, or signs of rust.

(xxv) Sinks. The housing project must have sinks in which the fittings 

work properly and are free of leaks, plumbing connections under the 

cabinet which are free of leaks, the finish is free of chips, damage, or signs 

of rust, the strainer is in good condition and in place, and which are 

secured to a wall, counter, or vanity top.

(xxvi) Cabinets. The housing project must have cabinets and vanities 

which are secure to walls or floor and have faces, doors, and drawer fronts 

that are in good condition and free of breaks and peeling. Shelving must 

be in place, fastened securely, and free of warps. The housing project 

must have counter tops which are secure and free of burn marks or chips, 

bottoms under sinks which are free of evidence of warping, breaks, or 

being water soaked. Kitchen counter, vanity tops, and back splashes must 

be properly caulked.

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(xxvii) Water closets. The housing project must have the base of the water 

closets at the floor properly caulked. The tanks must be free of cracks or 

leaks and have a lid which fits and is in good condition. The seats must be 

secure and in good condition, and the flushing mechanisms must be in 

good condition and operating properly. The stools must be free of cracks 

and breaks and be securely fastened to the floor.

(xviii) Bathtub and shower stalls. The housing project must have tubs or 

shower stalls which are free of cracks, breaks, and leaks, and a strainer in 

good condition and in place. The housing project must have walls and 

floors of the bathtubs which are properly caulked, tops and sides of 

shower stalls must be properly caulked, and the finish is free of chips, 

damage, or signs of rust.

(4) The Agency expects that upon discovery of a condition not in compliance with 

the standards listed in this section that the borrower will remedy the situation in a 

timeframe required by the Agency. The Borrower must provide documentation 

and justification for any failure to meet such timeframe. Properties with 

deficiencies in the process of being addressed will not be deemed to be out of 

compliance unless there are so many deficiencies that it would result in a 

declaration of substantial noncompliance and call into questions the viability of 

the property and the effectiveness of the borrower's maintenance program. 

Failure to make such corrections or repairs constitutes a non-monetary default 

under §3560.452(e).

(b) Maintenance systems. Borrowers must establish the following maintenance systems 

and must describe these systems in their management plan.

(1) A system for routine maintenance, including:

(i) Regular maintenance tasks that can be prescheduled or planned; and

(ii) Tasks performed on a regular basis to maintain compliance with the 

standards established in paragraph (a)(3) of this section.

(2) A system for responsive maintenance including:

(i) A process for responding to requests for maintenance from tenants;

(ii) A process for responding to unexpected malfunctions of equipment or 

damages to building systems such as a furnace breakdown or a water leak; 

and

(iii) A ‘work order’ process for managing and tracking responses to 

maintenance requests and the performance of maintenance tasks.

(3) A system for preventive maintenance including:

(i) Maintenance of mechanical systems, building exteriors, elevators, and 

heating and cooling systems which require specially trained personnel; 

and

(ii) Maintenance that supports energy-efficient operation of the housing 

project.

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(4) A system for correcting deficiencies identified by periodic inspections, which 

must include:

(i) A move-in inspection;

(ii) A move-out inspection; and

(iii) An annual inspection of occupied units.

(c) Capital budgeting and planning. 

(1) Borrowers must develop a capital budget as part of their annual housing 

project budget required under §3560.303. The capital budget must include 

anticipated expenditures on the long-term capital needs of the housing project to 

assure adequate maintenance and replacement of capital items.

(2) If the borrower requests an increase in the project's reserve for replacement 

account, the borrower must have a capital needs assessment prepared and 

submitted to the Agency to reflect anticipated needs of the housing project for 

replacement of capital equipment and systems. The cost for preparation of a 

capital needs assessment will be approved by the Agency as an eligible housing 

project expense provided the capital needs assessment is reasonable in cost and 

meets Agency requirements.

(3) [Reserved].

(4) As a part of the annual budget process, borrowers may request an increase in 

the amount to be contributed and held in the housing project reserve account to 

fund the needs identified in an Agency-approved capital needs assessment.

(5) At any time, borrowers may request and the Agency may approve 

amendments to loan or grant documents to increase the amount of funds to be 

contributed and held in a reserve account to cover the cost of capital 

improvements based on the needs identified in an Agency approved capital needs 

assessment. Borrowers must assure improvements are performed as specified in 

the capital needs assessment.

§3560.104 Fair housing.

(a) General. Borrowers must comply with the requirements of the Fair Housing 

Amendments Act of 1988, and this section to meet their fair housing responsibilities.

(b)Affirmative Fair Housing Marketing Plan. 

(1) Borrowers with housing projects that have five or more rental units must 

prepare and maintain an Affirmative Fair Housing Marketing Plan (AFHMP) as 

defined in 24 CFR part 200, subpart M.

(2) Loan or grant applicants must submit an AFHMP for Agency approval prior to 

loan closing or grant approval. Plans must be updated by the borrower whenever 

components of the plan change.
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(3) Borrowers must post the approved AFHMP for public inspection at the 

housing project site, rental office, or at any other location where tenant 

applications for the project are received.

(4) When developing the plan, the following items must be considered by the 

borrower:

(i) Direction of marketing activities. The plan should be designed to 

attract applications for occupancy from all potentially eligible groups of 

people in the housing marketing area, regardless of race, color, religion, 

sex, age, familial status, national origin, or disability. The plan must show 

which efforts will be made to reach very low-income or low-income 

groups who would least likely be expected to apply without special 

outreach efforts.

(ii) Marketing program. The applicant or borrower should determine 

which methods of marketing such as radio, newspaper, TV, signs, etc., are 

best suited to reach those very low-income or low-income groups who are 

in the market area but who are least likely to apply for occupancy. 

Marketing must not rely on “word of mouth” advertising.

(A) Advertising. 

(1) Frequency. The borrower should advertise availability of 

housing units in advance of their availability to allow time to 

receive and process applications. Advertising by newsprint or 

electronic media must occur at least annually to promote 

project visibility, even if there is an adequate waiting list.

(2) Posters, brochures, etc. Any radio, TV or newspaper 

advertisement, pamphlets, or brochures used must identify that 

the complex is operated on an equal housing opportunity basis. 

This must be done through the use of the equal housing 

opportunity statement, slogan, or logo type. Copies of the 

proposed material must be sent when requesting approval of 

the plan.

(B) Community contacts. Community leaders and special interest 

groups such as community, public interest, religious organizations, 

and organizations for the disabled must be contacted. Owners and 

managers of projects with fully accessible apartments must adopt 

suitable means to ensure that information regarding the availability

of accessible units reaches eligible persons with disabilities. In 

addition, owners and managers of elderly housing must ensure that 

information regarding eligibility reaches people who are less than 

62 years old but who are eligible because they are disabled. 

Appropriate contacts are with physical rehabilitation centers, 

hospitals, workshops for the disabled, commissions on aging, and 

veterans’ organizations.

(C) Rental staff. All staff persons responsible for renting the units 

must have had training provided on Federal, state, and local fair 

housing laws and regulations and in the requirements of fair 

housing marketing and in those actions necessary to carry out the 

marketing plan. Copies of instructions to the staff regarding fair 

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housing and a summary of the training they have received must be 

attached to the plan when requesting approval.

(iii) Marketing records. Records must be maintained by the borrower 

reflecting efforts to fulfill the plan. These records will be reviewed by the 

Agency during civil rights compliance reviews. Plans will be updated as 

needed.

(c) Accommodations and communication. The borrower must take appropriate steps to 

ensure effective communication with applicants, tenants, and members of the public with 

disabilities. At a minimum, the following steps must be taken:

(1) Furnish appropriate auxiliary aids (electronic, mechanical, or personal 

assistance) where necessary, to afford an individual with disabilities an equal 

opportunity to participate in and enjoy the benefits of Agency financed housing.

(i) In determining what auxiliary aids are necessary, the borrower must 

give primary consideration to the requests of individuals with disabilities.

(ii) The borrower is not required to provide individually prescribed 

devices, readers for personal use or study, or other devices of a personal 

nature.

(2) Where a borrower communicates with applicants and tenants by telephone, 

telecommunication devices for deaf persons or equally effective communication 

systems must be available for use.

(3) The borrower must implement procedures to ensure that interested persons, 

including persons with impaired vision or hearing, can obtain information 

concerning the existence and location of accessible services, activities, and 

facilities in the housing project and community.

(4) The borrower is required to provide reasonable accommodations at the 

project's expense unless doing so would result in undue financial or administrative 

burden on the project. Examples of reasonable accommodations may include 

such items as the installation of grab bars, ramps, and roll-in showers. 

Reasonable accommodations may also include the modification of rules or 

policies such as permitting a disabled tenant to have a two-bedroom unit to 

accommodate a resident assistant or to permit a disabled tenant to have a 

companion animal. The decision whether the requested accommodation is 

reasonable or unreasonable or whether to provide the accommodation would 

cause an undue financial or administrative burden lies with the borrower and 

would be for the borrower to defend should a complaint subsequently be filed. 

Borrowers may wish to consult with their legal counsel prior to denying a request. 

If the borrower takes the position that providing an accommodation would cause 

an undue financial or administrative burden, the borrower must permit the tenant 

to make reasonable modifications at the tenant's expense. Requests for reasonable 

accommodations must be handled in accordance with the management plan.
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(d) Housing sign requirements. 

(1) A permanent sign identifying the housing project is required for all housing 

projects approved on or after September 13, 1977. Permanent signs are 

recommended for all housing projects approved prior to September 13, 1977. The 

sign must meet the following requirements:

(i) Must be located at the primary site entrance and be readable and 

recognizable from the roadside;

(ii) Must be located near the site manager's office when the housing 

project has multiple sites and portable signs must be placed where 

vacancies exist at other site locations of a “scattered site” housing project;

(iii) May be of any shape;

(iv) Must be not less than 16 square feet of area for housing projects with 

8 or more rental units (smaller housing projects may have smaller signs);

(v) Must be made of durable material including its supports;

(vi) Must include the housing project name;

(vii) Must show rental contact information including but not limited to the 

office location of the housing project and a telephone number where 

applicant inquiries may be made;

(viii) Must show either the equal housing opportunity logotype (the house 

and equal sign, with the words equal housing opportunity underneath the 

house); the equal housing opportunity slogan “equal housing opportunity”; 

or the equal housing opportunity statement, “We are pledged to the letter 

and spirit of U.S. policy for the achievement of equal housing opportunity 

throughout the nation. We encourage and support an affirmative 

advertising and marketing program in which there are no barriers to 

obtaining housing because of race, color, religion, sex, handicap, familial 

status, or national origin.” If the logotype is used, the size of the logo must 

be no less than 5 percent of the total size of the project sign.

(ix) May display the Agency or Department logotype; and

(x) Must comply with state and local codes.

(2) Accessible parking spaces must be reserved for individuals with disabilities by 

a sign showing the international symbol of accessibility. The sign must be 

mounted on a post at a height that is readily visible from an occupied vehicle. In 

snow areas, the sign must be visible above piled snow. If there is an office, the 

designated parking space must be van accessible.

(3) When the continuous unobstructed ingress or egress disabled accessibility 

route to a primary building entrance is other than the usual or obvious route, the 

alternate route for disabled accessibility must be clearly marked with international 

accessibility symbols and directional signs to aid a disabled person's ingress or 

egress to the building, through an accessible entrance, and to the accessible 

common use and public and living areas.

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§3560.105 Insurance and taxes.

(a) General. Borrowers must purchase and maintain property insurance on all buildings 

included as security for an Agency loan. Also, borrowers must furnish fidelity coverage, 

liability insurance, and any other insurance coverage required by the Agency in 

accordance with this paragraph to protect the security of the asset. Failure to maintain 

adequate insurance coverage or pay taxes may lead to a non-monetary default under 

§3560.452(c).

(b) General insurance requirements. All insurance policies must meet the requirements 

established by the loan documents and this section.

(1) At loan closing, prior to loan approval, applicants must provide documentary 

evidence that insurance requirements have been met. The borrower must 

maintain insurance in accordance with requirements of their loan or grant 

documents and this section until the loan is repaid 

(2) Insurance companies must meet the requirements of paragraph (e) of this 

section.

(3) Insurance coverage amount, terms, and conditions must meet the requirements 

of paragraph (f) of this section.

(4) The Agency must be named as loss co-payee on all property insurance policies 

where it holds first lien position. The Agency must be named as an additional 

insured if its lien position is other than first.

(c) Borrower failure or inability to meet insurance requirements. The Agency will take 

the following actions in cases where a borrower is unwilling or unable to meet the 

Agency's insurance requirements:

(1) The Agency will obtain insurance for Agency financed property if the 

borrower fails to do so. If borrowers refuse to pay the insurance premium, the 

Agency will pay the insurance premium and charge the premium payment amount 

to the borrower's Agency account and will place the borrower in default as 

described in §3560.452(c).

(2) If borrowers habitually fail to pay premiums in a timely manner, the Agency 

will require borrowers to escrow amounts appropriate to pay insurance premiums.

(3) If insurance that meets the Agency's specified requirements is not available 

(e.g. flood or hurricane insurance), the Agency may accept the insurance policy 

that most nearly conforms to established requirements.

(4) If the best insurance policy a borrower can obtain at the time the borrower 

receives the loan or grant contains a loss deductible clause greater than that 

allowed by paragraph (f)(9) of this section, the insurance policy and an 

explanation of the reasons why more adequate insurance is not available must be 

submitted to the Agency prior to loan or grant approval.

(d) Credits, refunds, or rebates. Borrowers must credit any refund or rebate from an 

insurance company to the project's general operating account or reserve account.
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(e) Insurance company requirements. All insurers, insurance agents, and brokers must 

meet the following requirements:

(1) Be licensed or authorized to do business in the state or jurisdiction where the 

housing project is located; and

(2) Be deemed reputable and financially sound as determined by the Agency.

(f) Property insurance. The following conditions apply to property insurance purchased 

for Agency-financed housing projects.

(1) At a minimum, borrowers must obtain the following types of property 

insurance: 

(i) Hazard insurance. A policy which generally covers loss or damage by 

fire, smoke, lightning, hail, explosion, riot, civil commotion, aircraft, and 

vehicles. These policies may also be known as “Fire and Extended 

Coverage,” “Homeowners,” “All Physical Loss,” or “Broad Form” 

policies.

(ii) Flood insurance. This coverage is required for properties located in 

Special Flood Hazard Areas (SFHA) as defined in 44 CFR part 65, as 

determined by the Federal Emergency Management Agency (FEMA).

(iii) Builder's risk insurance. A policy that insures dwellings under 

construction or rehabilitation.

(iv) Elevators, boiler, and machinery coverage. This coverage is required 

for properties that operate elevators, steam boilers, turbines, engines, or 

other pressure vessels.

(2) Other types of insurance that the Agency may require:

(i) Windstorm Coverage.

(ii) Earthquake Coverage.

(iii) Sinkhole Insurance or Mine Subsidence Insurance.

(3) For property insurance, the minimum coverage amount must equal the “Total 

Estimated Reproduction Cost of New Improvements,” as reflected in the housing 

project's most recent appraisal. At a minimum, property insurance coverage must 

be adequate to cover the lesser of the depreciated replacement value of essential 

buildings or the unpaid balance of all secured debt, unless such coverage is 

financially unfeasible for the housing project.

(i) If the cost of the minimum level of property insurance coverage 

exceeds what the housing project can reasonably afford, the borrower, 

with Agency concurrence, must obtain the maximum amount of property 

insurance coverage that the housing project can afford.

(ii) If the coverage amount is less than the depreciated replacement value 

of all essential buildings, borrowers must obtain coverage on one or more 

of the most essential buildings, as determined by the Agency.

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(iii) When required, the coverage amount for flood insurance must equal 

the outstanding loan balance or the maximum coverage allowed by 

FEMA's “National Flood Insurance Program.”

(4) Except for flood insurance, property insurance is not required if the housing 

project:

(i) Has a depreciated replacement value of $2,500 or less; or

(ii) Is in a condition which the Agency determines makes insurance 

coverage not economical.

(5) Policies for several buildings or properties located on noncontiguous sites are 

acceptable if the insurer provides proof that each secured building or property 

related to the housing project is as fully protected as if a separate policy were 

issued.

(6) Borrowers must notify the Agency and their insurance company agents of any 

loss or damage to insured property and collect the amount of the loss.

(7) When the Agency is in the first lien position and an insurance settlement 

represents a satisfactory adjustment of a loss, the insurance settlement will be 

deposited in the housing project's general operating account unless the settlement 

exceeds $5,000. If the settlement exceeds $5,000, the funds will be placed in the 

reserve account for the housing project.

(i) Insurance settlement funds which remain after all repairs, replacements, 

and other authorized disbursements have been made retain their status as 

housing project funds.

(ii) If the indebtedness secured by the insured property has been paid in 

full or the insurance settlement is in payment for loss of property on which 

the Agency has no claim; a loss draft which includes the Agency as co- payee may be endorsed by the Agency without recourse and delivered to 

the borrower.

(8) When the Agency is not in the first lien position and the insurance settlement 

represents satisfactory adjustment of the loss, the Agency will release the 

settlement funds to the primary mortgagee upon agreement of all parties to the 

provisions contained in agreements between the Agency and the primary 

lienholder.

(9) Allowable deductible amounts are as follows:

(i) Hazard/Property Insurance. 

(A) $1,000 on any housing project with an insurable value under 

$200,000; or

(B) One-half of one percent (0.0050) of the insurable value, up to 

$10,000 on housing projects with insurance values over $200,000.
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(ii) Flood Insurance. The Agency allows a maximum deductible of $5,000 

per building.

(iii) Windstorm Coverage. When windstorm coverage is excluded from 

the “All Risk” policy, the deductible must not exceed five percent of the 

total insured value.

(iv) Earthquake Coverage. In the event that the borrower obtains 

earthquake coverage, the Agency is to be named as a loss payee. The 

deductible should be no more than 10 percent of the coverage amount.

(v) Sinkhole Insurance or Mine Subsidence Insurance. The deductible for

sinkhole insurance or mine subsidence insurance should be similar to what 

would be required for earthquake insurance.

(10) Deductible amounts (excluding flood, windstorm, earthquake and sinkhole 

insurance, or mine subsidence insurance) must be accounted for in the 

replacement reserve account, unless the deductible does not exceed the maximum 

deductible allowable as indicated in paragraph (f)(9)(i) of this section. Borrowers 

who wish to increase the deductible amount must deposit an additional amount to 

the reserve account equal to the difference between the Agency’s maximum 

deductible and the requested new deductible. The Borrower will be required to 

maintain this additional amount so long as the higher deductible is in force.

(g) Liability insurance. The borrower must carry comprehensive general liability 

insurance with coverage amounts that meet or exceed Agency requirements. This 

coverage must insure all common areas, commercial space, and public ways in the 

security premises. Coverage may also include borrower exposure to certain risks such as 

errors and omissions, environmental damages, or protection against discrimination 

claims. The insurer's limit of liability per occurrence for personal injury, bodily injury, or 

property damage under the terms of coverage must be at least $1 million.

(h) Fidelity coverage. Borrowers must provide fidelity coverage on any personnel 

entrusted with the receipt, custody, and disbursement of any housing monies, securities, 

or readily salable property other than money or securities. Borrowers must have fidelity 

coverage in force as soon as there are assets within the organization and it must be 

obtained before any loan funds or interim financing funds are made available to the 

borrower. In addition, the following conditions apply to fidelity insurance:

(1) Fidelity insurance coverage must be documented on a bond form acceptable to 

the Agency.

(2) Fidelity coverage policies must declare in the insuring agreements that the 

insurance company will provide protection to the insured against the loss of 

money, securities, and property other than money and securities, through any 

criminal or dishonest act or acts committed by any employee, whether acting 

alone or in collusion with others, not to exceed the amount of indemnity stated in 

the declaration of coverage.

(i) The fidelity insurance policy, at a minimum, must include an insuring 

agreement that covers employee dishonesty.

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(ii) Fidelity coverage amounts and deductible:

------------------------------------------------------------------------

 Deductible

 Fidelity coverage level

------------------------------------------------------------------------

Under $50,000..............................................$1,000

In the area of $100,000.................................2,500

In the area of $250,000..................................5,000

In the area of $500,000.................................10,000

In the area of $1,000,000..............................15,000

------------------------------------------------------------------------

(3) Blanket crime insurance coverage or fidelity bonds are acceptable types of 

fidelity coverage.

(4) At a minimum, borrowers must provide an endorsement, listing all of the 

borrower's Agency financed properties and their locations covered under the 

policy or bond as evidence of required fidelity insurance. The policy or bond may 

also include properties or operations other than Agency financed properties on 

separate endorsement listings.

(5) Individual or organizational borrowers must have fidelity coverage when they 

have employees with access to the MFH complex assets. Borrowers who use a 

management agent with exclusive access to housing assets must require the agent 

to have fidelity coverage on all principals and employees with access to the 

housing assets. If active management reverts to the borrower, the borrower must 

obtain fidelity coverage, as a first course of business.

(6) Fidelity coverage is not required under the following circumstances:

(i) The borrower is an individual or a general partnership and the 

individual or general partner will be responsible for the financial activities 

of the housing project.

(ii) In the case of a land trust where the beneficiary is responsible for 

management, the beneficiary will be treated as an individual.

(iii) A limited partnership (or its general partners) unless one or more of 

its general partners perform financial acts within the scope of the usual 

duties of an “employee.”

(7) The premium for fidelity coverage of employees and general partners at a 

housing project is an eligible operating account expense.

(i) The premium of a management agent's fidelity coverage for the agent's

principals and employees will be the management agent's business 

expense (i.e., it is included within the management fee).

(ii) When a housing project employee is covered under the “umbrella” of 

the management agent's fidelity coverage, the premium may be prorated 

among the housing projects covered..
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(8) Borrowers must review fidelity coverage annually and adjust it as necessary to 

comply with the requirements of this section.

(i) Taxes. The borrower is responsible for paying all taxes and assessments on a housing 

project before they become delinquent.

(1) An exception to the above may be made if the borrower has formally 

contested the amount of the property assessment and escrowed the amount of 

taxes in question in a manner approved by the Agency.

(2) Failure to pay taxes and assessments when due will be considered a default. If 

a borrower fails to pay outstanding taxes and assessments, the Agency will pay 

the outstanding balance and charge the tax or assessment amount, assessed 

penalties, and any additional incurred costs to the borrower's Agency account.

(3) The Agency will require borrowers who have demonstrated an inability to pay 

taxes in a timely manner to escrow amounts sufficient to pay taxes.

§§3560.106-3560.149 [Reserved].

§3560.150 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart D--Multi-Family Housing Occupancy

§3560.151 General.

(a) Applicability. This subpart contains borrower and tenant requirements and Agency 

responsibilities related to occupancy of Agency-financed multi-family housing (MFH) 

projects. Occupancy eligibility requirements apply to the following:

(1) Family housing projects, including farm labor housing;

(2) Elderly housing projects; and

(3) Congregate housing or group homes for persons with special needs.

(b) Civil rights requirements. All occupancy policies must meet applicable civil rights 

requirements, as stated in §3560.2.

§3560.152 Tenant eligibility.

(a) General requirements. Except as specified in paragraph (b) of this section, a tenant 

eligible for occupancy in Agency-financed housing must either:

(1) Be a United States citizen or qualified alien, and

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(2) Qualify as a very low-, low-, or moderate-income household; or

(3) Be eligible under the requirements established to qualify for housing benefits 

provided by sources other than the Agency, such as U.S. Department of Housing 

and Urban Development (HUD) Section 8 assistance or Low Income Housing 

Tax Credit (LIHTC), when a tenant receives such housing benefits.

(b) Exception. Households with incomes above the moderate-income level may occupy 

housing projects with an Agency loan approved prior to 1968 with a loan agreement that 

does not restrict occupancy by income.

(c) Requirements for elderly housing, congregate housing, and group homes. In addition 

to the requirements of paragraph (a) of this section, the following occupancy

requirements apply to elderly housing and congregate housing or group homes:

(1) For elderly housing and congregate housing, the following provisions apply:

(i) Households must meet the definition of an elderly household in 

§3560.11 to be eligible for occupancy in elderly or congregate housing.

(ii) If non-elderly persons are members of a household where the tenant or 

co-tenant is an elderly person, the non-elderly persons are eligible for 

occupancy in the tenant's or co-tenant's rental unit.

(iii) Applicants who will agree to participate in the services provided by a 

congregate housing project may be given occupancy priority.

(2) For group homes, the following provisions apply:

(i) Occupancy may be limited to a specific group of tenants, such as 

elderly persons or persons with developmental disabilities, or mental 

impairments, if such an occupancy limitation is contained in the 

borrower's management plan.

(ii) Tenants must be able to demonstrate a need for the special services 

provided by the group home.

(iii) Tenants cannot be required to participate in an ongoing training or 

rehabilitation program.

(iv) Tenants must be selected from the market area prior to considering 

applicants from other areas.

(d) Ineligible tenant waiver. The Agency may authorize the borrower in writing, upon 

receiving the borrower's written request with the necessary documentation, to rent vacant 

units to ineligible persons for temporary periods to protect the financial interest of the 

Government. Likewise, this provision may extend to a cooperative. This authority will 

be for the entire project for periods not to exceed one year. Within the period of the 

lease, the tenant may not be required to move to allow an eligible applicant to obtain 

occupancy, should one become available. The Agency must make the following 

determinations:
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(1) There are no eligible persons on a waiting list.

(2) The borrower provided documentation that a diligent but unsuccessful effort 

to rent any vacant units to an eligible tenant household has been made. Such 

documentation may consist of advertisements in appropriate publications, posting 

notices in several public places, including places where persons seeking rental 

housing would likely make contacts, holding open houses, making appropriate 

contacts with public housing agencies and organizations, Chambers of 

Commerce, and real estate agencies.

(3) The borrower agrees to continue with aggressive efforts to locate eligible 

tenants and retain documentation of all marketing.

(4) The borrower is temporarily unable to achieve or maintain a level of 

occupancy sufficient to prevent financial default and foreclosure. The Agency's 

approval of the waiver would then be for a limited duration.

(5) The lease agreement will not be more than 12 months and at its expiration will 

convert to a month-to-month lease. The monthly lease will require that the unit 

be vacated upon 30 days notice when an eligible applicant is available.

(6) Tenants residing in Rural Rental Housing (RRH) units who are ineligible 

because their adjusted annual income exceeds the maximum for the RRH project 

will be charged the Rural Housing Service (RHS) approved note rent for the size 

of unit occupied in a Plan II RRH project. In projects operated under Plan I, 

ineligible tenants will be charged a rental surcharge of 25 percent of the approved 

note rent.

(e) Tenant certification and verification. Tenants and borrowers must execute an 

Agency-approved tenant certification form establishing the tenant's eligibility prior to 

occupancy. In addition, tenant households must be recertified and must execute a tenant 

certification form at least annually or whenever a change in household income of $100 or 

more per month occurs. Borrowers must recertify for changes of $50 per month, if the

tenant requests that such a change be made.

(1) Tenant requirements. 

(i) Tenants must provide borrowers with the necessary income and other 

household information required by the Agency to determine eligibility.

(ii) Tenants must authorize borrowers to verify information provided to 

establish their eligibility or determination of tenant contribution.

(iii) Tenants must report all changes in household status that may affect 

their eligibility to borrowers.

(iv) Tenants who fail to comply with tenant certification and 

recertification requirements will be considered ineligible for occupancy 

and will be subject to unauthorized assistance claims, if applicable, as 

specified in subpart O of this part.

(2) Borrower requirements. 

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(i) Borrowers must verify household income and other information 

necessary to establish tenant eligibility for the requested rental unit type, 

in a format approved by the Agency, prior to a tenant's initial occupancy 

and prior to annual or other recertifications.

(ii) Borrowers must review all reported changes in household status and 

assess the impact of these changes on the tenant's eligibility or tenant 

contribution.

(iii) Borrowers must submit initial or updated tenant certification forms to 

the Agency within 10 days of the effective date of an initial certification or 

any changes in a tenant's status. The effective date of an initial or updated 

tenant certification form will always be a first day of the month.

(iv) Since tenant certifications are used to document interest credit and 

rental assistance eligibility and are a basic responsibility of the borrower 

under the loan documents, borrowers who fail to submit annual or updated 

tenant certification forms within the time period specified in paragraph 

(e)(2)(iii) of this section will be charged overage, as specified in 

§ 3560.203(c) and lost rental assistance. Unauthorized assistance, if any, 

will be handled in accordance with subpart O of this part.

(v) Borrowers must submit tenant certification forms to the Agency using 

a format approved by the Agency.

(vi) Borrowers must retain executed tenant certification forms and any 

supporting documentation in the tenant file for at least 3 years or until the 

next Agency monitoring visit or compliance review, whichever is longer.

(3) The Agency maintains the right to independently verify tenant eligibility 

information.

§3560.153 Calculation of household income and assets.

(a) Annual income will be calculated in accordance with 24 CFR 5.609.

(b) Adjusted income will be calculated in accordance with 24 CFR 5.611.

§3560.154 Tenant selection.

(a) Application for occupancy. Borrowers must use tenant application forms that collect 

sufficient information to properly determine household eligibility and to enable the 

Agency to monitor compliance with the Fair Housing Act, section 504 of the 

Rehabilitation Act of 1973, and title VI of the Civil Rights Act of 1964 during 

compliance reviews. At a minimum, borrowers must use application forms that collect 

the following information:

(1) Name of the applicant and present address;

(2) Number of household members and their birthdates;

(3) Annual income information calculated in accordance with §3560.153(a);

(4) Adjustments to income calculated in accordance with §3560.153(b);
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(5) Net assets calculated in accordance with §3560.153(c);

(6) Indication of a need for a unit accessible to individuals with disabilities and 

any disability adjustments to income;

(7) Certification by the applicant that the unit will serve as the household's 

primary residence, and a certification that the applicant is a U.S. citizen or a 

qualified alien as defined in §3560.11;

(8) Signature of the applicant and date;

(9) Race, ethnicity, and gender designation. The following disclosure notice shall 

be used:

“The information regarding race, ethnicity, and sex designation solicited on this 

application is requested in order to assure the Federal Government, acting through 

the Rural Housing Service, that the Federal laws prohibiting discrimination

against tenant applications on the basis of race, color, national origin, religion, 

sex, familial status, age, and disability are complied with. You are not required to 

furnish this information, but are encouraged to do so. This information will not 

be used in evaluating your application or to discriminate against you in any way. 

However, if you choose not to furnish it, the owner is required to note the race, 

ethnicity, and sex of individual applicants on the basis of visual observation or 

surname,” and

(10) Social security number.

(b) Additional information. Applicants are to be provided a list of any additional 

information that must be submitted with the application for the application to be 

considered complete (an application will be considered complete without verification of 

the applicant information). The list of information will be restricted to the same items for 

all Agency-assisted properties of a particular type, such as a family or elderly complex.

(c) Application submission. Borrowers must establish when 

applications may be submitted. Information on the place and times for 

tenant application submission must be documented in the housing 

project's management plan and Affirmative Fair Housing Marketing Plan.

(d) Selection of eligible applicants. 

(1) Applicants may be determined ineligible for occupancy based on selection 

criteria other than Agency requirements only if such criteria are contained in the 

borrower's management plan. Borrower established selection criteria may not 

contain arbitrary or discriminatory rejection criteria, but may consider an 

applicant's past rental and credit history and relations with other tenants.

(2) Borrowers with projects receiving low-income housing tax credits (LIHTCs), 

may leave a housing unit vacant if they are required to rent the available unit to an 

LIHTC-eligible applicant, and none of the applicants on the waiting list meet the 

applicable LIHTC eligibility requirements.

(e) Recordkeeping. Borrowers must retain all tenant application forms for at least 3 

years. The Agency may require borrowers to submit application information for Agency 

review.

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(f) Waiting lists.

(1) When an applicant has submitted an application form the borrower must place 

the applicant on the waiting list. All applications, whether complete, eligible, or 

ineligible, will be placed on the list. The waiting list will document the final 

disposition of all applications (rejected, withdrawn, or placed in a unit).

(2) The date and time a complete application was submitted will be recorded on 

the waiting list and will establish priority for selection from the list. If an 

applicant submits an incomplete application (see paragraph (a) of this section), 

they must be notified in writing within 10 days of the items that are needed for the 

application to be considered complete and that priority will not be established 

until the additional items are received.

(3) The race and the ethnicity of each applicant shall be recorded on the waiting 

list. This information shall be collected for statistical purposes only and must not 

be used when making eligibility determinations or in any other discriminatory 

manner. The information shall be recorded using the race and ethnicity codes that 

are utilized on the Agency tenant certification form available in the servicing 

office.

(4) Within 10 days of receipt of a complete application, the Borrower must notify 

the applicant in writing that he has been selected for immediate occupancy, placed 

on a waiting list, or rejected.

(5) Selections from the completed applications on the waiting list shall be made in 

the following priority order:

(i) Very low-income applicants;

(ii) Low-income applicants; and

(iii) Moderate-income applicants.

(g) Priorities and preferences for admission.

(1) Eligible applicants that meet the following conditions must be given priority 

for occupancy over all other tenants regardless of income. Such applicants, 

however, will be ranked among themselves by income level, giving priority first 

to very low-income households, then to low-income households, and finally to 

moderate-income households.

(i) Persons who require the special design features of a unit accessible to 

individuals with disabilities will have priority only for units with these 

features.

(ii) In congregate housing facilities, persons who agree to use the services 

provided by the facility will have priority over other applicants.

(2) Eligible applicants that meet any of the following conditions must be given 

priority over other applicants in their same income category.
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(i) The applicant has a Letter of Priority Entitlement (LOPE) issued in 

accordance with §3560.660(c).

(ii) The applicant was displaced from Agency-financed housing but was not 

issued a LOPE.

(iii) The applicant was displaced in a Federally declared disaster area.

(3) Borrowers receiving Section 8 project-based assistance may establish preferences in 

accordance with U.S. Department of Housing and Urban Development (HUD) 

regulations. The use of such preferences must be documented in the project's 

management plan.

(h) Notices of ineligibility or rejection. Borrowers must provide written notification to 

applicants who are determined to be ineligible or who are rejected for occupancy. Notices of 

ineligibility or rejection must give specific reasons for the ineligibility determination or rejection 

and, in accordance with §3560.160, the notice must advise the applicant of “the right to respond 

to the notice within ten calendar days after receipt” and of “the right to a hearing in accordance 

with §3560.160 which is available upon request.” When an applicant is rejected based on the 

information from a credit bureau report, the source of the credit bureau report must be revealed to 

the applicant in accordance with the Fair Credit Reporting Act.

(i) Purging waiting list. Procedures used by borrowers to purge waiting list must be documented 

in the project's management plan and must be based on the length of the waiting list or the extent 

of time an applicant will be expected to wait for housing. At a minimum, borrowers must 

document removal of any names from the waiting list with the time and date of the removal. If an 

electronic waiting list is used, borrowers must periodically print out electronic waiting lists or 

preserve backup copies showing how the waiting list appeared before and after the removal of 

each name.

(j) Criminal activity. Borrowers will deny admission for criminal activity or alcohol abuse by 

household members in accordance with the provisions of 24 CFR 5.854, 5.855, 5.856, and 5.857.

§3560.155 Assignment of rental units and occupancy policies.

(a) General. Available rental units are assigned in accordance with the requirements of this 

section and the priorities and preferences outlined in §3560.154.

(b) Rental units accessible to individuals with disabilities. If a rental unit accessible to 

individuals with disabilities is available and there are no applicants that require the features of the 

unit, borrowers may rent the unit to a non-disabled tenant subject to the inclusion of a lease 

provision that requires the tenant to vacate the unit within 30 days of notification from 

management that an eligible individual with disabilities requires the unit and provided the 

accessible unit has been marketed as an accessible unit, outreach has been made to organizations 

representing the disabled, and marketing of the unit as an accessible unit continues after it has 

been rented to a tenant who is not in need of the special design features.

(c) Transfer of existing tenants within a housing project. When a rental unit becomes available 

for occupancy and an eligible tenant in the housing project is either over housed or under housed 

as provided for in paragraph (e) of this section, the borrower must use the available unit for the 

over housed or under housed tenant, if suitable, prior to selecting an eligible applicant from the 

waiting list.

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(d) Applicant placement. When a specific rental unit type becomes available for 

occupancy, borrowers must select eligible applicants suitable for the available unit 

according to the priorities established in §3560.154.

(e) Occupancy policies. Borrowers must establish occupancy policies for each housing 

project. Households living in a rental unit with more bedrooms than persons in the 

household will be considered over housed and must be relocated in accordance with 

paragraph (c) of this section. Households under housed as defined by the project's 

occupancy standards must be relocated in accordance with paragraph (c) of this section. 

Borrowers with no one-bedroom units in a housing project may make an exception to this 

requirement in their occupancy policies. In addition, a borrower's occupancy policies 

must establish:

(1) Reasonable standards for determining when a tenant household is considered 

under housed. The standards will describe the maximum number of persons that 

may occupy units of a given size based on occupancy guidelines provided by the 

Agency or another governmental source;

(2) The order in which eligible applicants and existing tenants will be housed or 

re-housed; and

(3) How fair housing requirements will be met, including how reasonable 

accommodations will be made for applicants and tenants with disabilities.

(f) Agency concurrence. The Agency must concur with a borrower's occupancy rules 

prior to initial occupancy of the housing project. All modifications to occupancy rules 

must be posted for tenant comment in accordance with §3560.160 and receive Agency 

concurrence prior to implementation.

§3560.156 Lease requirements.

(a) Agency approval. Borrowers must use a lease approved by the Agency. The lease 

must be consistent with Agency requirements and the requirements of all programs 

participating in the housing project. Prior to submitting the lease to the Agency for 

approval, borrowers must have their attorney certify that the lease complies with state and 

local laws, Agency requirements, and the requirements of all programs participating in 

the housing project. If there are conflicting requirements the borrower shall notify the 

Agency of the conflict and request guidance. Borrowers must execute their Agency 

approved lease with each tenant household prior to tenant occupancy of a rental unit.

(b) Lease requirements.

(1) All leases must be in writing.

(2) Initial leases must be for a 1-year period.

(3) If the tenant is not subject to occupancy termination according to §3560.158 

and §3560.159, a renewal lease or lease extension must be for a 1-year period.

(4) In areas with a concentration of non-English speaking populations, leases 

(including the occupancy rules) must be available in both English and the non- English language.
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(5) Leases must give the address of the management agent to which tenants may direct 

complaints.

(6) Leases must include a statement of the terms and conditions for modifying the lease.

(c) Required items and provisions.

(1) Leases for tenants who hold a Letter of Priority Entitlement (LOPE) issued according 

to § 3560.660(c) and are temporarily occupying a unit for which they are not eligible 

must include a clause establishing the tenant’s responsibility to move when a suitable unit 

becomes available in the housing project.

(2) Leases must contain a clause permitting escalation in the tenant contribution when 

there is an Agency-approved change in basic or note rate rents prior to the expiration of 

the lease. The escalation clause also must specify that the tenant contribution may be 

changed prior to expiration of the lease if the change is due to changes in tenant status, as 

documented on the tenant certification form, or the tenant's failure to properly recertify.

(3) Leases must specify that no change in the tenant contribution will occur due to 

monetary or non-monetary default or when rental assistance or interest credit, is 

suspended, canceled, or terminated due to the borrower's fault. For information on tenant 

contributions when a borrower prepays the Agency loan, refer to subpart N of this part.

(4) Leases must contain a requirement that tenants make restitution when unauthorized 

assistance is received due to applicant or tenant fraud or misrepresentation and a 

statement advising tenants that submission of false information could result in legal 

action.

(5) Leases must include a statement that the housing project is financed by the Agency 

and that the Agency has the right to further verify information provided by the applicant.

(6) Leases must state that the housing project is subject to:

(i) Title VI of the Civil Rights Act of 1964;

(ii) Title VIII of the Fair Housing Act;

(iii) Section 504 of the Rehabilitation Act of 1973; 

(iv) The Age Discrimination Act of 1975; and

(v) The Violence Against Women Reauthorization Act of 2013 and any 

amendments thereto.

(7) Leases must establish the tenant's responsibility according to the housing project's 

occupancy rules to move to the next available appropriately sized rental unit if the 

household becomes over housed or under housed in the unit they occupy.

(8) Leases must include provisions that establish when a guest will be considered a 

member of the household and be required to be added to the tenant certification.

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(9) Leases must include a provision stating that tenancy continues until the 

tenant's possessions are removed from the housing either voluntarily or by legal 

means, subject to state and local law.

(10) Leases must include a requirement that tenants who are no longer eligible for 

occupancy under the housing project's occupancy rules or do not meet the criteria 

set forth in §3560.155(c) and (e) must vacate the property within 30 days of being

notified by the borrower that they are no longer eligible for occupancy or at the 

expiration of their lease, or whichever is greater, unless the conditions cited in 

§3560.158(c) exist;

(11) Leases for rental units receiving rental assistance must include clauses that 

specify that the tenant's monthly tenant contribution and a description of the 

circumstances under which the tenant's contribution may change.

(12) Leases must include a requirement that tenants notify borrowers when 

changes occur in their income or assets, their qualifications for adjustments to 

income, their citizenship status, or the number of persons living in the unit.

(13) A requirement that tenants agree to fulfill the tenant income verification and 

certification requirements established under §3560.152.

(14) Leases for tenants living in Plan II interest credit rental units must include 

provisions establishing the net monthly tenant contribution.

(15) Leases, including renewals, must include the following language:

“It is understood that the use, or possession, manufacture, sale, or distribution of 

an illegal controlled substance (as defined by local, State, Tribal or Federal law) 

while in or on any part of this apartment complex premises or cooperative is an 

illegal act. It is further understood that such action is a material lease violation. 

Such violations (hereafter called a ‘‘drug violation’’) may be evidenced upon the 

admission to or conviction of the use, possession, manufacture, sale, or 

distribution of a controlled substance (as defined by local, State, Tribal, or Federal 

law) in any local, State, Tribal or Federal court.

The landlord may require any lessee or other adult member of the tenant 

household occupying the unit (or other adult or non-adult person outside the 

tenant household who is using the unit) who commits a drug violation to vacate 

the leased unit permanently, within timeframes set by the landlord, and not 

thereafter to enter upon the landlord’s premises or the lessee’s unit without the 

landlord’s prior consent as a condition for continued occupancy by the remaining 

members of the tenant’s household. The landlord may deny consent for entry 

unless the person agrees to not commit a drug violation in the future and is either 

actively participating in a counseling or recovery program, complying with court 

orders related to a drug violation, or has successfully completed a counseling or 

recovery program.

The landlord may require any lessee to show evidence that any non-adult member of the 

tenant household occupying the unit, who committed a drug violation, agrees not to

commit a drug violation in the future, and to show evidence that the person is either 

actively seeking or receiving assistance through a counseling or recovery program,
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complying with court orders related to a drug violation, or has successfully completed a

counseling or recovery program within timeframes specified by the landlord as a 

condition for continued occupancy in the unit.

Should a further drug violation be committed by any non-adult person occupying the unit 

the landlord may require the person to be severed from tenancy as a condition for 

continued occupancy by the lessee. 

If a person vacating the unit, as a result of the above policies, is one of the lessees, the 

person shall be severed from the tenancy and the lease shall continue among any other 

remaining lessees and the landlord. The landlord may also, at the option of the landlord, 

permit another adult member of the household to be a lessee.

Should any of the above provisions governing a drug violation be found to violate any of 

the laws of the land the remaining enforceable provisions shall remain in effect. The 

provisions set out above do not supplant any rights of tenants afforded by law.’’

(16) Leases for rental units accessible to individuals with disabilities occupied by those 

not needing the accessibility features must establish the tenant’s responsibility to move to 

another unit within 30-days of written notification that the unit is needed by an eligible 

qualified person with disabilities who requires the accessibility features of the unit. 

Additionally, the lease clause must ensure that the household may remain in the rental 

unit with accessibility features until an appropriately sized vacant unit within the project 

becomes available and then must move or vacate within 30 days of notification from 

borrower.

(17) If loan prepayment occurs and the housing project is subject to restrictive use 

provisions, leases and renewals must be amended to include a clause specifying the 

tenant protections required under subpart N of this part.

(18) All leases must contain the following information and provisions:

(i) The name of the tenant, any co-tenants, and all members of the household 

residing in the rental unit;

(ii) The identification of the rental unit;

(iii) The amount and due date of monthly tenant contributions, any late payment 

penalties, and security deposit amounts;

(iv) The utilities, services, and equipment to be provided for the tenant;

(v) The tenant's utility payment responsibility;

(vi) The certification process for determining tenant occupancy eligibility and 

contribution;

(vii) The limitations of the tenant's right to use or occupancy of the dwelling;

(viii) The tenant's responsibilities regarding maintenance and consequences if the 

tenant fails to fulfill these responsibilities;

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(ix) The agreement of the borrower to accept the tenant contribution 

toward rent charges prior to payment of other charges that the tenant owes 

and a statement that borrowers may seek legal remedy for collecting other 

charges accrued by the tenant;

(x) The maintenance responsibilities of the borrower in buildings and 

common areas, according to state and local codes, Agency regulations, 

and Federal fair housing requirements;

(xi) The responsibility of the borrowers at move-in and move-out to 

provide the tenant with a written statement of rental unit's condition and 

provisions for tenant participation in inspection;

(xii) The provision for periodic inspections by the borrower and other 

circumstances under which the borrower may enter the premises while a 

tenant is renting;

(xiii) The tenant's responsibility to notify the borrower of an extended 

absence;

(xiv) A provision that tenants may not assign the lease or sublet the 

property;

(xv) A provision regarding transfer of the lease if the housing project is 

sold to an Agency-approved buyer;

(xvi) The procedures that must be followed by the borrower and the tenant 

in giving notices required under terms of the lease including lease 

violation notices;

(xvii) The good-cause circumstances under which the borrower may 

terminate the lease and the length of notice required;

(xviii) The disposition of the lease if the housing project becomes 

uninhabitable due to fire or other disaster, including rights of the borrower 

to repair building or terminate the lease;

(xix) The procedures for resolution of tenant grievances consistent with 

the requirements of §3560.160;

(xx) The terms under which a tenant may, for good cause, terminate their 

lease, with 30 days notice, prior to lease expiration; and

(xxi) The signature and date clause indicating that the lease has been 

executed by the borrower and the tenant.

(d) Prohibited provisions. Borrowers are prohibited from including any of the following 

clauses in the lease:

(1) Clauses prohibiting families with children under 18;

(2) Clauses requiring prior consent by tenant to any lawsuit that borrowers may 

bring against the tenant in connection with the lease;
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(3) Clauses authorizing borrowers to hold any of a tenant's property until the 

tenant fulfills an obligation;

(4) Clauses in which tenants agree not to hold borrowers liable for anything they 

may do or fail to do;

(5) Clauses in which tenants agree that borrowers may institute suit without any 

notice to the tenant that the suit has been filed;

(6) Clauses in which tenants agree that borrowers may evict the tenant or sell their 

possessions whenever borrowers determine that a breach or default has occurred;

(7) Clauses authorizing the borrower's attorneys to appear in court on behalf of 

the tenant, and to waive the tenant's right to a trial by jury;

(8) Clauses authorizing the borrower's attorneys to waive the tenant's right to 

appeal or to file suit; and

(9) Clauses requiring the tenant to agree to pay legal fees and court costs 

whenever the borrower takes action against the tenant, even if the court finds in 

favor of the tenant.

(e) Housing projects and units receiving HUD assistance.

(1) In housing projects receiving Section 8 project-based assistance, borrowers 

may use the HUD model lease. The provisions of the HUD model lease will 

prevail, unless they conflict with Agency lease requirements in accordance with 

this section. If there is conflict between HUD requirements and Agency 

requirements, the provision that will be enforced will be the one that is most 

favorable to the tenant.

(2) For units occupied by Section 8 certificate and voucher holders, borrowers 

may use:

(i) A standard HUD-approved lease;

(ii) A HUD-approved lease that includes a number of modifications from 

the standard HUD-approved lease; or

(iii) An Agency-approved lease may be used if acceptable by HUD or the 

local housing authority.

(f) State and local requirements. Borrowers must use a lease that is consistent with state 

and local requirements.

(1) If any lease provision is in violation of state or local law, the lease may be 

modified to the extent needed to comply with the law, but any changes must be 

consistent with the provisions established in paragraph (c) of this section.

(2) Leases must include a procedure for handling tenant's abandoned property, as 

provided by state or local law.

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§3560.157 Occupancy rules.

(a) General. The purpose of a borrower's occupancy rules is to outline the basis for the 

tenant and management relationship. Prior to Agency approval of occupancy rules, 

borrowers must provide written certification from their attorney that the housing project's 

occupancy rules are consistent with applicable Federal, state, and local laws, as well as 

Agency requirements, and the requirements of all programs participating in the housing 

project. Borrowers must obtain Agency approval of the occupancy rules prior to initial 

occupancy and obtain Agency approval prior to the implementation date of any 

subsequent modifications to the rules.

(b) Requirements. The occupancy rules must be in writing and posted for easy tenant 

access. A copy of these rules must be attached to the tenant's lease upon initial 

occupancy. At a minimum, the occupancy rules must address:

(1) The tenant's rights and responsibilities under the lease or occupancy 

agreement;

(2) The rent payment or occupancy charge policies;

(3) The policies regarding periodic inspection of units;

(4) The system for responding to tenant complaints;

(5) The maintenance request and work order procedures;

(6) The housing services and facilities available to tenants or members;

(7) The office locations, hours, and emergency telephone numbers;

(8) The restrictions on storage and prohibitions on non-functional vehicles in the 

housing project area;

(9) Other requirements related to a subsidy provided to a tenant from non-Agency 

sources;

(10) When a guest becomes a member of the tenant household; and

(11) The procedures tenants must follow to request reasonable accommodations.

(c) Modification of occupancy rules. The Agency must concur with any modification to 

the occupancy rules prior to implementation. Proper notice must be given to each tenant 

at least 30 days in advance of implementation of such rules in accordance with 

§3560.160.

(d) Federal, state and local requirements. The occupancy rules must be consistent with 

Federal, state, and local law.

(e) Pets/Assistance Animals. All housing projects should establish reasonable written 

pet rules. No rules may be promulgated that would prevent occupancy by a household 

member who requires a service or assistance animal. In elderly housing, borrowers must 

not prohibit tenants from keeping domestic animals in their rental units as pets.
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(f) Tenant organizations. Borrowers must not infringe on the rights of tenants to organize an 

association of tenants. Borrowers (or a designated management representative) should be 

available and willing to work with a tenant organization.

(g) Community rooms. Borrowers may not place unreasonable restrictions on tenants that desire 

to use a community room.

§3560.158 Changes in tenant eligibility.

(a) General requirements. Tenants must continue to meet the requirements of §3560.152 to 

remain eligible for occupancy.

(b) Tenants no longer eligible. Tenants who are no longer eligible for occupancy under the 

housing project's occupancy rules or do not meet the criteria set forth in §3560.155(c) and (e) 

must vacate the property within 30 days of being notified by the borrower that they are no longer 

eligible for occupancy or at the expiration of their lease, whichever is greater, unless the 

conditions specified in paragraph (c) of this section exist.

(c) Temporary continuation of tenancy. If conditions described in §3560.454(b) or the following 

conditions exist, borrowers may permit tenants who are no longer eligible for occupancy to 

continue to reside at the housing project with prior approval of the Agency.

(1) The waiting list for the specific rental unit type has no eligible applicants; or

(2) The required time period for vacating the rental unit would create a hardship on the 

tenant household. 

(d) Surviving and remaining household members.

(1) Members of a household may continue to reside in a housing project after the 

departure or death of the tenant or co-tenant, provided that:

(i) They are eligible with respect to adjusted income;

(ii) They occupied a rental unit in the housing project at the time of the departure 

or death of the tenant or co-tenant;

(iii) They execute a tenant certification form establishing their own tenancy; and

(iv) They have the legal ability to sign a lease for the rental unit, except where a 

legal guardian may sign when the tenant or member is otherwise eligible.

(2) Surviving or remaining members of the household may remain in the housing project, 

taking into consideration the conditions of paragraph (d)(1) of this section, but must 

move to a suitably sized rental unit within 30 days of its availability.

(3) After the death of a tenant or cotenant in elderly housing, the surviving members of 

the household, regardless of age but taking into consideration the conditions of paragraph 

(d)(1) of this section, may remain in the rental unit in which they were residing at the 

time of the tenant’s or co-tenant’s death, even if the household is over housed according 

to the housing project’s occupancy rules except as follows:

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(i) Continued occupancy of the rental unit will not be allowed when in 

either situation of paragraph (d)(1) or (d)(3) of this section, the rental unit 

has accessibility features for individuals with disabilities, the household no 

longer has a need for such accessibility features, and the housing project 

has a tenant application from an individual with a need for the 

accessibility features;

(ii) If the housing project does not have a tenant application from an 

individual with a need for the accessibility features, the household may 

remain in the rental unit with such features until the housing project 

receives an application from an individual with a need for accessibility 

features. The household in the unit with accessibility features will be 

required to move within 30 days of the housing project's receipt of a tenant 

application requiring accessibility features if another suitably sized unit 

without accessibility features is available in the project. If a suitably sized 

unit is not available in the project within 30 days, the tenant may remain in 

the unit with accessibility features until the first available unit in the 

project becomes available and then must move within 30 days.

§3560.159 Termination of occupancy.

(a) Tenants in violation of lease. Borrowers, in accordance with lease agreements, may 

terminate or refuse to renew a tenant's lease only for material non-compliance with the 

lease provisions, material non-compliance with the occupancy rules, or other good 

causes. Prior to terminating a lease, the borrower must give the tenant written notice of 

the violation and give the tenant an opportunity to correct the violation. Subsequently, 

termination may only occur when the incidences related to the termination are 

documented and there is documentation that the tenant was given notice prior to the 

initiation of the termination action that their activities would result in occupancy 

termination.

(1) Material non-compliance with lease provisions or occupancy rules, for 

purposes of occupancy termination by a borrower, includes actions such as:

(i) Violations of lease provisions or occupancy rules that are substantial 

and/or repeated;

(ii) Non-payment or repeated late payment of rent or other financial 

obligations due under the lease or occupancy rules; or

(iii) Admission to or conviction for use, attempted use, possession, 

manufacture, selling, or distribution of an illegal controlled substance 

when such activity occurred on the housing project's premises by the 

tenant, a member of the tenant's household, a guest of the tenant, or any 

other person under the tenant's control at the time of the activity.

(2) Good causes, for purposes of occupancy terminations by a borrower, include 

actions such as:

(i) Actions by the tenant or a member of the tenant's household which 

disrupt the livability of the housing by threatening the health and safety of 

other persons or the right of other persons to enjoyment of the premises 

and related facilities;
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(ii) Actions by the tenant or a member of the tenant's household which 

result in substantial physical damage causing an adverse financial effect 

on the housing or the property of other persons; or

(iii) Actions prohibited by state and local laws.

(b) Lease expiration or tenant eligibility. A tenant's occupancy in an Agency-financed 

housing project may not be terminated by a borrower when the lease agreement expires 

unless the tenant's actions meet the conditions described in paragraph (a) of this section, 

or the tenant is no longer eligible for occupancy in the housing. Borrowers must handle 

terminations of occupancy due to a change in tenant eligibility status in accordance with 

§3560.158. At a minimum, the occupancy termination notice must include the following 

information:

(1) A specific date by which lease termination will occur;

(2) A statement of the basis for lease termination with specific reference to the 

provisions of the lease or occupancy rules that, in the borrower's judgment, have 

been violated by the tenant in a manner constituting material non-compliance or 

good cause; and

(3) A statement explaining the conditions under which the borrower may initiate 

judicial action to enforce the lease termination notice.

(c) Other terminations. Should occupancy be terminated due to conditions which are 

beyond the control of the tenant, such as a condition related to required repair or 

rehabilitation of the building, or a natural disaster, and prior to expiration of the disaster 

declaration, the tenants who are affected by such a circumstance are entitled to benefits 

under the Uniform Relocation Act and may request a Letter of Priority Entitlement 

(LOPE) from the Agency. If tenants need additional time to secure replacement housing, 

the Agency may, at the tenant’s request, extend the LOPE entitlement period.

(d) Criminal activity. Borrowers may terminate tenancy for criminal activity or alcohol 

abuse by household members in accordance with the provisions of 24 CFR 5.858, 5.859, 

5.860, and 5.861.

§3560.160 Tenant grievances.

(a) General. 

(1) The requirements established in this section are designed to ensure that there 

is a fair and equitable process for addressing tenant or prospective tenant concerns 

and to ensure fair treatment of tenants in the event that an action or inaction by a 

borrower, including anyone designated to act for a borrower, adversely affects the 

tenants of a housing project.

(2) Any tenant/member or prospective tenant/member seeking occupancy in or 

use of Agency facilities who believes he or she is being discriminated against 

because of age, race, color, religion, sex, familial status, disability, or national 

origin may file a complaint in person with, or by mail to the U.S. Department of 

Agriculture's Office of Civil Rights, Room 326-W, Whitten Building, 14th and 

Independence Avenue, SW., Washington DC 20250-9410 or to the Office of Fair 

Housing and Equal Opportunity, U.S. Department of Housing and Urban 

Development (HUD), Washington, DC 20410. Complaints received by Agency 

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employees must be directed to the National Office Civil Rights Staff through the 

State Civil Rights Manager/Coordinator.

(b) Applicability.

(1) The requirements of this section apply to a borrower action regarding housing 

project operations, or the failure to act, that adversely affects tenants or 

prospective tenants.

(2) This section does not apply to the following situations:

(i) Rent changes authorized by the Agency in accordance with the 

requirements of §3560.203(a);

(ii) Complaints involving discrimination which must be handled in

accordance with §3560.2(b) and paragraph (a)(2) of this section;

(iii) Housing projects where an association of all tenants has been duly 

formed and the association and the borrower have agreed to an alternative 

method of settling grievances;

(iv) Changes required by the Agency in occupancy rules or other 

operational or management practices in which proper notice and 

opportunity have been given according to law and the provisions of the 

lease;

(v) Lease violations by the tenant that would result in the termination of 

tenancy and eviction;

(vi) Disputes between tenants not involving the borrower; and

(vii) Displacement or other adverse actions against tenant as a result of 

loan prepayment handled according to subpart N of this part.

(c) Borrower responsibilities. Borrowers must permanently post tenant grievance 

procedures that meet the requirements of this section in a conspicuous place at the 

housing project. Borrowers also must maintain copies of the tenant grievance procedure 

at the housing project's management office for inspection by the tenants and the Agency 

upon request. Each tenant must receive an Agency summary of tenant's rights when a 

lease agreement is signed. If a housing project is located in an area with a concentration 

of non-English speaking individuals, the borrower must provide grievance procedures in 

both English and the non-English language. The notice must include the telephone 

number and address of USDA's Office of Civil Rights and the appropriate Regional Fair 

Housing and Enforcement Agency.

(d) Reasons for grievance. Tenants or prospective tenants may file a grievance in 

writing with the borrower in response to a borrower action, or failure to act, in 

accordance with the lease or Agency regulations that results in a denial, significant 

reduction, or termination of benefits or when a tenant or prospective tenant contests a 

borrower's notice of proposed adverse action as provided in paragraph (e) of this section. 

Acceptable reasons for filing a grievance may include:
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(1) Failure to maintain the premises in such a manner that provides decent, safe, 

sanitary, and affordable housing in accordance with §3560.103 and applicable 

state and local laws;

(2) Borrower violation of lease provisions or occupancy rules;

(3) Modification of the lease;

(4) Occupancy rule changes;

(5) Rent changes not authorized by the Agency according to §3560.205; or

(6) Denial of approval for occupancy.

(e) Notice of adverse action. In the case of a proposed action that may have adverse 

consequences for tenants or prospective tenants such as denial of admission to occupancy 

and changes in the occupancy rules or lease, the borrower must notify the tenant or 

prospective tenant in writing. In the case of a Borrower's proposed adverse action 

including denial of admission to occupancy, the Borrower shall notify the 

applicant/tenant in writing. The notice must be delivered by certified mail return receipt 

requested or a hand-delivered letter with a signed and dated acknowledgement of receipt 

from the applicant/tenant. The notice must give specific reasons for the proposed action. 

The notice must also advise the tenant or prospective tenant of “the right to respond to the 

notice within ten calendar days after date of the notice” and of “the right to a hearing in 

accordance with §3560.160 (f), which is available upon request.” The notice must contain 

the information specified in paragraph (a)(2) of this section. For housing projects in 

areas with a concentration of non-English speaking individuals, the notice must be in 

English and the non-English language.

(f) Grievances and responses to notice of adverse action. The following procedures must 

be followed by tenants, prospective tenants, or borrowers involved in a grievance or a

response to an adverse action.

(1) The tenant or prospective tenant must communicate to the borrower in writing 

any grievance or response to a notice within 10 calendar days after occurrence of 

the adverse action or receipt of a notice of intent to take an adverse action.

(2) Borrowers must offer to meet with tenants to discuss the grievance within 10 

calendar days of receiving the grievance. The Agency encourages borrowers and 

tenants or prospective tenants to make an effort to reach a mutually satisfactory 

resolution to the grievance at the meeting.

(3) If the grievance is not resolved during an informal meeting to the tenant or 

prospective tenant's satisfaction, the borrower must prepare a summary of the 

problem and submit the summary to the tenant or prospective tenant and the 

Agency within 10 calendar days The summary should include: The borrower's 

position; the applicant/tenant's position; and the result of the meeting. The tenant 

also may submit a summary of the problem to the Agency.

(g) Hearing process. The following procedures apply to a hearing process.

(1) Request for hearing. If the tenant or prospective tenant desires a hearing, a 

written request for a hearing must be submitted to the borrower within 10 

calendar days after the receipt of the summary of any informal meeting.

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(2) Selection of hearing officer or hearing panel. In order to properly evaluate 

grievances and appeals, the borrower and tenant must select a hearing officer or 

hearing panel. If the borrower and the tenant cannot agree on a hearing officer, 

then they must each appoint a member to a hearing panel and the members 

selected must appoint a third member. If within 30 days from the date of the 

request for a hearing, the tenant and borrower have not agreed upon the selection 

of a hearing officer or hearing panel, the borrower must notify the Agency by 

mail of the situation. The Agency will appoint a person to serve as the sole 

hearing officer. The Agency may not appoint a hearing officer who was earlier 

considered by either the borrower or the tenant, in the interest of ensuring the 

integrity of the process.

(3) Standing hearing panel. In lieu of the procedure contained in paragraph (g)(2) 

of this section for each grievance or appeal presented, a borrower may ask the 

Agency to approve a standing hearing panel for the housing project.

(4) Examination of records. The borrower must allow the tenant the opportunity, 

at a reasonable time before a hearing and at the expense of the tenant, to examine 

or copy all documents, records, and policies of the borrower that the borrower 

intends to use at a hearing unless otherwise prohibited by law or confidentiality 

agreements.

(5) Scheduling of hearing. If a standing hearing panel has been approved, a 

hearing will be scheduled within 15 calendar days after receipt of the tenant's or 

prospective tenant's request for a hearing. If a hearing officer or hearing panel 

must be selected, a hearing will be scheduled within 15 calendar days after the 

selection or appointment of a hearing panel or a hearing officer. All hearings will 

be held at a time and place mutually convenient to both parties. If the parties 

cannot agree on a meeting place or time, the hearing officer or hearing panel will 

designate the place and time.

(6) Escrow deposits. If a grievance involves a rent increase not authorized by the 

Agency, or a situation where a borrower fails to maintain the property in a decent, 

safe, and sanitary manner, rental payments may be deposited by the tenant into an 

escrow account, provided the tenant's rental payments are otherwise current.

(i) The escrow account deposits must continue until the complaint is 

resolved through informal discussion or by the hearing officer or panel.

(ii) The escrow account must be in a Federally-insured institution or with a 

bonded independent agent.

(iii) Failure to make timely rent payments into the escrow account will 

result in a termination of the tenant grievance and appeals procedure and 

all sums will immediately become due and payable under the lease.

(iv) Receipts of escrow account deposits must be available for 

examination by the borrower.

(7) Failure to request a hearing. If the tenant or prospective tenant does not 

request a hearing within the time provided by paragraph (f)(1) of this section, the 

borrower's disposition of the grievance or appeal will become final.
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(h) Requirements governing the hearing. The following requirements will govern the 

hearing process.

(1) Subject to paragraph (f)(2) of this section, the hearing will proceed before a 

hearing officer or hearing panel at which evidence may be received without 

regard to whether that evidence could be used in judicial proceedings.

(2) The hearing must be structured so as to provide basic due process safeguards

for both the borrower and the tenants or prospective tenants, which must protect:

(i) The right of both parties to be represented by counsel or other person 

chosen as their representative;

(ii) The right of the tenant or prospective tenant to a private hearing unless 

a public hearing is requested;

(iii) The right of the tenant or prospective tenant to present oral or written 

evidence and arguments in support of their grievance or appeal and to 

cross-examine and refute the evidence of all witnesses on whose testimony 

or information the borrower relies; and

(iv) The right of the borrower to present oral and written evidence and 

arguments in support of the decision, to refute evidence relied upon by the 

tenant or prospective tenant, and to confront and cross-examine all 

witnesses in whose testimony or information the tenant or prospective 

tenant relies.

(3) At the hearing, the tenant or prospective tenant must present evidence that 

they are entitled to the relief sought, and the borrower must present evidence 

showing the basis for action or failure to act against that which the grievance or 

appeal is directed.

(4) The hearing officer or hearing panel must require that the borrower, the tenant 

or prospective tenant, counsel, and other participants or spectators conduct 

themselves in an orderly manner. Failure to comply may result in exclusion from 

the proceedings or in a decision adverse to the interests of the disorderly party and 

granting or denial of the relief sought, as appropriate.

(5) If either party or their representative fails to appear at a scheduled hearing, the 

hearing officer or hearing panel may make a determination to postpone the 

hearing for no more than five days or may make a determination that the absent 

party has waived their right to a hearing under this subpart. If the determination is 

made that the absent party has waived their rights, the hearing officer or hearing 

panel will make a decision on the grievance. Both the tenant or prospective tenant 

and the borrower must be notified in writing of the determination of the hearing 

officer or hearing panel.

(i) Decision. Hearing decisions must be issued in accordance with the following 

requirements.

(1) The hearing officer or hearing panel has the authority to affirm or reverse a 

borrower's decision.

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(2) The hearing officer or hearing panel must prepare a written decision, together 

with the reasons thereof based solely and exclusively upon the facts presented at 

the hearing within 10 calendar days after the hearing. The notice must state that

the decision is not effective for 10 calendar days to allow time for an Agency 

review as specified in paragraphs (i)(3) and (i)(4) of this section.

(3) The hearing officer or hearing panel must send a copy of the decision to the 

tenant, or prospective tenant, borrower, and the Agency.

(4) The decision of the hearing officer or hearing panel shall be binding upon the 

parties to the hearing unless the parties to the hearing are notified within 10 

calendar days by the Agency that the decision is not in compliance with Agency 

regulations.

(5) Upon receipt of written notification from the hearing officer or hearing panel, 

the borrower and tenant must take the necessary action, or refrain from any 

actions, specified in the decision.

§§3560.161-3560.199 [Reserved]

§3560.200 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart E--Rents

§3560.201 General.

This subpart sets forth the requirements for establishing and collecting rents charged 

to occupants of multi-family housing (MFH) projects financed by the Agency.

§3560.202 Establishing rents and utility allowances.

(a) General. Rents and utility allowances for rental units in Agency-financed housing 

projects are set by the borrower and must be based on the operating, management and 

maintenance expenses and other costs related to the housing project including loan 

payment amounts due to the Agency.

(b) Agency approval. All rents and utility allowances set by borrowers are subject to 

Agency approval.

(c) Rents. As applicable, borrowers must establish the following rents:

(1) Note rent;

(2) Basic rent;
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(3) U.S. Department of Housing and Urban Development (HUD) contract rents; 

and

(4) Low-income housing tax credit (LIHTC) rents.

(d) Utility allowances. In projects where tenants pay the utilities, borrowers must 

establish utility allowances for each size and type of rental unit in the housing project 

based on estimated utility costs. Borrowers must review utility allowances annually,

adjust for accuracy, and submit any utility allowance changes to the Agency for approval. 

If no changes are needed, the borrower must notify the Agency that no changes were 

made. Documentation to justify utility allowances must be maintained in the housing 

project files.

(e) Funds contributed to reduce rents. If borrowers use funds contributed from sources 

other than the Agency (e.g., state or local grants, private contributions) to reduce general 

operating and management expenses, housing project rents must be reduced to reflect the 

funding being used to offset housing project expenses. When funds contributed from 

sources other than the Agency are used for housing project expenses, the borrower must 

certify to the Agency, in writing, that the funds provided will not need to be repaid with 

Agency funds. Funds from borrower contributions or rehabilitation loans will not be 

counted towards reducing rents.

(f) Rents for resident manager, caretaker, or owner-occupied unit.

(1) If approved as a part of a management plan, a borrower may occupy a rental 

unit in a housing project when they are acting as a management agent or resident 

manager as specified in §3560.102(e).

(2) If the rental unit being occupied by a borrower or resident manager is 

designated as a revenue-producing unit, borrowers must calculate the rental 

charge to the borrower or resident manager in the same manner as tenant 

contributions.

(3) If the rental unit being occupied by a borrower or resident manager is 

designated as a non-revenue producing unit, borrowers must treat the cost of 

providing the unit the same as other non-revenue producing portions of the 

housing project.

(g) LIHTC. Borrowers who receive LIHTCs may establish rents in accordance with 

LIHTC requirements. However, borrowers are obligated to ensure that sufficient annual 

funds are available to cover expenses in the housing project's approved budget, including 

the required payments on the borrower's Agency loan. Borrowers must not use housing 

project funds to make up any difference between rents required under Agency program 

requirements and the maximum allowed rents under the LIHTC program.

§3560.203 Tenant contributions.

(a) Tenant contributions. A tenant's contribution to rent charged for a rental unit in an 

Agency financed housing project is based on the tenant's income, as calculated on the 

Agency's tenant certification forms, and the availability of Agency or non-Agency rental 

subsidies.

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(1) Tenant contributions. Borrowers must set tenant contributions to rent at the 

highest of the following standards but never more than the note rent:

(i) Thirty percent of monthly adjusted income;

(ii) Ten percent of gross monthly income;

(iii) An amount equal to the portion of an assistance payment specifically 

designated to meet the household's shelter costs if the household is 

receiving assistance payments from a public agency; or

(iv) The basic rent, unless RHS rental assistance is provided to the 

household.

(2) Tenant contribution surcharge. Tenants in a Plan I housing project with 

incomes above the eligibility standards set in §3560.152(a)(1) must pay a 25 

percent surcharge in addition to note rent.

(b) Adjustment of tenant contribution. Borrowers must adjust the tenant contribution 

whenever there is a change in tenant household status or income sufficient to generate a 

revised tenant certification in accordance with §3560.152(e) or an Agency approved rent 

or utility allowance change that affects the tenant contribution amount.

(c) Overage. If a tenant's tenant contribution is higher than basic rent, borrowers must 

remit to the Agency the rent collected in excess of the basic rent and up to the note rent.

§3560.204 Security deposits and membership fees.

(a) General. Borrowers may collect security deposits when it is reasonable and 

customary for the area in which the housing is located. Borrowers must hold security 

deposits in a separate bank or bookkeeping account in accordance with §3560.302(c)(3).

(b) Allowable amounts. Borrowers may charge security deposits that are typical for the 

area in which the housing is located, as long as the security deposit charged a tenant does 

not exceed that tenant's net contribution for one month's rent or basic rent, whichever is 

greater.

(1) As noted in §3560.102(b)(1)(viii) and §3560.156(c)(18)(iii), borrowers must 

specify in the housing project's management plan how the amount to be charged 

as a security deposit will be established and must specify the amount to be 

charged to individual tenants in the lease to be signed by the tenant.

(2) Borrowers may charge security deposits to households receiving HUD 

assistance in accordance with HUD requirements.

(3) Members of a cooperative shall be required to pay a membership fee no 

greater than one month's occupancy charge.

(4) Additional security deposits for pets may be charged as long as the additional 

deposit is not greater than basic rent for 1 month. No additional security deposit 

for assistance animals is allowed where an assistance animal is necessary for the 

normal functioning of a household member with a disability.
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(5) Borrowers must not charge additional security deposits based on disabilities of 

tenants or other personal characteristics.

(c) Payment plans. Borrowers must offer, for persons who are eligible for rental assistance 

or Section 8 assistance, the option of paying the security deposit on an installment payment 

plan. Should installments not be met, the total charge may become due and payable in full.

(d) Charges for damage or loss. Borrowers may charge tenants for damage or loss caused or 

allowed by the tenant equal to the cost of the damage or loss.

(1) Borrowers must consider expenses due for addressing normal wear and tear as 

normal operating expenses and must not charge tenants a fee or withhold security 

deposits to pay for such costs.

(2) Borrowers may withhold security deposits and may charge tenants for damage or 

loss costs above security deposit amounts.

(e) State and local security deposit requirements. Borrowers must follow all state and local 

laws and other requirements governing the handling and disposition of security deposits.

(1) Resolution of any security deposit disputes must be handled in accordance with 

state and local law.

(2) Any interest earned on security deposits will accrue in 

accordance with state law.

(f) Unclaimed security deposits. Any funds in the housing project's security deposit account 

unclaimed by a tenant must be deposited into the housing project's general operating account.

§3560.205 Rent and utility allowance changes.

(a) General. Borrowers must fully document that changes to rents and utility allowances are 

necessary to cover housing or utility costs allowed under the approved budget for the 

housing. Any changes must apply to all similar units in the housing project.

(b) Agency approval. Borrowers must submit a fully documented request to the Agency to 

effect any rent or utility allowance change.

(1) Borrowers must obtain written consent or approval from the Agency as specified 

in paragraph (e) of this section before implementing any changes in the rents or utility 

allowances.

(2) If a borrower implements an unauthorized rent or utility allowance charge, the 

Agency will require the borrower to roll back rents to the last authorized rent charge, 

and the borrower must reimburse tenants for any unauthorized rents collected.

(c) Timing of request for changes. Borrowers must submit rent and utility allowance change 

requests in conjunction with the annual budget submission as required under §3560.303(d). 

The effective dates of any approved changes will coincide with the start of the housing 

project's fiscal year or the start of the season for seasonally occupied farm labor housing. 

However, the Agency will accept borrower requests for rent or utility 

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allowance changes anytime during the year if a change is necessary to preserve the 

financial integrity of the housing complex and the financial distress is due to 

circumstances beyond the borrower's control.

(d) Tenant notification. Borrowers must notify tenants and solicit their comments to 

proposed rent or utility allowance change requests that are submitted to the Agency at the 

same time that the initial request is made to the Agency.

(1) Tenants will be given 20 calendar days to provide their comments to the 

Agency.

(2) Borrowers must deliver the proposed rent or utility allowance change request 

notice to each tenant and post at least one copy of the notice at the housing project 

site in a visible location frequented by tenants.

(e) Approval. If the Agency approves a rent or utility allowance increase request on 

which the comments were solicited, tenants or members receiving notice of a proposed 

rent or utility allowance change in accordance with paragraph (d)(2) of this section shall 

be notified of the rent or utility allowance change to be effective, at least 30 calendar 

days from the date of the notification.

(f) Denial of change request. The Agency may deny a rent or utility allowance increase 

request in the following circumstances.

(1) The Agency determines that the borrower did not provide sufficient 

information to justify operating costs.

(2) The borrower is out of compliance with Agency requirements including any 

corrective action requirements agreed to in a workout agreement developed 

according to subpart J of this part.

(3) Sufficient funds are being collected under existing rents to meet approved 

expenses.

(g) Notice of denial. If the rent change will not be approved as requested, the Agency 

will notify the borrower of the denial in accordance with §3560.303(d).

§3560.206 Conversion to Plan II (Interest Credit).

The Agency encourages any borrower not on Plan II to convert to Plan II to provide 

more favorable rent costs to very-low, low, and moderate-income households.

§3560.207 Annual adjustment factors for Section 8 units.

(a) General. For rental units receiving project-based Section 8 assistance, the Agency 

will review rents annually without regard to HUD's automatic annual adjustment.

(b) Establishing rents in housing with HUD rent assistance. Borrowers will set basic, 

note, and HUD contract rents for housing receiving HUD project-based Section 8 

assistance, as specified in § 3560.202(c).

(1) Borrowers must notify the Agency of any HUD rent changes.
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(2) If allowed by the interest credit agreement, the borrower will remit the amount 

collected in excess of the basic rent up to the note rent to the Agency as overage.

(3) When HUD contract rents exceed note rents, borrowers must deposit HUD funds 

equal to the difference between the Agency approved note rent and the HUD approved 

rent into the reserve account for the housing project.

(c) Excess HUD rents. When permitted by the Agency interest credit agreement, the Agency 

may reduce or cancel the interest credit on the housing, if excess HUD rents deposited in the 

reserve account result in the reserve account being funded beyond the fully funded level approved 

by the Agency.

§3560.208 Rents during eviction or failure to recertify.

(a) Rents during eviction. If a tenant is appealing an eviction and the borrower refuses to accept 

rent payment during the appeal of the eviction, the tenant must escrow required rent payments to 

safeguard their occupancy, unless State or local laws specify otherwise.

(b) Rents when tenants fail to recertify. If a borrower can document that a tenant received a 

notice specifying a tenant recertification date and the tenant fails to comply by the specified date 

or fails to cooperate with verification or other procedures related to the tenant's recertification so 

that the tenant recertification cannot be completed by the recertification date, the borrower, within 

10 days of the recertification date, shall give the tenant and the Agency written notification that:

(1) Termination proceedings are being initiated, in accordance with §3560.159; and

(2) The tenant will be charged note rent until the tenant's lease is terminated.

(c) Unauthorized assistance due to tenant recertification failure. Any unauthorized assistance 

received because of the tenant's failure to be recertified will be collected in accordance with the 

provisions of subpart O of this part.

(d) Rents when borrowers fail to recertify tenants. If a borrower cannot document that a tenant 

received a recertification notice, and a tenant is not recertified within 12 months of the most

recently executed tenant certification, tenants shall continue to make net tenant contributions to 

rent based on their most recent tenant certification and the borrower must remit to the Agency full 

overage as if the tenant was paying the note rent until the tenant is recertified.

(e) Unauthorized assistance due to borrower recertification failure. Any unauthorized assistance 

received as a result of the borrower's failure to recertify a tenant will be collected from the 

borrower in accordance with the provisions of subpart O of this part and may not be paid from 

housing project funds or funds collected from the tenant.

§3560.209 Rent collection.

(a) General. Borrowers must collect rents on a monthly basis and maintain a system for 

collecting and tracking rents.

(b) Fees for late rent payments. Borrowers may adopt a late fee schedule for overdue rental

payments. Late fee schedules must be submitted to the Agency for approval as part of the housing 

project's management plan, be in accordance with State and local law, and consistent with the 

following requirements:

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(1) A grace period of 10 days from the rental payment due date must be allowed for 

all tenants.

(2) The late fee must not exceed the higher of $10 or an amount equal to 5 percent of 

the tenant's gross tenant contribution.

(3) Tenants receiving housing benefits from sources other than the Agency may be 

subject to the late rent fee requirements of the other funding sources.

(c) Improperly advanced rents. Improperly advanced interest credit or rental assistance is

considered unauthorized assistance and is subject to recapture in accordance with subpart O 

of this part.

§3560.210 Special note rents (SNRs).

When a Plan II housing project is experiencing severe vacancies due to market conditions, 

the Agency may allow the borrower to charge an SNR, which is less than note rent but higher than 

basic rent, to attract or retain tenants whose income level would require them to pay special note rent. 

The requirements for requesting and receiving an SNR are established under §3560.454.

§§3560.211-3560.249 [Reserved]

§3560.250 OMB control number.

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0189. Public reporting burden for this collection of information is estimated to vary from 15 

minutes to 18 hours per response, including time for reviewing instructions, searching existing data 

sources, gathering and maintaining the data needed, and completing and reviewing the collection of 

information. A person is not required to respond to a collection of information unless it displays a 

currently valid OMB control number.

Subpart F--Rental Subsidies

§3560.251 General.

This subpart contains policies for borrower administration and tenant use of rental 

subsidies in Agency financed multi-family housing (MFH) projects.

§3560.252 Authorized rental subsidies.

(a) General. The purpose of rental subsidies is to reduce amounts paid by tenants for rent. 

Rental subsidies equal the difference between the approved shelter costs and tenant 

contributions as calculated in accordance with §3560.203(a)(1).

(b) Forms of rental subsidies. Rental subsidies may be in the form of:

(1) Agency rental assistance;

(2) Agency housing vouchers;

(3) HUD section 8 assistance, including project-based and vouchers;
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(4) Private rental subsidies; or

(5) State or local government rental subsidies.

(c) Multiple rent subsidies. 

(1) Multiple types of rent subsidies may be used in the same MFH project.

(2) Tenants with subsidies from sources other than the Agency may be eligible for 

Agency rental assistance if all the following conditions are met.

(i) The tenant qualifies for Agency rental assistance.

(ii) The rental subsidy the tenant is receiving is not a HUD voucher.

(iii) The rental subsidy being received by the tenant is less than the full 

amount of Agency rental assistance for which the tenant would qualify. In 

such cases, the Agency may provide the difference between the subsidy 

received by the tenant and the amount of Agency rental assistance for 

which the tenant qualifies.

(d) Agency rental assistance (RA). Agency RA is obligated to MFH projects on a rental 

unit basis. The obligation is composed of a number of rental units and associated dollar 

amounts of RA specified in a RA agreement with a borrower. The following types of 

Agency RA may be obligated to a housing project.

(1) Renewal units. RA may be assigned to a housing project to replace existing 

rental unit obligations because funds associated with the units have been fully 

disbursed.

(2) New construction units. RA may be provided in conjunction with initial 

Agency loans for construction or substantial rehabilitation of MFH projects.

(3) Servicing units. Additional RA may be provided to operational MFH projects 

as a part of the Agency's general loan servicing or preservation activities.

§3560.253 [Reserved]

§3560.254 Eligibility for rental assistance.

(a) Eligible housing. Housing projects eligible for Agency RA include the following 

types of projects.

(1) Housing projects that operate under an Interest Credit Plan II RA agreement.

(2) Housing projects financed with an Agency off-farm labor housing loan or 

grant. On-farm labor housing is not eligible for rental assistance.

(3) Housing projects financed with a direct or insured Rural Rental Housing loan 

approved prior to August 1, 1968, and operated under an interest credit agreement 

that identifies the housing project as a Plan RA project.

(4) Housing projects financed from Agency and other sources if the conditions of 

§3560.66 are met.

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(b) Eligible units. Borrowers may not request RA for rental units that the Agency 

determines are not habitable in accordance with §3560.103.

(c) Eligible households. Households eligible for rental assistance are those:

(1) With very low- or low-incomes who are eligible to live in MFH; 

(2) Whose net tenant contribution to rent determined in accordance with § 

3560.203(a)(1) is less than the basic rent for the unit;

(3) Whose head of the household is a U.S. citizen or a legal alien as defined in 

§3560.11;

(4) Who meet the occupancy rules/ policies established by the borrower in 

accordance with § 3560.155(e); 

(5) Who have a signed, unexpired tenant certification form on file with the 

borrower; and 

(6) Who is not delinquent on any Agency unauthorized assistance repayment 

agreements.

§3560.255 Requesting rental assistance.

(a) Submitting requests. Borrowers seeking an allocation of rental assistance for MFH 

must request the rental assistance from the Agency as follows.

(1) Renewal rental assistance. To the extent sufficient funds are available, the 

Agency will automatically renew expiring rental assistance agreements at the 

existing number of units.

(2) New construction units. Loan applicants proposing to use Agency rental 

assistance must include their request for rental assistance in their loan proposal in 

accordance with §3560.56.

(3) Servicing units. Borrowers requesting rental assistance must have tenants or 

eligible tenant applicants on a waiting list who are RA eligible.

(b) Denial of requests. 

(1) If a rental assistance request is denied due to the loan applicant's or borrower's 

ineligibility, the Agency will send the loan applicant or borrower written 

notification of the decision with an explanation of the denial.

(2) If a rental assistance request to renew expiring rental assistance agreements is 

denied because funding is not available, the Agency will notify the borrower and 

the borrower must notify the tenants of rent increases in accordance with their 

lease and state and local law. Tenants losing rental assistance due to a lack of 

Agency funding may quit the lease and vacate the housing without penalty in

accordance with the terms of their lease.

(3) Loan applicants or borrowers determined to be eligible for RA as a result of an 

appeal or funding review will receive RA, if RA funding is available, beginning 

with the month following the date of the appeal or funding review decision or 

beginning in the first month that RA funding becomes available.
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§3560.256 Rental assistance payments.

(a) Borrower submission requirements. The borrower must submit monthly requests for 

RA payments to the Agency based on occupancy as of the first day of the month previous 

to the month in which the request is being made.

(b) Basis of RA requests. Borrower requests for RA payments must be based on the 

difference between the basic rent plus utility allowances for each rental unit eligible for 

RA and the net tenant contribution of the tenant.

(c) Payments to borrower. Prior to making RA payments to a borrower, the Agency will 

deduct from the approved RA payment amount any unpaid loan payments, late fees, and 

other amounts which the borrower owes to the Agency.

(d) Utility payments to tenants. The borrower must pay tenants the difference between 

the utility allowance and the tenant's net contribution to rent when a tenant receiving RA 

is billed directly for utilities and the utility allowance exceeds the net tenant contribution 

to rent. Such utility payments to tenants must be made on a monthly basis.

(e) Administrative errors. Borrowers are responsible for correcting borrower errors 

made in regard to RA requests for payments. In accordance with subpart O of this part, 

borrowers will be required to repay the Agency for any unauthorized RA received or any 

unauthorized use of RA except in certain cases of tenant error or fraud.

§3560.257 Assigning rental assistance.

(a) Priorities for rental assistance. 

(1) Borrowers must use the following priorities when assigning available rental 

assistance.

(i) First priority is to eligible very low-income tenants paying the highest 

percentage of their adjusted annual income for Agency approved shelter 

costs.

(ii) Second priority, if the housing project has vacant rental units, is to 

eligible very low-income applicants on the waiting list.

(iii) Third priority is to eligible low-income tenants paying the highest 

percentage of their adjusted annual income for Agency approved shelter 

costs.

(iv) Fourth priority, if the housing project has vacant rental units, is to 

eligible low-income applicants on the waiting list.

(v) Fifth priority is to households which are residing in a rental unit for 

which they do not qualify on the basis of an occupancy waiver or other 

special approval situations.

(2) In order to provide rental assistance to the third, fourth, and fifth priority 

categories, a borrower must fully document either that there are no very low- income households on the housing project's waiting list or that occupancy by low- income households is limited as follows:

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(i) For housing occupied on or after November 30, 1983, no more than 5 

percent of the units in the housing are occupied by low-income 

households; or

(ii) For housing occupied before November 30, 1983, no more than 25 

percent of the units in the housing are occupied by low-income 

households.

(b) Continued eligibility. Tenants receiving rental assistance may continue to do so as 

long as they remain eligible for occupancy and for rental assistance under §3560.254(c), 

and as long as rental assistance units are available.

(c) Assignment of rental assistance. Except as provided in §3560.454(c) and using the 

priorities given in paragraph (a) of this section, borrowers must assign available rental 

assistance units as soon as rental assistance units become available.

(1) When a rental assistance unit is assigned to an eligible existing tenant on a day 

other than the first day of a month, the Agency will not provide the borrower 

rental assistance for the newly assigned existing tenant and the tenant will not pay 

reduced rental charges until the first of the month following the assignment of the 

rental assistance.

(2) When an eligible applicant moves into a rental assistance unit on a day other 

than the first day of a month, they will pay a prorated rent based on the number of 

days they occupy the rental assistance unit and the amount of rental assistance 

they will be receiving.

(d) Incorrectly assigned rental assistance. Incorrectly assigned rental assistance is 

viewed as unauthorized assistance and handled in accordance with subpart O of this part.

§3560.258 Terms of agreement.

(a) Term of agreement. Rental assistance agreements will have a term of the later of 12 

months from the first disbursement of the obligation or when funds under the agreement 

are exhausted.

(b) Replacing expiring obligations. Rental assistance agreements may be renewed in 

accordance with § 3560.255(a)(1).

§3560.259 Transferring rental assistance.

(a) Agency authority. The Agency may transfer rental assistance in the following 

instances:

(1) To accompany the transfer of a housing project to a different borrower;

(2) After a voluntary conveyance or a foreclosure sale;

(3) After a liquidation, prepayment, or natural maturity;

(4) To the extent permitted by law, when any rental assistance units have not been 

used for a 6-month period (Section 515) or a 12-month period (Section 514 or 

516); or

(5) When the loan cannot be closed.
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(b) Agency review before transferring rental assistance. The Agency must perform a review to 

determine if all eligible tenants in the project are receiving rental assistance before the Agency 

transfers it to another project.

(c) Transferring rental assistance for displaced tenants. The Agency may transfer rental 

assistance from one housing project to another eligible housing project for a tenant who is 

moving due to displacement as a result of prepayment, liquidation, or a natural disaster. The 

tenant must begin using the rental assistance within 4 months of the transfer or the RA will 

become available for use by the next rental assistance eligible tenant in the housing project.

(d) Agency use of obligation balances. In lieu of transferring rental assistance units, the Agency 

may elect to utilize the remaining obligation balances of units identified in paragraphs (a)(2) and 

(3) of this section for renewal purposes.

§3560.260 Rental subsidies from non-Agency sources.

(a) General. The Agency may authorize the use of rental subsidies from sources other than the 

Agency in Agency financed housing projects. The Agency will make no commitment to 

providing Agency rental assistance at the expiration of the rental subsidies from other sources.

(b) HUD vouchers. For tenants with HUD vouchers, the borrower must set the rental unit rent at 

the basic rent or the rent standard set by the public housing authority, whichever is less. The 

public housing authority distributing the HUD vouchers may set the utility allowance.

(c) Loan proposals using non-Agency rental subsidy. Loan applicants or borrowers proposing to 

use rental subsidy from sources other than the Agency must provide:

(1) Documentation demonstrating that a market exists for households eligible for the 

subsidy and the households are at income levels that would benefit from the amount of 

rental subsidy that will be provided;

(2) A plan describing actions to be taken when the rental subsidy expires to minimize the 

impact on tenants losing the rental assistance and to avoid displacement; and

(3) A copy of the project-based rental assistance agreement to be signed by the borrower 

and the provider of the rental assistance.

(d) Rental subsidy agreement. The borrower and the provider of rental subsidies from sources 

other than the Agency must execute a rental subsidy agreement and submit a copy of the 

agreement to the Agency. At a minimum, the rental subsidy agreement between the borrower and 

the source of the rental subsidy must include the following provisions:

(1) A description of how the subsidy will be paid. The rental subsidy payments may be 

paid directly to the tenants, to the borrower on behalf of the tenants, or deposited to a 

separate account established for the subsidy. The tenants must be advised of the amount 

and source of the subsidy through the lease or a supplement to the lease.

(2) The life of a project-based rental subsidy agreement with a non-Agency source must 

be similar to existing or current Agency rental assistance funding levels and sufficient 

funds must be set aside to assure availability of the rental subsidy for this term. The 

method of supplying the funds must be clearly established.

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§3560.261 Improperly advanced rental assistance.

Improperly advanced RHS rental assistance resulting from tenant or borrower error or 

fraud constitutes unauthorized assistance and the provisions of subpart O of this part apply.

§§3560.262-3560.299 [Reserved]

§3560.300 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart G--Financial Management

§3560.301 General.

This subpart contains requirements for the financial management of Agency financed

multi-family housing (MFH) projects, including accounts, budgets, and reports. Financial 

management systems and procedures must cover all housing operations and provide adequate 

documentation to ensure that program objectives are met.

§3560.302 Accounting, bookkeeping, budgeting, and financial management systems.

(a) General. Borrowers must establish the accounting, bookkeeping, budgeting and 

financial management procedures necessary to conduct housing project operations in a 

financially safe and sound manner. Borrowers must maintain records in a manner suitable

for an audit, and must be able to report accurate operational results to the Agency from 

these accounts and records.

(b) Acceptable methods of accounting. 

(1) Borrowers are required to use the accrual method of accounting in preparing 

annual financial reports, as identified in § 3560.308. 

(2) Borrowers must describe their accounting, bookkeeping, budget preparation, 

and financial reporting procedures in their management plan.

(3) Borrowers must notify the Agency of any changes in their accounting, 

bookkeeping, budget preparation, and financial management reporting systems 

through a revision of their management plan.

(c) Account requirements.

(1) As used in this paragraph, the term account is used interchangeably to mean a 

bookkeeping account (ledger) or a bank account.
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(2) At a minimum, borrowers must maintain the accounts required by their loan 

agreement or resolution.

(3) The following list identifies the financial accounts that are required for each housing 

project. Additional accounts may be required by third-party lenders. Accounts are to be 

funded in the following priority order, except that paragraphs (c)(3)(iv), (v), and (vi) of 

this section are funded directly by tenant security deposits or patron capital receipts 

respectively:

(i) General operating account;

(ii) Real estate tax and insurance account (if not part of the general operating

account or unless escrowed by the Agency);

(iii) Reserve account (unless escrowed by the Agency in accordance with § 

3560.65);

(iv) Tenant security deposit account;

(v) Membership fee account for cooperative housing; and

(vi) For cooperative housing only, a patron capital account.

(4) Amounts escrowed for taxes and insurance may be kept in the general operating 

account as long as the accounting system reflects the amount escrowed.

(5) Regardless of the number or types of accounts established, the borrower must meet 

the following requirements:

(i) All housing project funds must be held only in financial institution accounts 

insured by an agency of the Federal Government or held in securities meeting the 

conditions in this subpart.

(ii) Funds maintained in an institution may not exceed the limit established for 

Federal deposit insurance. Funds exceeding the Federally insured limit under a 

Tax ID Number must be moved to a different qualified banking institution that 

will ensure the funds unless the current financial institution provides additional 

surety such as a collateral pledge that may already be in place.

(iii) All funds and proceeds in any account must be used only for authorized 

purposes as described in Agency's regulations, loan or grant documents. Use of 

funds for non-program purposes constitutes non-monetary default as described in 

§3560.452(c).

(iv) All funds received and held in any account, except the tenant security 

deposit, membership fee, and patron capital accounts, are considered assets of the 

property and must be held in trust by the borrower for the loan obligations until 

used and serve as security, through transfers or assumptions for the Agency loan 

or grant until all outstanding balances are satisfied.

(v) Borrowers must be able to account for housing project funds with accounting 

methods or practices that maintain the proprietary identity of the funds for each 

project. A borrower may operate one account for multiple projects as long as the 

funds for each project themselves are accounted for separately.

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(vi) Each borrower must have access to at least one demand deposit or 

checking account.

(vii) Housing project funds may not be pledged as collateral for debts 

without Agency approval. If such a need arises for an eligible program 

purpose, the borrower must obtain prior Agency approval.

(6) Tenant security deposit accounts or membership fee accounts and patron 

capital accounts must be maintained in a separate account in trust for the tenants 

or members and handled in a manner consistent with state and local laws.

(d) Documentation of separate accountability. Housing project funds may be combined 

in one or more bank accounts for two or more housing projects as long as the borrower's 

accounting system segregates and tracks funds for each project separately.

(1) When borrowers request Agency approval of an accounting system that 

combines funds from two or more housing projects, they must demonstrate to the 

Agency that the accounting systems are structured to segregate and maintain 

separate accountability for each housing project. Such demonstration must include 

a statement issued by a Certified Public Accountant (CPA) stating that the 

accounting system is structured to meet this principle of separate accountability.

(2) The accounting system and management plan must document the method for 

prorating revenue and expenses that are not clearly identifiable as being 

associated with a particular housing project.

(3) Funds for housing projects managed by the same management company must 

not be co-mingled.

(e) Records. 

(1) Borrowers must retain all housing project financial records, books, and

supporting material for at least three years after the issuance of their financial

reports. Upon request, these materials will immediately be made available to the 

Agency, its representatives, the USDA Office of Inspector General (OIG), or the 

Government Accountability Office (GAO).

(2) Borrower accounts and records will be kept or made available in a location 

with reasonable access for inspection, review, and copying by the Agency, other 

authorized representatives of the USDA, OIG, or GAO.

(3) Automated records may be used if they meet the conditions of paragraph (f) of 

this section.

(f) Forms generated by automated systems. 

(1) The forms and formats approved for use by borrowers may be prepared on 

automated systems when they meet the requirements of this paragraph.
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(2) Forms may be automated if they meet the following requirements:

(i) The identical wording and nomenclature of an official form must be included 

in the automated version of the form, including the Office of Management and 

Budget (OMB) approval number.

(ii) The logic or mathematical calculation of an official form must be the same in 

an automated version of the form.

(iii) The name or logo of the source of the automated form must be visible on 

each output of the automated form.

(iv) Output size must be 8\1/2\ x 11 inches.

(v) Nominal spacing adjustment and colored paper are allowed.

(g) Farm Labor Housing. Borrowers with on-farm labor housing units will be considered in 

compliance with this section by virtue of completing the record keeping and reporting 

requirements outlined in subpart M of this part.

§3560.303 Housing project budgets.

(a) General requirements. 

(1) Using an Agency-approved format, borrowers must submit to the Agency for 

approval a proposed annual housing project budget prior to the start of the housing 

project’s fiscal year. The capital budget section of the annual project budget must include 

anticipated expenditures on the project’s long-term capital needs as specified in § 

3560.103(c) and will assist the Agency on utilization of the reserve account for current or 

future rent increase requests.

(2) Budget projections regarding income, expenses, vacancies, and contingencies must be 

realistic given the housing project’s history, current circumstances, and market 

conditions. 

(3) Borrowers must document that the operating expenses included in the budget 

accurately reflect reasonable and necessary costs to operate the housing project in a 

manner consistent with the objectives of the loan and in accordance with the applicable 

Agency requirements in this part. 

(4) Borrower must submit supporting documentation to justify housing project utility 

allowances. 

(5) Upon Agency request, borrowers must submit any additional documentation 

necessary to establish that applicable Agency requirements in this part have been met. 

(b) Allowable and unallowable project expenses. Expenses charged to project operations, 

whether for management agent services or other expenses, must be reasonable, typical, necessary 

and show a clear benefit to the residents of the property. Services and expenses charged to the 

property must show value added and be for authorized purposes.

(1) Allowable expenses. Allowable expenses include those expenses that are directly 

attributable to housing project operations and are necessary to carry out successful 

operations.

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(i) Housing project expenses must not duplicate expenses included in the 

management fee as defined in § 3560.102(i).

(ii) Actual costs for direct personnel costs of permanent and part-time staff 

assigned directly to the project site. This includes managers, maintenance 

staff, and temporary help including their:

(A) Gross salary;

(B) Employer Federal Insurance Contributions Act (FICA) 

contribution;

(C) Federal unemployment tax; 

(D) State unemployment tax;

(E) Workers compensation insurance; 

(F) Health insurance premiums; 

(G) Cost of fidelity or comparable insurance; 

(H) Leasing, performance incentive, or annual bonuses that are 

clearly provided for by the site manager salary contract; 

(I) Direct costs of travel to off-site locations by on-site staff for 

property business or training; and/or 

(J) Retirement benefits. 

(iii) Legal fees directly related to the operation and management of the 

property including tenant lease enforcement actions, property tax appeals 

and suits, and the preparation of all legal documents.

(iv) All outside account and auditing fees, if required by the Agency, 

directly related to the preparation of the annual audit, partnership tax 

returns, and 401– K’s, as well as other outside reports and year-end reports 

to the Agency, or other governmental agency.

(v) All repair and maintenance costs for the project including:

(A) Maintenance staffing costs and related expenses.

(B) Maintenance supplies.

(C) Contract repairs to the projects (e.g., heating and air 

conditioning, painting, roofing).

(D) Make ready expenses including painting and repairs, flooring 

replacement, and appliance replacement as well as drapery or miniblind replacement. (Turnover maintenance.)

(E) Preventive maintenance expenses including occupied unit 

repairs and maintenance as well as common area systems repairs 

and maintenance.
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(F) Snow removal. 

(G) Elevator repairs and maintenance contracts. 

(H) Section 504 and other Fair Housing compliance modifications and 

maintenance. 

(I) Landscaping maintenance, replacements, and seasonal plantings. 

(J) Pest control services. 

(K) Other related maintenance expenses. 

(vi) All operational costs related to the project including:

(A) The costs of obtaining and receiving credit reports, police reports, 

and other checks related to tenant selection criteria for prospective 

residents.

(B) Photocopying or printing expense related to actual production of 

project brochures, marketing pieces, forms, reports, notices, and 

newsletters are allowable project expenses no matter what location or 

point of origin the work is performed including outsourcing the work to a 

professional printer.

(C) All bank charges related to the property including purchases of 

supplies (e.g., checks, deposit slips, returned check fees, service fees). 

(D) Costs of site-based telephone including initial installation, basic 

services, directory listings, and longdistances charges. 

(E) All advertising costs related specifically to the operations of that 

project. This can include advertising for applicants or employees in 

newspapers, newsletters, social media, radio, cable TV, and telephone 

books. 

(F) Postage expense to mail out rental applications, third-party (asset 

income and adjustments to income) verifications, application processing 

correspondence (acceptance or denial letters), mailing project invoice 

payments, required correspondence, report submittals to various 

regulatory authorities for the managed property are allowable project 

expenses no matter what location or point of origin the mail is generated. 

(G) State taxes and other mandated Tribal, State, or local fees as well as 

other relevant expenses required for operation of the property by a 

thirdparty governmental unit. Costs of continuation financing 

statements and site license and permit costs. 

(H) Expenses related to site utilities. 

(I) Site office furniture and equipment including site-based computer and 

copiers. Service agreements and warranties for copiers, telephone 

systems and computers are also included (if approved by the Agency).

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(J) Real estate taxes (personal tangible property and real property taxes) 

and expenses related to controlling or reducing taxes. 

(K) All costs of insurance including property liability and casualty as 

well as fidelity or crime and dishonesty coverage for on-site employees 

and the owners. 

(L) All bookkeeping supplies and recordkeeping items related to costs of 

collecting rents on-site. 

(M) All office supplies and copies related to costs of preparing and 

maintaining tenant files and processing tenant certifications to include 

electronic storage. 

(N) Public relations expense relative to maintaining positive relationships 

between the local community and the tenants with the management staff 

and the borrowers. Chamber of Commerce dues, contributions to local 

charity events, and sponsorship of tenant activities, are examples.

(O) Tax credit compliance monitoring fees imposed by Housing Finance 

Authorities (HFAs). 

(P) All insurance deductibles as well as adjuster expenses. 

(Q) Professional service contracts (audits, owner-certified submissions in 

accordance with § 3560.308(a)(2), tax returns, energy audits, utility 

allowances, architectural, construction, rehabilitation and inspection 

contracts, capital needs assessments (CNA), etc.). 

(R) Association dues to be paid by the project should be related to 

training for site managers or management agents. To the extent that 

association dues can document training for site managers or management 

agents related to project activities by actual cost or pro-ration, a 

reasonable expense may be billed to the project. 

(S) Legal fees if found not guilty of civil lawsuits, commercially 

reasonable legal expenses and costs for defending or settling lawsuits.

(vii) With prior Agency approval, cooperatives and nonprofit organizations may 

use housing project funds to reimburse actual and typical asset management 

expenses directly attributable to ownership responsibilities. Such expenses may 

include:

(A) Errors and omissions insurance policy for the Board of Directors. 

The cost must be prorated if the policy covers multiple Agency housing 

properties. 

(B) Board of Directors review and approval of proposed Agency’s 

annual operating budgets, including proposed repair and replacement 

outlays and accruals. The cost must be prorated if the policy covers 

multiple Agency housing properties. 

(C) Board of Directors review and approval of capital expenditures, 

financial statements, and consideration of any management comments

noted. The cost must be prorated if the policy covers multiple Agency 

housing properties. 
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(D) The cost must be prorated if the policy covers multiple Agency 

housing properties.

(viii) Agency approved third party debt service for the project.

(2) Unallowable expenses. Housing project funds may not be used for any of the 

following:

(i) Equity skimming as defined in 42 U.S.C. 543(a);

(ii) Purposes unrelated to the housing project;

(iii) Reimbursement of inaccurate or false claims;

(iv) Court ordered settlement agreements, court ordered decrees, legal fees, or 

other costs that result from the filing of civil rights complaints or legal action

alleging the borrower, or a representative of the borrower, has committed a civil 

rights violation. It is inappropriate to charge for legal services to represent any 

interest other than the borrower’s interest (i.e., representing a general partner or 

limited partner to defend their individual owner interest is not allowable); 

(v) Fines, penalties, and legal fees where the borrower or a borrower’s 

representative has been found guilty of violating laws, including, but not limited 

to, civil rights, and building codes. Charging for payment of penalties including 

opposition legal fees resulting from an award finding improper actions on the 

part of the owner or management agent is generally an inappropriate project 

expense. The party responsible generally pays such expenses for violating the 

standards or by their insurance carriers;

(vi) Association dues unless related to training for site managers or management 

agents. To the extent that association dues can document training for site 

managers or management agents related to project activities by actual cost or proration, a reasonable expense may be billed to the project;

(vii) Pay for bonuses or monetary performance awards to site managers or 

management agents that are not clearly provided for by the site manager salary 

contract;

(viii) Billing for parties or gifts to management agent staff; 

(ix) Billing for practices that are inefficient such as routine use of collect calls 

from a site manager to a management agent office;

(x) Billing the project for computer hardware, some software, and internal 

connections that are beyond the scope and size reasonably needed for the services 

supplied (i.e., purchasing equipment or software for use by a site manager that is 

clearly beyond that needed to support project operations). Note that computer 

learning center activities benefiting tenants are not covered in this prohibition; or 

(xi) Costs of tenant services.

(c) Priorities. The priority order of planned and actual budget expenditures will be:

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(1) Senior position lienholder, if any; 

(2) Operating and maintenance expenses, including taxes and insurance; 

(3) Agency debt payments; 

(4) Reserve account requirements; 

(5) All accounts payable; 

(6) Other authorized expenditures; and 

(7) Return on owner investment. 

(d) Determining if expenses are reasonable. Generally, expenses charged to project operations, 

whether for management agent services or other expenses, must be reasonable, typical, necessary 

and show a clear benefit to the residents of the property. Services and expenses charged to the 

property must show value added and be for authorized purposes. If such value is not apparent, the 

service or expense should be examined.

(1) Administrative expenses for project operations exceeding 23 percent, or those typical 

for the area, of gross potential basic rents and revenues (i.e., referred to as gross potential 

rents in industry publications) highlight a need for closer review for unnecessary 

expenditures. Budget approval is required, and project resources may not always permit 

an otherwise allowable expense to be incurred if it is not fiscally prudent in the market. 

(2) Excessive administrative expenses can result in inadequate funds to meet other 

essential project needs, including expenditures for repair and maintenance needed to keep 

the project in sound physical condition. Actions that are improper or not fiscally prudent 

may warrant budget denial and/or a demand for recovery action.

(e) Agency review and approval.

(1) The Agency will only approve housing project budgets that meet the requirements of 

paragraphs (a) through (d) of this section.

(2) If no rent change is requested, borrowers must submit budget documents for Agency 

approval 60 calendar days prior to the start of the housing project’s fiscal year. The 

Agency will notify borrowers if the budget submission does not meet the requirements of 

paragraphs (a) through (d) of this section. The borrower will have 10 days to submit the 

additional material. 

(3) If a rent change is requested, the borrower must submit budget documents to the 

Agency and notify tenants of the requested rent change at least 90 calendar days prior to 

the start of the housing project’s fiscal year. 

(i) The Agency will notify borrowers if the budget submission does not meet the 

requirements of paragraphs (a) through (d) of this section, or if the rent and 

utility allowance request has been denied in accordance with § 3560.205(f). The 

borrower will have 10 days to submit the additional material to address any 

issues raised by the Agency. 

(ii) The rent change is not approved until the Agency issues a written approval. If 

there is no response from the Agency within the 30-day period, the rent change is 

considered automatic. The following budgets are not eligible for automatic

approval:
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(A) Budgets with rent increases above $25 per unit; and 

(B) Budgets that are submitted late or that miss other deadlines set by the 

Agency.

(4) If the Agency denies the budget approval, the Agency will notify the borrower in 

writing. 

(5) If budget approval is denied, the borrower shall continue to operate the housing 

project based on the most recently approved budget.

§3560.304 Initial operating capital.

(a) Purpose. To provide a source of capital for start-up costs, such as the purchase of equipment, 

and paying operating, maintenance, and debt service expenses. Borrowers are required to make an 

initial operating capital contribution to the general operating account as described in §3560.64.

(b) Authorized uses of initial operating capital. Initial operating capital may be used only to pay 

for approved budgeted expenses.

(c) Withdrawal of initial operating capital. Initial operating capital funds may be withdrawn by a 

borrower if:

(1) The initial operating capital was provided from the borrower's own funds;

(2) The borrower requests the withdrawal after the second year of housing project 

operations and prior to the 7th year of operations;

(3) The housing project has had a 90 percent occupancy rate for a period of 12 months 

prior to the withdrawal request;

(4) The withdrawal will not affect the financial viability of the housing project;

(5) Contributions to the reserve account are at authorized levels;

(6) The withdrawal request will not result in rent increases; and

(7) There are no outstanding deficiencies in management's physical maintenance 

of the housing project.

§3560.305 Return on investment.

(a) Borrower's return on investment. Borrowers may receive a return on their investment (ROI) 

in accordance with the terms of their loan agreement and the following:

(1) If there is a positive net cash flow in housing project operations, the ROI may be 

taken by the borrower after the housing project's fiscal year, provided that the balance of 

the reserve account is equal to or greater than required deposits minus authorized 

withdrawals. If the annual financial reports indicate that an ROI should not have been 

taken, borrowers will be required to return any unauthorized ROI.

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(2) If there is negative cash flow in housing project operations, the Agency may authorize 

the borrower to take the ROI only after the Agency has reviewed the housing project's 

annual financial reports and determines:

(i) Surplus cash exists in either the general operating account as defined in 

§3560.306(d)(1) or the reserve account, if the balance is greater than the required 

deposits minus authorized withdrawals.

(ii) The housing project has sufficient funds to address identified capital or 

operational needs.

(b) Unpaid return on investment. An earned, but unpaid ROI for the previous year only may be 

requested by the borrower and authorized by the Agency under the provisions of §3560.305(a)(2) 

provided the current year's ROI has been paid first and a rent increase is not required to generate 

funds to pay the unpaid ROI.

§3560.306 Reserve account.

(a) Purpose. To meet the major capital expense needs of a housing project, borrowers must 

establish and maintain a reserve account, unless escrowed by the Agency.

(b) Financial management of the reserve account. Unless otherwise approved by the Agency, 

borrower management of the reserve account is subject to the requirements of 7 CFR part 1902, 

subpart A, regarding supervised bank accounts.

(c) Funding of the reserve account. Borrowers must make payments to the reserve account in the 

amount established in loan documents, beginning with the first loan payment or a date specified 

in loan documents.

(d) Transfer of surplus general operating account funds. 

(1) The general operating account will be deemed to contain surplus funds when the 

balance at the end of the housing project’s fiscal year, after all payables and priorities, 

exceeds 20 percent of the operating and maintenance expenses. If the borrower is

escrowing taxes and insurance premiums, include the amount that should be escrowed by 

year end and subtract such tax and insurance premiums from operating and maintenance 

expenses used to calculate 20 percent of the operating and maintenance expenses.

(2) If a housing project’s general operating account has surplus funds at the end of the 

housing project’s fiscal year as defined in paragraph (d)(1) of this section, the Agency 

will require the borrower to use the surplus funds to address capital needs, make a deposit 

in the housing project’s reserve account, reduce the debt service on the borrower’s loan, 

or reduce rents in the following year. At the end of the borrower’s fiscal year, if the 

borrower is required to transfer surplus funds from the general operating account to the 

reserve account, the transfer does not change the future required contributions to the 

reserve account. 
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(e) Account requirements. Borrowers must establish and maintain the reserve account according 

to §3560.65, §3560.302(c)(5), and the following requirements:

(1) Reserve accounts must be deposited in interest-bearing accounts or securities; and

(2) Reserve accounts must be supervised accounts that require the Agency to approve all 

withdrawals; except, this requirement is not applicable when loan funds guaranteed by 

the Section 538 GRRH program are used for the construction and/or rehabilitation of a 

direct MFH loan project. Direct MFH loan borrowers, who are exempted from the

supervised account requirement, as described in this section, must follow Section 538 

GRRH program regulatory requirements pertaining to reserve accounts. In all cases, 

Section 538 lenders must get prior written approval from the Agency before reserve 

account funds involving a direct MFH loan project can be disbursed to the borrower.

(f) Funds invested in securities. In addition to the requirements specified in paragraph (e) of this 

section, the following requirements apply when reserve funds are invested in securities:

(1) The reserve account must be held either at a Federally insured domestic institution 

such as a bank, savings and loan association, credit union, or at a domestic institution 

authorized to sell securities.

(2) The borrower must record the price actually paid for the securities. When designated 

as a reserve deposit, the price paid must equal the required contribution to reserves.

(3) Borrowers must be knowledgeable about industry practices and consider the impact of 

typical fees and charges for purchases and sales and maintenance of an account when 

making investment decisions. Such fees may be paid for out of reserves, only with the 

consent of the Agency. Housing project funds may not be used to pay for a financial 

advisor.

(g) Use of the reserve account. 

(1) Borrowers must request Agency approval of reserve account withdrawals prior to the 

withdrawal. Borrowers must inform the Agency of planned uses of reserve accounts in 

their annual capital budget if known at budget planning time. Any item on the approved 

capital budget does not require additional pre-approval by the Agency.

(2) Borrowers should include any needed capital improvements based on the needs 

identified in an Agency approved Capital Needs Assessment (if obtained) are completed 

within a reasonable timeframe.

(3) The Agency will indicate any conditions governing withdrawals from a reserve 

account at the time it approves the withdrawal.

(4) In emergency situations, the Agency may specify special procedures to provide an 

expedited approval process for the use of the reserve account.

(5) The Agency may approve the use of reserve funds for operating costs when 

circumstances that are determined by the Agency to be beyond the borrower's control 

have resulted in a shortfall in the housing project's general operating account.

(6) Funds from the replacement reserve account cannot be used to pay any fees associated 

with the Section 538 GRRH loan guarantee, as determined by the Agency.

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(h) Allowable uses. Allowable uses of reserve funds include the following:

(1) Major capital improvements and replacements.

(2) Housing project operating expenses provided the requirement of paragraph (g)(4) of 

this section has been met, including:

(i) Payments due on the loan, or

(ii) Payment of a return on investment at the end of the borrower’s fiscal year if 

such payment comes from surplus operating funds in the reserve account.

(3) With Agency approval, borrowers operating on a for-profit or a limited profit basis 

may make an annual withdrawal from the reserve account, equal to no more than 25 

percent of the interest earned on a reserve account during the prior year.

(4) For other purposes, which in the judgment of the Agency will promote the loan 

purposes, strengthen the security or facilitate, improve, or maintain the housing and the 

orderly collection of the loan without jeopardizing the loan or impairing the adequacy of 

the security.

(i) Records. Borrowers must maintain records documenting all expenses that were paid by 

withdrawals from the reserve account.

(j) Changes to reserve requirements. 

(1) As projects age, the required reserve account level may be adjusted to meet 

anticipated “life-cycle” needs, including equipment and facility replacement costs, by 

amending the loan agreement/resolution.

(2) The Agency will allow for an annual adjustment to increase reserve account funding

levels by Operating Cost Adjustment Factor (OCAF) as published by HUD annually. 

This will require a modification to the Loan agreement and the increase documented with 

budget submission as outlined in § 3560.303. 

(3) The Agency may approve a change in the reserve account funding level based on the 

findings of an approved capital needs assessment. The approval to increase reserve 

account funding levels will take into consideration the housing project's approved budget 

and the housing project's ability to support increased reserve account deposits without 

causing basic rents to exceed conventional rents for comparable units in the area.

(k) Excess reserves. Amounts in the reserve account which exceed the total required by the loan 

or grant agreement must be used, at the direction of the Agency, for any of the following:
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(1) Pay for expenses specified in a long-term capital plan;

(2) Make payments and reamortize the Agency loan;

(3) Reduce rents by a transfer to the general operating account;

(4) Fund preservation incentives authorized in subpart N of this part; or

(5) Cover other expenditures determined to be related to the purpose of the housing

project and in the best interest of the Federal Government.

(l) Procurement. The requirements of §3560.102(g), (j), and (k), and all other Agency 

requirements relating to procurement, bidding, identity-of-interest, cost-reasonableness, and 

construction management apply to any work or services paid out of reserve funds. Structural 

repairs and other significant work on major building systems such as heating or air conditioning 

must be done in accordance with the requirements of 7 CFR part 1924, subpart A.

§3560.307 Reports.

(a) Required reports. Borrowers must submit required reports using Agency-approved formats.

(b) Quarterly and monthly reports. The Agency may require quarterly or monthly reports to 

monitor financial progress when closer supervision is warranted.

§3560.308 Annual financial reports.

(a) General. 

(1) For-profit borrowers that receive $500,000 or more in combined Federal financial 

assistance must include an independent auditor’s report that includes, financial statements 

and notes to the financial statements, supplemental information containing Agency 

approved forms for project budgets and borrower balance sheets, a report on internal 

control over financial reporting and on compliance and other matters based on an audit of

financial statements in accordance with Government Auditing Standards; a report on 

compliance for each major program and internal control over compliance (if applicable). 

Federal Financial Assistance is defined in accordance with 2 CFR 200.40.

(2) Non-profit borrowers that receive $750,000 or more in combined Federal financial 

assistance must meet the audit requirements set forth by OMB, Uniform Administrative 

Requirements, Cost Principles, and Audit Requirements for Federal Awards, found at 2 

CFR parts 200 and 400. Borrowers must provide a copy of this audit to RHS in 

compliance with these financial reporting requirements. 

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(3) Non-profit borrowers that receive less than $750,000, and for-profit borrowers that 

receive less than $500,000in combined Federal financial assistance will submit annual 

owner certified prescribed forms on the accrual method of accounting in accordance with 

the Statements on Standards for Accounting and Review Services promulgated by the 

Accounting and Review Services Committee of the American Institute of Certified Public

Accountants (AICPA). Borrowers may use a CPA to prepare this compilation report of 

the prescribed forms.

(b) Performance standards. Borrowers must ensure that:

(1) Required accounts are properly maintained and tracked separately;

(2) Payments from operating accounts are disclosed and accurately represented on 

financial reports;

(3) The reserve amount is at the authorized level and there are no encumbrances;

(4) Tenant security deposit accounts are fully-funded and are maintained in separate 

accounts and meet state and local requirements;

(5) Amount of payment of owner return was consistent with the terms of the applicable 

loan agreement;

(6) The borrower has maintained proper insurance in accordance with the requirements of 

§3560.105(b); and

(7) All financial records are adequate and suitable for examination.

(8) There have been no changes in project ownership other than those approved by the 

Agency and identified in the certification.

(9) Real estate taxes are paid in accordance with state and/or local requirements and are 

current. 

(10) Replacement Reserve accounts have been used for only authorized purposes.

(c) Other financial reports.

(1) Non-profit and public borrower entities subject to OMB Uniform Guidance: Cost 

Principles, Audit, and Administrative Requirements for Federal Awards, must submit 

audits in accordance with 2 CFR parts 200 and 400.

(2) The Agency may require additional opinions of financial condition and compliance, 

such as audits, to assure the security of the asset, determine whether the housing project 

is being operated at a reasonable cost, or to detect fraud, waste, or abuse.

(3) Any audits independently obtained by the borrower also must be submitted to the 

Agency.

§3560.309 Advancement (loan) of funds to a RRH project by the owner, member of the organization, or 

agent of the owner.

(a) Prior written approval by the Servicing Office is required. Such advances may be authorized 

when justified by unusual short-term conditions. When conditions are not short-term in nature, a 

servicing plan may be developed and advances may be approved in accordance with the 

provisions set out in §3560.453 of this part. Justification will be based on the following:
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(1) A review of the documented circumstances and the project operating budget before any funds 

are advanced (loaned). The financial position of the project must not be jeopardized.

(2) Funds are not immediately available from any of the following sources:

(i) Reserve funds;

(ii) Initial operating capital; and

(iii) An imminent rent increase.

(b) The funds will be applied to ordinary project operating and maintenance expenses.

(c) Interest may be charged or paid on the loan from project income; however, interest 

must be reasonable. The proposal may be denied if Rural Development financing can be 

provided to resolve the problem in a more cost-effective manner.

(d) No lien in connection with the loan will be filed against the property securing the 

Rural Development loan or against project income. The advance may show as an 

unsecured project liability on financial statements prepared for year-end reports until 

such time as it is authorized to be repaid.

(e) The payback of the advance (loan) may be permitted by the Servicing Official 

provided the terms and conditions were mutually agreed to by the borrower and Rural 

Development at the time of the advance and the financial position of the project will not 

be jeopardized. Payback should only be permitted on the advance when the Rural 

Development debt is current and the reserve requirements are being maintained at the 

authorized levels.

§§3560.310-3560.349 [Reserved]

§3560.350 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart H--Agency Monitoring

§3560.351 General.

This subpart contains policies for Agency monitoring of operations and management 

at multi-family housing (MFH) projects.

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§3560.352 Agency monitoring scope, purpose, and borrower responsibilities.

(a) Scope of Agency monitoring activities. The Agency will review reports, records, and 

other materials related to the housing project, including borrower financial reports, 

housing project records, and other communications. The Agency also will review 

material related to a housing project submitted by a tenant or other source. To assess 

conditions such as a housing project's physical condition, record keeping procedures, and 

operations and management activities, including borrower compliance with Federal, state, 

and local laws and Agency requirements, the Agency will conduct periodic on-site 

monitoring reviews of a housing project.

(b) Purpose of Agency monitoring activities. Agency monitoring activities are designed 

to assess borrower and tenant compliance with Agency requirements, and to:

(1) Ensure housing projects are managed in accordance with the goals and 

objectives of the Agency's MFH programs and are maintained in accordance with 

Agency requirements for affordable, decent, safe, and sanitary housing;

(2) Preserve the value of the Agency-financed housing projects;

(3) Detect waste, fraud, and abuse in housing project operations or management 

and to ensure the cost of operations and management are necessary and 

reasonable;

(4) Verify compliance with Affirmative Fair Housing Marketing requirements, 

Title VI of the Civil Rights Act of 1964, Title VIII of the Civil Rights Act of 

1968, as amended, section 504 of the Rehabilitation Act of 1973, the Age 

Discrimination Act of 1975, Americans with Disabilities Act of 1990, other 

applicable Federal laws, and Agency requirements related to occupancy and 

tenant eligibility.

(c) Borrower responsibilities. The borrower is responsible for cooperating fully and 

promptly with Agency monitoring activities. Agency monitoring activities do not 

diminish borrower operation and management responsibilities and do not relieve 

borrowers from any Agency requirements including, but not limited to, borrower 

requirements to comply with:

(1) The terms of all agreements with the Agency, including the loan or grant 

agreement, assurance agreement, loan resolution, promissory note, mortgage, 

interest credit agreement, rental assistance agreement, mitigation measures 

contained in the environmental review document, and workout agreement;

(2) The requirements contained in this part;

(3) The requirements of Title VI of the Civil Rights Act of 1964, Title VIII of the 

Civil Rights Act of 1968, as amended; section 504 of the Rehabilitation Act of 

1973, the Age Discrimination Act of 1975, Americans with Disabilities Act of 

1990; and

(4) Applicable Federal, state, and local laws.
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§3560.353 Scheduling of on-site monitoring reviews.

Generally, the Agency will provide the borrower prior notice of an on-site monitoring 

review and will conduct the on-site monitoring review in the presence of the borrower. However, 

the Agency may visit a housing project, without prior notice, to observe physical conditions, 

operations and management activities, or other borrower or tenant activities. In addition, the 

Agency may conduct on-site reviews without the presence of the borrower, the management 

agent, or other designated representative of the borrower.

§3560.354 Borrower response to monitoring review notifications.

The Agency will notify borrowers, in writing, whenever Agency monitoring activities 

result in deficiency findings or compliance violations. The monitoring review notification will 

describe the deficiencies findings or compliance violations and will specify a time period by 

which corrective action must be taken by the borrower. The notification will offer borrowers an 

opportunity to discuss the reported deficiency findings or compliance violations with the Agency 

and will explain enforcement actions that the Agency may take if corrective action is not taken 

within the time period specified in the monitoring review notification. When civil rights noncompliance is found, the State Civil Rights Coordinator or Manager (SCRC/M) will be notified. 

If voluntary compliance cannot be obtained, appropriate enforcement or remedial action will be 

taken.

§§3560.355-3560.399 [Reserved]

§3560.400 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart I--Servicing

§3560.401 General.

(a) Purpose. This subpart contains actions the Agency may take to service and collect 

loans or other debts owed by multi-family housing (MFH) borrowers. The loan servicing 

and other actions set forth are designed to protect Agency and tenant interests and assist 

borrowers in meeting program objectives.

(b) General servicing policies. Borrowers must repay loans or other amounts due to the 

Agency according to provisions specified in promissory notes, loan agreements and 

resolutions, mortgages, deeds-of-trust, assumption agreements, reamortization 

agreements, or other agreements executed between the borrower and the Agency.

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(c) Special servicing actions. The Agency will not agree to any proposal for loan 

servicing or debt collection action other than actions consistent with this section, debt 

instruments, and other agreements. When payments due to the Agency from a borrower 

remain unpaid for more than 30 days after the due date, past due, after the Agency may 

initiate the special servicing actions described in subpart J of this part.

§3560.402 Loan payment processing.

(a) Predetermined Amortization Schedule System (PASS) requirements. All loans, 

except the loans specified in paragraph (c) of this section, must be closed and serviced 

using the PASS.

(b) Required conversion to PASS. Borrowers with Daily Interest Accrual System 

(DIAS) accounts must convert to PASS with any loan servicing action.

(c) Exceptions. Seasonal farm labor housing loans and on-farm labor housing loans may 

be closed on DIAS, monthly, or annual payment schedules.

§3560.403 Account servicing.

(a) Payment due dates. Loan or other payments due to the Agency are due on the first 

day of each month unless otherwise established in the debt instrument or other agreement 

executed with the Agency.

(b) Payment application order. Loan payments will be applied to the borrower's account 

in the following order of priority:

(1) Amortized audit receivables. (i.e., amounts due to the Agency, over a period 

of time, as a result of a finding from an audit or other monitoring activity.)

(2) Unamortized audit receivables. (i.e., amounts due to the Agency, in a lump 

sum payment, as a result of a finding from an audit or other monitoring activity.)

(3) Late fees. (i.e., amounts due to the Agency as a result of late payments.)

(4) Amortized recoverable costs. (i.e., amounts due to the Agency, over a period 

of time, as a result of Agency payments made on behalf of a borrower for housing 

project related expenses such as taxes or insurance premiums.)

(5) Unamortized recoverable costs. (i.e., amounts due to the Agency, in a lump 

sum payment, as a result of Agency payments made on behalf of a borrower for 

housing project related expenses such as taxes or insurance premiums.)

(6) Overage. (i.e., amounts due to the Agency as a result of a tenant's tenant 

contribution being higher than basic rent.)

(7) Interest. (i.e., amounts due to the Agency as a result of scheduled interest on a 

loan and as a result of interest charged on unpaid delinquent principal amounts.)

(8) Principal. (i.e., amounts due to the Agency as the loan principal.)
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(9) Advance payments. (Any funds remaining after disbursement of a payment to 

all other payment priorities will be applied to the borrower's account as an 

advance regular payment unless a borrower specifically designates, in writing, 

another application.)

(c) Late fees. If payments on a borrower's account, under PASS, are more than $15 

delinquent after the close of business on the 10th day after the payment due date, a late 

fee will be charged to the borrower's account.

(1) Late fees charged to a borrower's account will equal 6 percent of the total 

regular payments due as specified in any promissory notes, assumption 

agreements, or reamortization agreements related to the borrower's account.

(2) Late fees are a borrower expense and must not be paid from housing project 

funds.

(3) The Agency may waive late fees for circumstances beyond a borrower's 

control and when a waiver is determined by the Agency to be in the best financial 

interest of the Federal Government.

(d) Interest on unpaid overdue principal. On the first day of the month following a 

payment due date, the Agency will charge interest at the note rate on any unpaid principal 

payment due according to the loan's amortization schedule (i.e., interest will be charged 

on delinquent principal). The interest charged on the unpaid principal payment due will 

be charged to the borrower in addition to the scheduled interest due on payments 

according to the loan's amortization schedule.

§3560.404 Final loan payments.

(a) Payoff statements. At the borrower's request, the Agency will provide a statement 

indicating the pay off amount necessary to pay the borrower's account in full.

(b) Final payments. A borrower's final loan payment must include repayment of all 

outstanding obligations to the Agency.

(1) Any supervised funds being held by the Agency will be applied to the 

borrower's account or, at the borrower's option, will be returned to the borrower 

following acceptance of final payment on all outstanding obligations.

(2) If a balance due remains on a borrower's account after Agency acceptance of a 

final payment, due to borrower error or fraud or Agency error, the Agency will 

initiate collection action in accordance with the unauthorized assistance collection 

procedures described in subpart O of this part.

(c) Final payment loans. Borrowers with loans for which the Agency approved an 

amortization period that exceeded the term of the loan may request a loan to finance the 

final payment in accordance with the requirements of §3560.74.

(d) Loan prepayment requests. If prepayment of an Agency loan is requested, the 

applicable preservation requirements of subpart N of this part, including the execution of 

any appropriate restrictive-use agreements, must be met prior to the Agency's acceptance 

of a final loan payment under the prepayment request.

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(e) Payment forms. Final payments may be made by cashier's check, certified check, 

money order, bank draft, or other withdrawal instruments approved by the Agency.

(1) If borrowers use forms of payment requiring special handling, the borrower is 

responsible for the cost of the special handling.

(2) When payment is provided in a form that is not the equivalent of cash, the 

Agency will consider the payment to be received at the time the payment has been 

converted to cash and funds have been transferred to the Agency.

(f) Release of security instruments. The Agency will release security instruments, subject 

to applicable restrictive-use agreements referenced in subpart N of this part, when full 

payment of all outstanding obligations to the Agency has been received, accepted, and 

the funds have been transferred to the Agency.

(1) If the Agency and the borrower agree to settle an account for less than the full 

amount owed, the Agency will release security instruments when the borrower 

has paid in full all agreed upon obligations.

(2) Recording costs for the release of the security instruments will be the 

responsibility of the borrower, except where state law requires the mortgagee to 

record or file the satisfaction.

(g) Special circumstances--Refund of entire principal. If the entire principal of the loan is 

refunded after the loan is closed, the borrower must pay interest from the date of the note 

to the date of receipt of the refund.

§3560.405 Borrower organizational structure or ownership interest changes.

(a) General. The requirements of this section apply to changes in a borrower entity's 

organizational structure or to a change in a borrower entity's controlling interest. If 100

percent of a borrower entity's ownership interest is transferred, within a 12-month period, 

the change will be considered a housing project transfer and the provisions of §3560.406, 

which covers transfers or sales of housing projects, will apply.

(b) Agency requirements. Borrowers must notify the Agency prior to the implementation 

of any changes in a borrower entity's organizational structure. The Agency must give its 

consent prior to the implementation of changes in a borrower entity's controlling interest.

(1) Borrowers must submit written requests for Agency consent to the Agency at 

least 45 days prior to the anticipated effective date of the proposed organizational 

change. The request must document that the proposed changes will not adversely 

affect the program purposes or security interest of the Agency and will not 

adversely affect tenants.

(2) If the controlling interest change involves a transfer of interest to an entity not

previously holding an ownership interest in the borrower entity, the request for 

consent must include a written certification, executed by the party receiving the 

ownership interest, certifying that the recipient of the ownership interest agrees to 

assume responsibilities and obligations required of a borrower as established in 

Agency program requirements including requirements in the promissory note, 

loan agreement, or other document related to Agency loans held by the borrower 

entity.
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(3) The Agency will not take a consent request for a controlling interest change 

under consideration if the borrower's request fails to meet the requirements 

specified in paragraph (b)(2) of this section.

(c) Documentation of organizational structures and ownership interest. Borrowers must 

annually document their organizational structure and ownership.

(1) Documentation must be submitted with the annual financial reports required 

by §3560.308 and must reflect any changes made during the 12-month period 

preceding the submission of the annual financial reports.

(2) If no changes in a borrower entity's organizational structure or ownership were 

made during the 12-month period prior to submission of the annual financial 

reports, borrowers are not required to submit documentation, but must submit a 

statement certifying that no changes have been made in the documents on file 

with the Agency.

(3) Organizational structure and ownership documentation must include the 

following items:

(i) A current organization description reflecting all approved changes in 

the organizational structure of the borrower entity and listing the names, 

addresses, and tax identification numbers of all parties with an ownership 

interest in the borrower entity; and

(ii) A written statement by the borrower certifying that the changes in the 

borrower entity's organizational structure or ownership interests were 

completed in compliance with state and local laws and in accordance with 

organizational requirements of the borrower entity.

§3560.406 MFH ownership transfers or sales.

(a) General. The provisions of this section apply to ownership transfers or sales (e.g., 

title transfers) involving an Agency financed housing project. The provisions cover 

situations where Agency loans are being assumed as a part of a housing project transfer 

or sale.

(b) Agency consent requirements. Agency consent must be obtained prior to an 

ownership transfer or sale and Agency consent will only be given when the transfer or 

sale is in the best interest of the Federal Government. Any ownership transfer or sale 

without the consent of the Agency will be considered a default and will be handled in 

accordance with subpart J of this part.

(1) Priority consideration will be given to ownership transfers or sales needed to 

remove a hardship to the borrower that was caused by circumstances beyond the 

borrower's control.

(2) Ownership transfers or sales with an assumption of debt at an amount less than 

the borrower's debt amount will only be approved by the Agency when all persons 

in the borrower entity who are transferring their ownership interest or are 

involved in the selling of the property are not part of the transferee organization.

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(c) Consent request requirements. Borrowers must submit written requests for Agency consent 

to an ownership transfer or sale of a housing project to the Agency at least 45 days prior to 

proposed ownership transfer or sale date. The consent request must document that the proposed 

transfer or sale meets the requirements of paragraph (d) of this section and must include the 

following items:

(1) A statement disclosing any identity-of-interest between the borrower and the party to 

which the housing project ownership is being transferred or sold.

(2) A statement certifying that the housing project's financial accounts are funded at 

required levels, less authorized withdrawals, and that payments due for operation and 

maintenance expenses, tax assessments, insurance premiums, any required tenant security 

deposit accounts, and other obligations incurred as a part of the housing project 

operations are paid in full with no overdue balances or a statement explaining the housing 

project's financial situation and the reasons for overdue payments or under funded 

accounts.

(3) A proposed housing project budget covering the partial year, if applicable, and first 

full year operation following the ownership transfer or housing project sale.

(4) A written statement, signed by the proposed transferee or buyer, certifying that the 

transferee or buyer will assume the borrower responsibilities and obligations specified in 

Agency program requirements including requirements in a promissory note, loan 

agreement or other documents related to Agency loans held by the borrower entity.

(5) A certification from the borrower and the proposed transferee or buyer that the 

borrower does not and will not have a reversionary interest in the housing project.

(d) Requirements for ownership transfers or sales. An ownership transfer or sale of a housing 

project with an assumption of Agency loans by the transferee or buyer must comply with the 

following conditions:

(1) The transferee or buyer must be an eligible borrower under the requirements 

established by subpart B of this part;

(2) The transferee or buyer must agree to set basic rents at the housing project covered by 

the assumed loans at levels that do no exceed conventional rents for comparable units in 

the area, except that when determined necessary by the Agency to allow for decent, safe 

and sanitary housing to be provided in market areas where conventional rents are not 

sufficient to cover necessary operating, maintenance, and reserve costs. Basic rents may 

be allowed to exceed comparable rents for conventional units, but in no case by more 

than 150% of the comparable rent for conventional unit rent level; and

(3) The value of the housing project covered by the loans to be assumed, at the time of an 

ownership transfer or sale, must be sufficient to ensure that all Agency loans being 

assumed and all subsequent loans being offered as a part of the transfer or sale can be 

secured to a level that fully protects the Agency's interest. Loans from third-party sources 

that are not dependent on project revenue for payment will not be included in this 

determination.
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(i) If the total value of the loans being offered as a part of an ownership transfer 

or sale is $100,000 or less, the security value of the housing project may be 

determined through either: An Agency review of monitoring reports conducted 

in accordance with the requirements in subpart H of this part or an 

appraisal paid for by the borrower and conducted in accordance with 

subpart P of this part.

(ii) If the total value of the loans being offered as a part of an ownership 

transfer or sale exceeds $100,000, the security value of the housing project 

must be determined through an appraisal obtained by the Agency and 

conducted in accordance with subpart P of this part.

(iii) The Agency may approve a loan write-down, in accordance with 

§3560.455, prior to an ownership transfer or sale to reduce the amount of 

debt being assumed by the transferee or buyer.

(4) Prior to Agency approval of an ownership transfer or sale, the appropriate 

level of environmental review in accordance with 7 CFR part 1970 must be 

completed by the Agency on all property related to the ownership transfer or sale. 

If releases of or contamination from hazardous substances or petroleum products 

is found on the property, the finding must be disclosed to the Agency and the 

transferee or buyer and must be taken into consideration in the determination of 

the housing project's value. (Revised 04-01-16, SPECIAL PN.)

(5) All immediate and long-term repair and rehabilitation needs must be identified 

by a capital needs assessment. The reserve requirements for the housing project 

will be reviewed by the Agency and adjusted, if necessary, to adequately cover 

the cost of addressing the property's capital needs. The Agency may approve the 

release of the current reserve amount to the transferor provided the transferee 

agrees to deposit the amount to cover the project's immediate needs into the 

reserve account at closing.

(6) The borrower and transferee must disclose to the Agency all terms, conditions, 

or other considerations related to the ownership transfer or sale. All side or other 

agreements must be disclosed and all sources and uses of funds related to the 

ownership transfer or sale must be disclosed.

(7) An agreement must be signed between the borrower and the transferee listing 

all repairs known by the borrower to be necessary to bring the housing project 

into compliance with Agency requirements for decent, safe, and sanitary housing 

as listed in subpart C of this part.

(i) The agreement must include repairs required to correct compliance 

violations cited in a compliance violation notice issued by the Agency.

(ii) The agreement must specify whether each repair listed will be 

completed by the borrower prior to the ownership transfer or by the 

transferee in accordance with a workout agreement developed in 

accordance with the requirements of §3560.453 and executed between the 

transferee or buyer and the Agency.

(8) A civil rights compliance review, as required by 7 CFR part 1901, subpart E, 

will be conducted by the Agency prior to the ownership transfer or sale.

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(9) During or immediately after the transfer, a review of the property must be 

conducted to ensure that it complies with or will comply with section 504(c) of 

the Americans with Disabilities Act (ADA), which covers accessibility 

requirements, and the Title VI of the Fair Housing Act of 1968.

(10) A transferee must ensure that tenant certifications in compliance with subpart 

D of this part for all occupied rental units are on file with the Agency.

(11) A transferee must comply with insurance and bonding requirements 

established in subpart C of this part at the time of the transfer.

(12) A transferee must agree to submit financial reports to the Agency according 

to subpart G of this part.

(13) A transferee must establish that there are no liens, judgments, or other claims 

against the housing project other than those by the Agency and those to which the 

Agency has previously agreed.

(14) A limited profit Rural Rental Housing transferee's initial investment and 

return on investment will remain the same as that originally provided to the 

transferor unless:

(i) The property is transferred to a non-profit entity and the return on 

investment is eliminated; or

(ii) The transferee contributes additional funds for repair or rehabilitation 

and the Agency agrees to recognize a higher initial investment.

(e) Equity payments. The Agency will withhold any equity payment due to the borrower, 

as part of an ownership transfer or sale, if any of the following conditions exist:

(1) The borrower's indebtedness to the Agency has not been paid in full or is not 

being assumed by the transferee. The Agency will require that all or part of an 

equity payment be applied against other Agency loans owed by the borrower if 

payments on the other loans are not current.

(2) Any non-Agency prior liens against a housing project are not paid in full.

(3) Any housing project financial accounts are not funded at required levels, less 

authorized withdrawals, or any payments due for operation and maintenance 

expenses, tax assessments, insurance premiums, tenant security deposits or other 

obligations incurred as a part of housing project operations are not paid in full.

(4) Any management deficiencies cited in a compliance violation notice issued by 

the Agency to the borrower have not been corrected or the housing project is not 

operating under an approved management plan or, if applicable, an approved 

management agreement.

(5) Any operation and maintenance deficiencies cited in compliance violation 

notices issued by the Agency have not been corrected or are not scheduled for 

correction in a workout agreement developed in accordance with the requirements 

of §3560.453.
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(6) The borrower entity is, at the time of the ownership transfer or sale, cited by

the Agency or other Federal, state, or local agencies for violations of Fair Housing 

or Equal Opportunity requirements.

(7) The borrower entity is, at the time of the ownership transfer or sale, cited by 

the Agency or any other entity involved in the financing of the housing project for 

misappropriation of funds.

(f) Equity payment funding sources. Equity may be provided in cash or through a loan. If 

a full equity payment to the transferor is not paid at the time of the ownership transfer or 

sale or has not been paid through an Agency equity loan or third-party equity loan 

approved by the Agency to the borrower, the transferee must certify that equity payments 

due to the borrower will be paid from sources other than housing project's funds and must 

identify the sources of such payments.

(g) Restrictive-use requirement. Transferees assuming Agency loans, including loans 

approved prior to December 21, 1979, will be required to execute a restrictive-use 

agreement that contains the language specified in §3560.662. The restrictive-use 

agreement will require the housing project to be used for program purposes for a 

specified period of time beyond the date that the ownership transfer or sale is closed.

When an equity loan is involved at the time of transfer, the restrictions will be for 30 

years.

(h) Subsequent loans. The Agency may approve a subsequent loan or permit a loan from 

a third-party source in conjunction with an ownership transfer or sale of a housing 

project. The subsequent loan may be in the form of a junior or parity lien.

(1) Subsequent loans on a housing project proposed in conjunction with an 

ownership transfer or sale must be requested and processed in accordance with the 

Agency loan origination requirements in subpart B of this part.

(2) The Agency may amortize the subsequent loan over a period not to exceed the 

remaining economic life of the housing or 50 years, whichever is less.

(3) The Agency may extend the term of the existing loan to a period not to exceed 

30 years or the remaining economic life of the housing, whichever is less.

(i) Loan assumption interest rates. The interest rate for Agency loans assumed in 

conjunction with an ownership transfer or sale will be determined as follows:

(1) The interest rate for all loans, except farm labor housing loans, will be set at 

the lower of:

(i) The note rate of the existing Agency loan;

(ii) The Agency note rate on the day the transfer is approved;

(iii) The Agency note rate on the day the transfer is closed; or

(iv) If the rents are increased due to a transfer, the transfer will be done 

under new rates and terms when the Agency determines that it is in the 

best interest of the government. Subsequent loan may be in the form of a

senior, junior or parity lien or soft second.

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(2) The interest rate on farm labor housing loans will be the rate specified in the 

note, except that loans transferred to public bodies, nonprofit organizations of 

farm workers, and broadly-based nonprofit corporations for farm labor housing 

purposes may be at a one percent interest rate regardless of the rate specified in 

the note if the Agency determines that such a reduction is necessary to maintain

affordable rental rates for tenants.

(j) Loan assumption terms. The amount of the loan balance that may be assumed through 

an ownership transfer or sale must not exceed the security value of the housing project 

determined according to §3560.406(d)(3)(i).

(1) The Agency may reamortize a loan assumed e time of the transfer or sale, to a 

monthly payment amortization and will be made subject to PASS. When on- or 

off-farm labor housing projects are involved in an ownership transfer or sale, the 

related loans may be transferred on a DIAS basis or converted to PASS if the 

Agency determines that such a conversion will not be detrimental to the operation 

of the farm labor housing.

(k) Processing ownership transfers or sales. 

(1) At the time of the transfer, the Agency will require the borrower to transfer all 

equipment, related facilities, and housing project financial accounts to the 

transferee including the operation and maintenance account, reserve account, 

tenant security deposit account, tax and insurance escrow accounts.

(i) Any funds remaining in a rental assistance contract not dispersed by the 

transferor will be assigned to the transferee unless the rental assistance is 

not needed for tenants or another form of rental subsidy is to be used.

(ii) Any rental assistance determined to be unnecessary will be reassigned 

to other housing projects in accordance with the provisions of subpart F of 

this part.

(2) The Agency will require that appropriate loan documents are executed by the 

transferee. The Agency may require such documents to be referenced in security 

instruments (e.g., mortgage or deed of trust).

(3) If all of a borrower's outstanding Agency debt is not assumed or paid off at the 

time of the transfer or sale, the Agency will not release a borrower from liability 

unless the Agency determines that the borrower is unable to pay the remaining 

debt from assets taken as security through the debt settlement procedure in 

accordance with §3560.457.

(l) Ownership transfers or sales under special rates, terms, and conditions. Housing 

projects may be transferred or sold to entities that do not meet borrower eligibility

requirements for the type of loans being assumed. However, such a transfer or sale will 

only be considered when it is determined by the Agency to be in the best interest of the 

Federal Government and the objectives of the original loan can no longer be met. The 

following special rates, terms, and conditions will apply to such situations.

(1) The transferee makes a down payment of at least 10 percent of the remaining 

loan balance to be assumed.

(2) The transferee has the ability to pay the Agency debt.
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(3) Monthly or annual installments will be amortized over the term of the loan and the 

interest rate will be at a rate of interest at least one percent higher than the interest rate 

offered to eligible borrowers as specified in paragraphs (i)(1) or (2) of this section.

§3560.407 Sales or other disposition of security property.

(a) General. Borrowers must obtain Agency approval prior to selling or exchanging all or a part 

of, or an interest in, property serving as security for Agency loans. Agency approval also must be 

requested and received prior to the granting or conveyance of rights-of-way through property 

serving as security property. Agency approvals of sales or other dispositions of security property 

are not subject to the requirements outlined in 7 CFR part 1970. (Revised 04-01-16, SPECIAL 

PN.)

(b) Request requirements. Requests for Agency approval of transactions related to security 

property must document that the following conditions will be met.

(1) The borrower's ability to repay the Agency debt will not be impaired;

(2) The transaction will not interfere with the successful operation of the housing project 

or prevent the borrower from carrying out the purpose for which the loan was made.

(3) The monetary or other consideration offered in the transaction is equal to or greater 

than the market value of the security property being disposed of or the rights being 

granted, except that right-of-way easements may be granted or conveyed with minimal or 

no consideration being offered if:

(i) The value of the security property will not be reduced;

(ii) The suitability of the security property for the intended purpose will not be 

impaired; and

(iii) The easement is granted to allow the borrower to develop additional lots or 

units that will be integrated into the housing project or for enhancement of 

streets, utilities or other services provided by a public body.

(4) The property that will remain as security for Agency loans, after any transaction 

related to security property, will fully secure the borrower's debt to the Agency.

(5) Borrowers must report to the Agency the total of all proceeds derived from the sale or 

other disposition of property serving as security for Agency loans. The proceeds from the 

disposition of the security property will be used for purposes approved by the Agency.

§3560.408 Lease of security property.

(a) General. Borrowers must obtain Agency approval prior to entering into a lease agreement 

related to any property serving as security for Agency loans. Agency approvals of lease 

agreements are considered loan servicing actions under 7 CFR part 1970, and as such do not 

require additional NEPA analysis and documentation. (Revised 04-01-16, SPECIAL PN.)

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(b) Leases to public housing authorities. Borrowers may not lease all or part of their housing 

facilities to a housing authority. Lease agreements in place prior to the effective date of this 

regulation may be continued provided that leases are in a form acceptable to the housing authority 

and are on terms that will enable the borrower to comply with Agency program requirements, to 

meet Agency program objectives, and make loan and other required payments to the Agency on 

an Agency approved schedule.

(c) Lease of a portion of the security property. The Agency may, subject to the applicable 

provisions governing loan purposes found in of §3560.53, §3560.553 and §3560.603, approve the 

leasing of facilities related to a housing project (e.g., central kitchens, recreation facilities, 

laundry rooms, and community rooms) when the borrower will continue to operate the facilities 

for the purposes for which the loan was made. Agency approval is not required for leases with a 

term of less than 30 days. The Agency will only approve a lease with a term over 30 days if the 

following conditions are met:

(1) The lease is in the best interest of the borrower, the tenants, and the Federal 

Government.

(2) The amount of the consideration agreed to in the lease is adequate to pay all prorated 

operating and maintenance expenses, a prorated share of the annual reserve deposit, and 

the prorated part of the loan amortization at the note rate of interest.

(3) All compensation and considerations, whether payments, a share of proceeds, or 

improvements to the property paid for by the lessee, must be disclosed to the Agency. No 

payments or compensation for entering into a lease shall flow to the borrower or any 

identity-of-interest related to the borrower.

(4) The lease provides at its termination for the restoration of the leased space to its

original condition or a condition acceptable to the owner and the Federal Government.

(5) Consent to the lease will not exceed 3 years at a time unless 

the Agency determines that a longer lease is advantageous to the 

borrower, the tenants, and the Federal Government.

(6) When another lienholder's mortgage requires that lienholder's 

consent to a lease, the borrower must obtain written consent from the lienholder before 

the Agency will consider approving the lease.

(d) Mineral leases. Mineral leases will be handled according to 7 CFR 3550.159 except that all 

references to County Supervisor will be construed to mean District Director when applied to the 

MFH Programs.

§3560.409 Subordinations or junior liens against security property.

(a) General. Borrowers must obtain Agency consent prior to entering into any financial 

transaction that will require a subordination of the Agency security interest in the property, or lien 

subordination, (i.e., granting of a prior interest to another lender.) Prior to Agency consent, 

environmental review requirements must be completed in accordance with 7 CFR part 1970. 

Borrowers must use an Agency approved lien subordination agreement. (Revised 04-01-16, 

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(1) If a lien is placed against property serving as security for an Agency loan without 

prior Agency consent, the Agency will declare the borrower to be in default and will 

pursue liquidation of the borrower's loans in accordance with the procedures specified in 

§3560.457, unless an agreement can be reached between the borrower and the Agency to 

work out removal of the lien or post approve the lien.

(2) Subordinations or junior liens need not encompass the entire site, (e.g., a 

subordination or junior lien requested to permit an interim lender to advance construction 

funds may only cover the portion of the site proposed for construction.)

(3) The subordination or junior lien must be for a specific amount.

(4) The subordination or junior lien must not adversely impact the Agency's ability to 

service the loan according to the requirements of this part.

(b) Consent request requirements. Borrowers proposing to have the Agency subordinate its 

interest to another lender or to give a creditor a junior lien against property serving as security for 

an Agency loan must submit a consent request to the Agency. The consent request must 

document the following:

(1) The action will enable the borrower to obtain financial resources for improvements or 

repairs on the security property that are consistent with the purposes of the Agency loan 

secured by the property.

(2) The action will not adversely impact the borrower's financial condition and the 

borrower's ability to repay the Agency loan being secured by the property.

(3) The action will not result in basic rents at the security property that exceed 

conventional rents for comparable units in the area.

(4) The terms and conditions of the credit to be secured by the subordination or junior 

lien are not expected to adversely affect the borrowers ability to meet the terms and 

conditions of the Agency loan secured by the property.

(5) The proposed use of the funds obtained through the granting of a subordination or 

junior lien will not adversely affect the borrower's ability to meet Agency program 

requirements or to operate and manage the housing project in a manner consistent with 

program objectives.

(6) The creditor receiving the “subordination” of interest in the property or the junior lien 

will agree that a foreclosure or acceptance of a deed-in-lieu of foreclosure will not be 

initiated without at least 30 days prior notice to the Agency.

(7) The subordination or junior lien is not being secured with any funding from housing 

project financial accounts.

(8) The “subordination” of interest or junior lien will not cause the debt from all sources 

to exceed the value of the security property.

(9) The transaction related to the placement of a “subordination” of interest or junior lien 

against the property serving as security for an Agency loan is in the best interest of the 

Federal Government.

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(c) Required conditions for subordinations and junior liens. Subordinations of interest in 

or junior liens against property serving as security for an Agency loan may be approved 

by the Agency only if they improve a borrower's financial condition and allow for 

improvements or repairs that are consistent with the purposes of the Agency loan secured 

by the property.

(1) Farm Labor Housing loans on farm tracts may be subordinated for essential 

farm improvements and operations.

(2) Any proposed development must be planned and performed according to 7 

CFR part 1924, subpart A, or in a manner directed by the other lienholder that 

meets the objectives of 7 CFR part 1924, subpart A.

(d) Other liens against a property or other assets. 

(1) Borrowers must not enter into any agreements to place a lien on a housing 

project or any equipment related to a housing project without prior Agency

approval and unless the following conditions are met:

(i) The transaction will not adversely affect the Agency's security position;

(ii) The lien is not related to a non-program eligible action;

(iii) The items to be acquired by the funding related to the lien is needed 

for the operation of the property; and

(iv) The financing arrangements are otherwise sound.

(2) In cases where the above criteria are met, borrowers must complete and 

provide the Agency a copy of the financing statement, loan document, or contract, 

as applicable, as well as a security agreement acceptable to the Agency.

§3560.410 Consolidations.

(a) General. With Agency approval, loans, loan agreements, or loan resolutions may be 

consolidated to reduce the administrative burden (i.e., record keeping, budgeting), to 

improve the cost effectiveness and efficiencies of housing project operations, and to 

effectively utilize facilities common to housing projects.

(b) Loan consolidations. Loan consolidations will only be considered when:

(1) Multiple loans to the one borrower entity are being transferred to a different 

borrower entity in accordance with §3560.406, or

(2) One borrower entity has an initial loan and one or more subsequent loans for 

the same housing project and all the loans were closed on the same date and with 

the same rates and terms.

(c) Loan agreement or loan resolution consolidations. Loan agreements or loan 

resolutions may be consolidated, even if the loans related to the agreement or resolution 

are not consolidated, to allow borrowers to comply with reporting, accounting, and other 

Agency requirements as a single housing project.
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(1) The loan agreements or loan resolutions may only be consolidated when they 

are related to loans made for the same purposes, to the same borrower, and 

operating under the same type of interest credit, if applicable.

(2) All of a borrower's loan accounts must be current after the loan agreement or 

loan resolution consolidation is processed, unless otherwise approved by the 

Agency.

§§3560.411-3560.449 [Reserved]

§3560.450 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart J--Special Servicing, Enforcement, Liquidation, and Other Actions

§3560.451 General.

This subpart contains special servicing, enforcement, liquidation, and other actions 

that the borrower may request or the Agency may implement when compliance violations, 

monetary defaults, or non-monetary defaults cannot be resolved through regular servicing.

(a) Agency obligations. The Agency is under no obligation to offer or agree to any 

special servicing actions.

(b) Relationship to workout agreements. Special servicing actions may be implemented 

either as a part of a workout agreement, developed in accordance with §3560.453, or as 

an action approved by the Agency separate from a workout agreement unless indicated 

otherwise in this subpart.

§3560.452 Monetary and non-monetary defaults.

(a) General. Borrowers are in default when they have received a compliance violation 

notice, issued in accordance with §3560.354, and have failed to correct the compliance 

violation identified in the compliance violation notice within the time period specified in 

the notice. Compliance violations include, but are not limited to, violations of promissory 

note provisions, loan or grant agreement provisions, regulatory, or other Agency 

requirements, including requirements imposed on a borrower through a workout 

agreement developed in accordance with §3560.453.

(b) Monetary defaults. A monetary default exists when any amount due to the Agency or 

a third party (such as real estate taxes and insurance) under a promissory note, loan or 

grant agreement, workout agreement, or other agreement remains due more than 30 days 

after the due date.

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(c) Nonmonetary defaults. A nonmonetary default exists when a borrower fails to correct 

a compliance violation, other than a monetary amount past due, within the time period 

specified in a compliance violation notice issued in accordance with §3560.354. 

Nonmonetary defaults include, but are not limited to, failure to:

(1) Operate and manage a housing project in accordance with the Agency 

approved management plan or Agency requirements;

(2) Maintain the physical condition of a housing project in a decent, safe, and 

sanitary manner and in accordance with Agency requirements;

(3) Keep general operating expense, reserve, and other financial accounts related 

to a housing project at required funding levels;

(4) Occupy rental units with eligible tenants, unless granted an exception by the 

Agency;

(5) Charge correct rents or to correctly calculate net tenant contributions, utility 

allowances, or rental assistance payments or to properly administer the Agency

rental assistance assigned to the housing project;

(6) Submit required annual financial reports to the Agency within time periods 

specified in §3560.308;

(7) Submit management plans, leases, occupancy rules, and other required 

materials to the Agency in accordance with Agency requirements; and,

(8) Comply with applicable Federal laws including laws related to civil rights, fair 

housing, disabilities, and environmental conditions.

(d) Default notice. When borrowers are in default, the Agency will notify borrowers, in 

writing, that they are in default. The default notice will identify the compliance violation 

that led to the default, will specify actions necessary to cure the default, and will establish 

a date by which the default must be cured to preclude Agency initiation of enforcement 

actions, liquidation, or other actions.

(e) Agency action. If a borrower fails to cure a default within the time period specified 

in the default notice, the Agency may initiate the enforcement actions described in 

§3560.461 or liquidation as described in §3560.456. Also, Agency compliance violation 

notices and related default notices may be referred to Federal, state, and local agencies 

with jurisdictions related to the violations for handling, in accordance with their 

requirements.

§3560.453 Workout agreements.

(a) General. 

(1) Prevention or resolution of compliance violations or default cures are a 

borrower's responsibility.

(2) A borrower may develop and submit to the Agency for approval a workout 

agreement that proposes actions to be taken over a period of time to prevent or 

correct a compliance violation or to cure a monetary or non-monetary default.
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(3) A borrower developed workout agreement may propose, but is not limited to, 

the following actions:

(i) A combination of one or more of the special servicing actions outlined 

in §§3560.454 and 3560.455;

(ii) A change in operations and management at a housing project; or

(iii) A commitment of additional financial resources to the housing project 

with the amount and source of the additional resources to be committed to 

the housing project specifically identified.

(b) Workout agreement approval. 

(1) The Agency is under no obligation to approve a workout agreement as 

submitted by a borrower or to act with forbearance when a housing project is in 

monetary or non-monetary default.

(2) Borrower developed workout agreements may not be implemented until the 

borrower receives written approval from the Agency.

(3) The Agency will only approve a workout agreement if the Agency determines 

that the actions proposed are likely to prevent or correct compliance violations or 

cure a default and approval is in the best interest of the Federal Government and 

tenants.

(4) The Agency will only approve a workout agreement if the proposed actions 

are consistent with the borrower's management plan. If proposed actions are not 

consistent with the borrower's management plan, applicable revisions to the 

borrower's management plan must be made before approval of the workout 

agreement is given.

(c) Workout agreement required content. 

(1) Workout agreements submitted to the Agency for approval must be in writing 

and signed by the borrower. Workout agreements must describe proposed actions 

in sufficient detail to demonstrate the likelihood of the actions to prevent or 

correct compliance violations or cure defaults.

(2) At a minimum, workout agreements must include the following.

(i) The name and address of the housing project, project number, 

borrower's tax identification number, and other information necessary to 

identify the housing project.

(ii) A description of the potential or actual compliance violation or default 

situation, including an explanation of related causes, such as cash flow 

concerns, budget revisions, deferred maintenance, vacancies, or violations 

of statutes.

(iii) A definition and description of the housing project's market area, 

including information on housing availability, rents, and vacancy rates in 

the market area.

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(iv) A description of the proposed actions to prevent or correct compliance 

violations or to cure defaults along with a date specific schedule indicating 

when interim and final actions will be taken to correct the compliance 

violation or cure the default.

(v) A description of financial and other resources necessary to prevent or 

correct the compliance violation or cure the default including an

identification of the sources for such resources.

(d) Workout agreement budgets. Budget revisions submitted as a part of a workout 

agreement for a housing project experiencing cash flow problems must prioritize cash 

disbursements in the following order:

(1) Prior lienholder, if any;

(2) Critical operating and maintenance expenses, including taxes and insurance;

(3) Agency debt payments;

(4) Reserve account requirements; and

(5) Other authorized expenditures.

(e) Workout agreement terms and cancellation. 

(1) Workout agreements shall be in effect for no longer than a 2-year time period, 

beginning on the date of Agency approval. If an approved workout agreement 

calls for actions that extend beyond a 2-year period, borrowers must submit an 

updated and, if necessary, revised workout agreement to the Agency for approval. 

The updated workout agreement must be submitted to the Agency, 30 days prior 

to the expiration of the workout agreement in effect.

(2) The Agency may cancel a workout agreement at any time if the borrower fails 

to comply with the terms of the agreement. The Agency will provide notice to the 

borrower upon cancellation of the workout agreement.

§3560.454 Special servicing actions related to housing operations.

(a) Changing rents or revising budgets. The Agency may approve a borrower request for 

a rent change, rent incentives, or a revised budget, at any time during a housing project's 

fiscal year.

(b) Occupancy waivers. If the Agency determines that a housing project with high 

vacancies could be kept operationally and financially viable by allowing the borrower to 

accept as tenants persons with incomes above the income eligibility standards specified in 

§3560.152(a), the Agency, in writing, may grant the borrower an occupancy waiver to 

allow such persons as tenants. Occupancy waivers will be in effect only during the time 

period specified by the Agency when the waiver is granted. In addition, borrowers must 

rent to all eligible applicants on the housing projects waiting list prior to accepting 

persons with incomes above the Agency standards as tenants.

(c) Additional rental assistance (RA). If the Agency determines that a housing project 

with high vacancies could be kept operationally and financially viable by increasing the 

amount of RA allocated to the housing project, the Agency, subject to available funds, 
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may offer the housing project RA as a means of preventing or correcting a compliance 

violation or curing a default.

(d) Special note rents. When a Plan II housing project is experiencing severe vacancies 

due to market conditions, the Agency may approve a rent less than the note rent to attract 

and keep tenants whose incomes, according to the formula in §3560.203, would require 

them to pay the note rent. The reduced rent is called a Special Note Rent (SNR) and, as 

noted in §3560.210, approval of an SNR may affect approvals of loan proposals 

submitted to the Agency for the market area where the SNR is in effect.

(1) An SNR rent may only be requested as a part of a proposed workout 

agreement and must include documentation of market conditions, the housing 

project's vacancy rates, evidence of marketing efforts, and other concerns 

necessitating the request for an SNR.

(2) Borrowers must forego the annual return to owner for each housing project's 

fiscal year that an SNR is in effect for all or part of a fiscal year at a housing 

project.

(3) SNR's may be increased, decreased, or terminated any time during a housing 

project's fiscal year when market conditions, vacancy rates, or other concerns that 

necessitated the SNR warrant a change.

(4) In addition to any state lease law requirements that might be related to the 

implementation of an SNR, the borrower must notify each tenant of any change in 

rents or utility allowances that result from approval of an SNR, in accordance 

with §3560.205(c) and must submit the appropriate budget changes to the Agency 

for approval.

(e) Termination of management agreement. If the Agency determines that a compliance 

violation or loan default was caused, in full or in part, by actions or inactions of the 

housing project's management agent, the Agency will require the borrower to terminate 

the management agreement with that agent, or in the case of a borrower managed housing 

project, to enter an agreement with a third-party non-identity of interest management 

agent, unless the borrower and the Agency agree on a written plan to prevent 

reoccurrence of the violation. Housing project funds may not be used to pay a 

management fee to a management agent after the Agency has directed the borrower to 

terminate a management agreement with that agent, except during an Agency approved 

transition period.

§3560.455 Special servicing actions related to loan accounts.

(a) General. To prevent or correct a compliance violation or to prevent or cure a default 

in a situation that cannot be resolved through regular servicing, the Agency may approve 

a deferral of loan payments or a loan restructuring. Nothing herein precludes the Agency 

from initiating appropriate legal action to correct a compliance violation if the Agency 

determines such action is more in the Government's interest than entering into a special 

servicing agreement as provided for in this section. Procedures for debt collection are 

discussed in §3560.460. As part of a workout agreement, the Agency may agree to accept 

less than full monthly payment installments due on an Agency loan for a specified period 

of time, not to exceed the effective period of the workout agreement.

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(b) Loan reamortizations. A loan reamortization is a restructuring of loan terms and 

conditions over a period of time that does not exceed the remaining useful life of the 

housing project.

(1) Loan reamortizations will only be approved when they are in the best interest 

of the Federal Government and tenants and when the following conditions are 

met.

(i) The Agency determines that the borrower will be unable to meet their 

obligations without a reduction in monthly payment installments; and

(ii) The Agency is satisfied that the security, including the potential 

income for debt service, will be adequate to protect the Agency's interest 

over the term of the reamortization and that the reamortization will not 

adversely affect the Federal Government's lien priority.

(2) If the Agency approves a reamortization of a loan under this section, it will be 

at the existing note rate, or the current interest rate at the time of reamortization 

closing or approval, whichever is less.

(3) Loan reamortization may be used to:

(i) Restructure loan repayments to prevent or correct a compliance 

violation or cure a default caused by circumstances beyond the borrower's 

control in situations where the borrower is otherwise in compliance with 

Agency requirements;

(ii) Repay principal, outstanding interest, overage, and advances made by 

the Agency for recoverable cost items when less than full payments were 

authorized under the provisions of an Agency approved workout 

agreement;

(iii) Restructure a borrower's loan payments in conjunction with an 

incentive package developed in accordance with §3560.656 to prevent 

prepayment of the loan;

(iv) Restructure an existing loan in conjunction with a subsequent loan for 

rehabilitation; or

(v) Restructure remaining debt when a portion of the property serving as 

loan security is sold and there is a need to reestablish the financial stability 

of the housing project.

(c) Loan writedowns. A loan writedown is a reduction of a borrower's debt approved by 

the Agency.

(1) Loan writedowns will only be approved when they are in the best interest of 

the Federal Government and when the following conditions exist:

(i) Sound management of the housing project is evident or sound 

management practices are proposed for correction in accordance with an 

Agency approved workout agreement; and
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(ii) The housing project's financial stability is being affected by conditions 

beyond the borrower's control, such as market weaknesses, unforeseen site 

problems, or natural disasters.

(2) Prior to Agency approval for a loan writedown, the borrower must obtain an 

appraisal of the housing project that concludes the ‘as-is’ market value, subject to 

restricted rents, conducted in accordance with subpart P of this part. The Agency 

will not approve a loan write-down unless the appraisal indicates the Federal 

Government's interests are secured at the proposed writedown level.

(3) Any writedown will be conditioned on a finding that the borrower does not 

have the ability to pay a higher loan payment, even if the loan is reamortized.

(4) Loan writedowns may be used to allow for a loan transfer and assumption for 

less than the total amount of outstanding debt.

§3560.456 Liquidation.

Prior to any servicing action which might lead to the acquisition of real property by 

the Agency, the Agency must complete a due diligence report to assess any potential 

contamination of the property from hazardous substances, hazardous wastes, or petroleum 

products. The borrower must cooperate with the Agency in the development of this 

report.

(a) Before acceleration. Before accelerating a project loan, the Agency will consider the 

possibility that the borrower is forcing an acceleration to circumvent the prepayment 

process. If it is found that this is the borrower's motivation, the Agency will consider 

alternatives to acceleration, such as suing for specific performance under loan and 

management documents.

(b) Acceleration. When a borrower is in monetary or non-monetary default, the Agency 

will accelerate the loan unless the Agency decides other enforcement measures are more 

appropriate.

(1) If the borrower does not pay the full account balance and meet the other terms 

of the acceleration notice within the time period set forth in the acceleration 

notice, the Agency will foreclose or acquire the security property through deed in 

lieu of foreclosure.

(2) The Agency will suspend interest credit and rental assistance.

(3) The Agency will not accept partial payment of an accelerated loan unless 

required by state law.

(c) Voluntary liquidation. After acceleration, borrowers may voluntarily liquidate 

through either of the following mechanisms:

(1) Deed in lieu of foreclosure. RHS may accept a deed in lieu of foreclosure to 

convey title to the security property only after the debt has been accelerated and 

when it is in the Government's best interest.

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(2) Offer by third party. If a junior lienholder or cosigner makes an offer in the amount of 

at least the net recovery value, RHS may assign the note and mortgage after all appeal 

rights have expired.

(d) Foreclosure. 

(1) The Agency will initiate foreclosure when a borrower is in monetary or non-monetary 

default and foreclosure is in the best interest of the Federal Government.

(2) When a junior lienholder foreclosure does not result in payment in full of the Agency 

debt but the property is sold subject to the Agency lien, the Agency will liquidate the 

account.

(e) Acquisition of chattel properties. 

(1) The Agency will accept voluntary conveyance of chattel property only when the 

borrower can convey ownership free of other liens and the Agency has agreed to release 

the borrower from further liability on the account.

(2) If the Agency decides to accept an offer of voluntary conveyance of chattel property, 

the borrower must provide an itemized listing of each chattel property item being 

conveyed and provide title to vehicles or other equipment, where applicable.

§3560.457 Negotiated debt settlement.

(a) Borrower proposals to settle debt. A borrower who cannot pay the full amount of loan 

payments may propose an offer to settle an outstanding debt for less than the full amount of that 

debt. The Agency may approve a negotiated debt settlement only in cases where a default is 

evident and doing so is in the best interest of the Federal Government and tenants.

(b) Required information. Borrowers requesting debt settlement must submit complete and 

accurate information from which a full determination of financial condition can be made. Debt 

settlement offers will not be approved by the Agency unless the financial information submitted 

by the borrower indicates that the borrower will be able to make the debt settlement payments as 

proposed.

(c) Effective date of approval. Debt settlement offers will not be accepted until the borrower 

receives written approval from the Agency.

(d) Appraisal requirement. No debt settlement offer will be accepted for less than the net 

recovery value of the security as determined by a licensed appraiser or other qualified official, 

and concurred in by the Agency's qualified appraisal review official or other qualified official.

(e) Disposition of security prior to offer. Borrowers are not required to dispose of security prior 

to making a debt settlement offer. However, if a borrower has disposed of security prior to 

making a debt settlement offer, the proceeds from the disposed security must be applied to the 

borrower's account prior to any negotiations on the debt settlement offer.
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(f) Final release condition. Upon full payment of the approved debt settlement, the Agency will 

release the borrower from liability.

§3560.458 Special property circumstances.

(a) Abandonment. When the Agency determines that a borrower has abandoned security 

for a loan under this part, the Agency will take the steps necessary to protect the Federal 

Government's interest in the security. Costs associated with managing abandoned 

property are the responsibility of the borrower and will be charged to the borrower's 

account until liquidation is completed.

(b) Other security. The Agency will service security such as collateral assignments, 

assignments of rents, Housing Assistance Payments Contracts, and notices of lienholder 

interest according to acceptable practices in the respective states.

(c) Taking of additional security to protect Agency interests. The Agency may require 

borrowers to provide additional security in the form of real estate, cash reserves, letters of 

credit, or other security when needed to improve the chances that the Agency will not 

suffer a loss, and when:

(1) The account is in default; or

(2) The property has not been properly managed or maintained.

(d) Due diligence. When the Agency has completed an environmental site assessment in 

accordance with 7 CFR part 1970, and decides not to acquire security property through 

liquidation action or chooses to abandon its security interest in real property, whether due 

in whole or in part, to releases of or the presence of contamination from hazardous 

substances, hazardous wastes, or petroleum products, the Agency will provide the 

appropriate environmental authorities with a copy of its environmental site assessment.

(Revised 04-01-16, SPECIAL PN.)

§3560.459 Special borrower circumstances.

(a) Deceased borrower, bankruptcy, insolvency, and divorce actions. The Agency will 

address borrower accounts affected by special circumstances such as death, bankruptcy, 

insolvency, and divorce on a case-by-case basis. The Agency will make servicing 

decisions in such cases on the basis of best interest to the Federal Government and 

tenants. The Agency will bring a legal action to establish the legal capacity of the 

borrower to administer the project if found necessary to protect the government's 

interests. In order for the Agency to make servicing decisions in such cases, the borrower 

or the borrower's representative will provide to the Agency:

(1) On the part of the heirs or executor of the borrower's estate, evidence of legal 

action due to a will or court actions that establish who is to become the owner;

(2) The financial status of the borrower and any member pledging additional 

security for the debt;

(3) The status of the security property; and

(4) The impact of the identified actions on the operation of the project.

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(b) Membership liability agreements. If a borrower's note is endorsed by individuals 

other than the borrower or a borrower has security agreements with members of the 

organization for the purchase of shares of stock or for the payment of a pro rata share of 

the loan in the event of default, or has individual liability agreements, which are usually 

assigned to and held by the Agency as additional security for the loan, the security and 

liability agreements must be adequate to protect the Agency's interest.

(c) Security issues in participation loans. When a multi-family housing (MFH) project is 

receiving financing or a subsidy from sources other than the Agency, the Agency will 

service the account in accordance with the participation agreements made with the 

Agency and the other funding sources under §3560.65.

§3560.460 Double damages.

(a) Action to recover assets or income. 

(1) The Agency may request to the Attorney General to bring an action in a 

United States district court to recover any assets or income used by any person in 

violation of the provisions of a loan made by the Agency under this section or in 

violation of any applicable statute or regulation.

(2) For the purposes of this section, a use of assets or income in violation of the 

applicable loan, statute, or regulation includes any use for which the 

documentation in the books and accounts does not establish that the use was made 

for a reasonable operating expense or necessary repair of the project or for which 

the documentation has not been maintained in accordance with the requirements 

of the Agency and in reasonable condition for proper audit.

(3) For the purposes of this section, the term “person” means:

(i) Any individual or entity that borrows funds in accordance with 

programs authorized by this section;

(ii) Any individual or entity holding 25 percent or more interest in any 

entity that the Agency funds in accordance with programs authorized by 

this section; and

(iii) Any officer, director, or partner of an entity that borrows funds in 

accordance with programs authorized by this section.

(b) Amount recoverable. 

(1) In any judgment favorable to the United States entered under this section, the 

Attorney General may recover double the value of the assets and income of the 

project that the court determines to have been used in violation of the provisions 

of a loan made by the Agency under this section or any applicable statute or 

regulation, plus all costs related to the actions, including reasonable attorney and 

auditing fees.

(2) Notwithstanding any other provisions of law, the Agency may use amounts 

recovered under this section for activities authorized under this section and such 

funds must remain available for such use until expended.
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(c) Time limitation. Notwithstanding any other provisions of law, an action under this section 

may be commenced at any time during the six-year period beginning on the date that the Agency 

discovered or should have discovered the violation of the provisions of this section or any related 

statutes or regulations.

(d) Continued availability of other remedies. The remedy provided in this section is in 

addition to and not in substitution of any other remedies available to the Agency or the 

United States.

§3560.461 Enforcement provisions.

(a) Equity skimming. 

(1) Criminal penalty. Whoever, as an owner, agent, employee, or manager, or is 

otherwise in custody, control, or possession of property that is security for a loan 

made under this title, willfully uses, or authorizes the use, of any part of the rents, 

assets, proceeds, income, or other funds derived from such property, for any 

purpose other than to meet actual, reasonable, and necessary expenses of the 

property, or for any other purpose not authorized by this title or the regulations 

adopted pursuant to this title, must be fined under title 18, United States Code, or 

imprisoned not more than five years, or both.

(2) Civil sanctions. An entity or individual who as an owner, operator, employee, 

or manager, or who acts as an agency for a property that is security for a loan 

made under this title where any part of the rents, assets, proceeds, income, or 

other funds derived from such property are used for any purpose other than to 

meet actual, reasonable, and necessary expenses of the property, or for any other 

purpose not authorized by this title of the regulations adopted pursuant to this 

title, must be subject to a fine of not more than $25,000 per violation. The 

sanctions provided in this paragraph may be imposed in addition to any other civil 

sanctions or civil monetary penalties authorized by law.

(b) Civil monetary penalties. 

(1) When civil monetary penalties may be imposed. The Agency may, after notice 

and opportunity for a hearing, impose a civil monetary penalty in accordance with 

this section against any individual or entity, including its owners, officers, general 

partners, limited partners, or employees, who knowingly and materially violate, or 

participate in the violation of, the provisions of this title, the regulation issued by 

the Agency pursuant to this title, or agreements made in accordance to this title 

by:

(i) Submitting information to the Agency that is false.

(ii) Providing the Agency with false certifications.

(iii) Failing to submit information requested by the Agency in a timely 

manner.

(iv) Failing to maintain the property subject to loans made under this title 

in good repair and condition, as determined by the Agency.

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(v) Failing to provide management for a project that received a loan made 

under this title that is acceptable to the Agency.

(vi) Failing to comply with the provisions of applicable civil rights statutes 

and regulations.

(2) Amount. Civil penalties shall be assessed in accordance with 7 CFR part 3, 

subpart I. In determining the amount of a civil monetary penalty under this 

section, the Agency must take into consideration:

(i) The gravity of the offense;

(ii) Any history of prior offenses by the violator (including offenses 

occurring prior to the enactment of this section);

(iii) Any injury to tenants;

(iv) Any injury to the public;

(v) Any benefits received by the violator as a result of the violation;

(vi) Deterrence of future violations; and

(vii) Such other factors as the Agency may establish by regulation.

(3) Payment of penalties. No payment of a penalty assessed under this section 

may be made from funds provided under this title or from funds of a project 

which serve as security for a loan made under this title.

(4) Hearings under this part shall be conducted in accordance with the procedures 

applicable to hearings in accordance with 7 CFR part 1, subpart H.

(c) Conditions for renewal extension. The Agency may require that expiring loan or 

assistance agreements entered into under this title must not be renewed or extended 

unless the owner executes an agreement to comply with additional conditions prescribed 

by the Agency, or executes a new loan or assistance agreement in the form prescribed by 

the Agency.

§3560.462 Money laundering.

The Agency will act in accordance with U.S. Code Title 18, part I, chapter 95, section 

1956(c)(7)(D).

§3560.463 Obstruction of Federal audits.

The Agency will act in accordance with U.S. Code Title 18, part I, chapter 73, section 

1516(a).

§§3560.464-3560.499 [Reserved]
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§3560.500 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart K--Management and Disposition of Real Estate Owned (REO) Properties

§3560.501 General.

This subpart contains Agency procedures and other policies related to the management 

and disposition of multi-family housing (MFH) projects in the Agency's inventory (Real Estate 

Owned (REO) property). Housing projects will not be accepted into the Agency's inventory 

unless one of the following has occurred:

(a) The borrower has abandoned the housing project and the Agency has performed the 

required steps to take the housing project into custody.

(b) The housing project title has been transferred to the Agency as a result of foreclosure, 

voluntary conveyance, redemption, or other action.

§3560.502 Tenant notifications and assistance.

Each tenant in an REO property designated to be sold as a non-program property will 

be notified by the Agency, in writing, of the housing projects' non-program designation and will 

be given an opportunity to obtain a Letter Of Priority Entitlement (LOPE) as specified in 

§3560.159(c).

§3560.503 Disposition of REO property.

(a) Preference will be given to offers from bidders who are determined eligible by the 

Agency to purchase REO property designated to be sold as program property. It is the 

Agency's priority that property previously operated as program property prior to 

becoming REO inventory property be sold as program property. However, REO property 

may be sold under whatever Agency program is most appropriate for the property and the 

community needs regardless of the program under which the property was originally 

financed or whether the property was being used to secure loans under more than one 

Agency program.

(b) When the Agency determines that the REO property to be sold is not decent, safe, and 

sanitary and/or does not meet cost effective energy conservation standards, it will 

disclose the basis for this determination to prospective purchasers. The deed by which 

such an REO property is conveyed will contain a covenant restricting it from residential 

use until it is decent, safe, and sanitary, and meets the Agency's cost effective 

conservation standards. The Agency will also notify any potential purchaser of any 

known lead based paint hazards.

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§3560.504 Sales price and bidding process.

(a) The loan documents related to REO property sold for program purposes must contain 

the restrictive-use language specified in §3560.662(a).

(b) Entities bidding on REO property designated to be sold as program property must 

submit a loan application package that meets the requirements specified in subpart B of 

this part.

(1) Bidders on REO property designated to be sold as program property must 

meet the eligibility requirements established under §3560.55.

(2) Bidders determined by the Agency to be ineligible to purchase REO property 

designated to be sold as program property will be notified in writing. The bidding 

process will continue regardless of pending appeals.

(3) All offers from bidders determined to be eligible to purchase REO property 

designated to be sold as program property will be considered in the bidding 

process and must provide evidence of financial stability and credit worthiness.

(c) The Agency will determine the successful bidder on REO property designated to be 

sold as program property by conducting a drawing of sealed bids.

(1) The Agency may authorize the sale of an REO property by sealed bid or 

public auction when it is in the best interest of the Government. The Agency will 

publicly solicit requests for sealed bids and publicize auctions. If the highest bid is 

lower than the minimum acceptable bid established by the Agency, or if no 

acceptable bids are received, the Agency may negotiate a sale without further 

public notice.

(2) Bidders who desire to withdraw their bids must do so prior to the drawing 

date.

(d) Property designated to be sold as non-program property may be sold to entities that do 

not meet the Agency's eligible borrower requirements specified in §3560.55, and must be 

sold for cash or on terms approved by the Agency. Cash sales will be given first 

preference and will be drawn before any sales on terms.

§3560.505 Agency loans to finance purchases of REO properties.

(a) Agency loans to finance the purchase of REO property designated to be sold as 

program property must meet the same requirements as specified in subparts A and B of 

this part. In addition, the following provisions apply.

(1) At the borrower's option, the interest rate will be the prevailing rate at the time 

of loan approval or the prevailing rate at loan closing.

(2) Purchasers may pay closing costs from their own funds or, if allowable under 

subparts B, L, or M of this part, as applicable, may finance such costs as part of 

the Agency loan.

(b) Agency loans to finance the purchase of REO property designated to be sold as non- program property must meet the following terms.
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(1) A down payment of not less than 10 percent of the purchase price is required at closing.

(2) The interest rate will equal the lesser of the prevailing interest rate at the time of loan 

approval or loan closing for MFH loans plus one-half percent.

(3) The note amount will be amortized over a period not to exceed 10 years. If the 

Agency determines that more favorable terms are necessary to facilitate the sale, the note 

amount may be amortized using a 30-year factor with payment in full due no later than 10 

years from the date of closing (balloon payment). In no case will the term be longer than 

the useful life of the property.

(4) Agency loans to finance the purchase of non-program REO property are subject to the 

availability of funds.

(c) Loan limits and allowable uses of loan funds specified in subparts B, L, and M of this part, as 

applicable, are applicable to any Agency-financed (credit) sale of REO property.

(d) Title clearance and loan closing for an Agency financed sale and any subsequent loan to be 

closed simultaneously with the sale must meet the requirements in subpart B of this part for an 

initial loan, with the following exceptions:

(1) A “Quit Claim” or other non-warranty deed will be used; and

(2) The buyer must pay attorney's fees, insurance costs, recording fees and other 

customary fees unless they are included in a subsequent loan and the subsequent loan is 

for purposes other than closing costs and fees.

(e) After approval of an Agency-financed sale of occupied REO property designated to be sold as 

program property, but prior to closing, the purchaser must prepare a budget for housing 

operations in accordance with subpart B of this part. If a rent increase is necessary, procedures 

specified in subparts E and F of this part for calculating rents, net tenant contributions, and rental 

assistance will be followed by the borrower.

§3560.506 Conversion of single family type REO property to MFH use.

Single family type REO property may be sold for conversion to MFH program use under the 

following conditions:

(a) The Agency will allow nonprofit organizations, public bodies, or for-profit entities to 

purchase single family type REO property for conversion to MFH program use. When the 

Agency finances the sale of single family-type REO property for conversion to rural rental 

housing program use (i.e., MFH including group homes and homes for the elderly or disabled, 

farm labor housing, or rural cooperative housing), the sale price will be the lesser of the Federal 

Government's investment or an amount based on the “as-is” market value of the housing project 

as determined by an appraisal conducted in accordance with subpart P of this part.

(b) The Agency will only accept written offers to purchase two or more single family type REO 

properties for conversion to rural rental housing from nonprofit organizations, public bodies, or 

for-profit entities with a good record of providing housing under the Agency's MFH programs. 

The single family type properties are not required to be contiguous, however, they must be 

located in close enough proximity so that management capabilities are not diminished because of

distance.

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§§3560.507-3560.549 [Reserved]

§3560.550 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.
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Subpart L--Off-Farm Labor Housing

§3560.551 General.

This subpart establishes the requirements for making loans and grants for off-farm 

labor housing and for ongoing operations of this housing. Unless otherwise specified in this

subpart, the requirements of subparts A through K, N, O, and P of this part will apply in addition 

to the requirements in this subpart.

§3560.552 Program objectives.

(a) In addition to the objectives stated in §3560.52, off-farm labor housing loan and grant 

funds will be used to increase:

(1) The supply of affordable housing for farm labor; and

(2) The ability of communities to attract farm labor by providing housing which is 

affordable, decent, safe and sanitary.

(b) Under section 516(i) of the Housing Act of 1949 (42 U.S.C. 1486(i)), the Agency 

may award technical assistance grants to encourage the development of farm labor 

housing.

§3560.553 Loan and grant purposes.

(a) In addition to the purposes stated in §3560.53, off-farm labor housing loan and grant 

funds may be used to provide facilities for seasonal or temporary residential use with 

appropriate furnishings and equipment. A temporary residence is a dwelling which is 

used for occupancy, usually for a short period of time, but is not the legal domicile for the 

occupant.

(b) The Agency may award technical assistance grants to eligible private and public 

nonprofit agencies. These grant recipients will, in turn, assist other organizations to 

obtain loans and grants for the construction of farm labor housing.

(c) Technical assistance services may not be used to reimburse a nonprofit or public 

body applicant for technical services provided by a nonprofit organization, with housing 

and/or community development experience, to assist the nonprofit applicant entity in the 

development and packaging of its loan/grant docket and project. In addition, technical 

assistance will not be funded by the Agency when an identity of interest exists between 

the technical assistance provider and the loan or grant applicant.

§3560.554 Use of funds restrictions.

Off-farm labor housing loan and grant funds may not be used for any purpose 

prohibited by §3560.54 except §3560.54(a)(1). Off-farm labor housing may be used to serve 

migrant farmworkers.

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§3560.555 Eligibility requirements for off-farm labor housing loans and grants.

(a) Eligibility for loans. Applicants for off-farm labor housing loans must be:

(1) A broad-based nonprofit organization, a nonprofit organization of 

farmworkers, a federally recognized Indian tribe, a community organization, or an 

agency or political subdivision of State or local government, and must meet the 

requirements of §3560.55, excluding §3560.55(a)(6). A broad-based nonprofit 

organization is a nonprofit organization that has a membership that reflects a 

variety of interests in the area where the housing will be located; or

(2) A limited partnership with a non-profit general partner which meets the 

requirements of §3560.55(d).

(b) Eligibility for grants. To be eligible for off-farm labor housing grants, applicants 

must:

(1) Meet the requirements in §3560.555(a)(1); and

(2) Be able to contribute at least one-tenth of the total farm labor housing 

development cost from its own or other resources. The applicant's contribution 

must be available at the time of grant closing. An off-farm labor housing loan 

financed by RHS may be used to meet this requirement.

(c) Limitation. Limited partnerships eligible under paragraph (a)(2) of this section are 

not eligible for farm labor housing grants.

§3560.556 Application requirements and processing.

Off-farm loans and grants will be available under a Notice of Funding Availability 

(NOFA) that will be published in the Federal Register each fiscal year.

§3560.557 [Reserved]

§3560.558 Site requirements.

The requirements established in §3560.58 apply to all applications for off-farm labor 

housing loans and grants except that off-farm labor housing are not limited to rural areas.

§3560.559 Design and construction requirements.

(a) General. The requirements established in §3560.60 apply to all applications for off- farm labor housing loans and grants except that seasonal off-farm labor housing that will 

be occupied for eight months or less per year by migrant farmworkers while they are 

away from their residence, may be constructed in accordance with Exhibit I of 7 CFR 

part 1924, subpart A.

(b) Additional requirements. In addition to the requirements established in §3560.60, it is

encouraged that the design of off-farm labor housing incorporate outdoor shower, boot 

washing station, and/or hose bibb facilities as necessary to protect the resident and the 

asset from excess dirt and chemical exposure.
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(c) Davis-Bacon wage requirements. Construction financed with the assistance of a 

Section 516 grant will be subject to the provisions of the Davis-Bacon Act (40 U.S.C. 

276(a)-276(a)(7)), and the implementing regulations published by the Department of 

Labor at 29 CFR parts 1, 3, and 5.

§3560.560 Security.

The security requirements established in §3560.61 will apply to all applications for 

off-farm labor housing loans.

§3560.561 Technical, legal, insurance and other services.

The requirements established under §3560.62 apply to all applications for off-farm 

labor housing loans and grants.

§3560.562 Loan and grant limits.

(a) Determining the security value. The requirements established under §3560.63(a) 

apply to off-farm labor housing loans.

(b) Maximum amount of loan. The requirements established in §3560.63(c)(1) and (2), 

regarding borrower equity contribution apply to all applications for off-farm labor 

housing loans. (For applicants eligible under §3560.555(a)(2), the amount of Agency 

financing for the housing will not exceed 95 percent of the total development cost or 95 

percent of the security value available for the Agency loan, whichever is lower.) In 

determining the amount of the loan, the Agency will also review the capacity of the 

applicant to amortize such loan, considering any rental assistance provided for use in the 

housing, and any rents anticipated to be paid by farmworkers expected to occupy the 

housing.

(c) Maximum amount of grant. The amount of any off-farm labor housing grant must not 

exceed the lesser of:

(1) Ninety percent of the total development cost, or

(2) That portion of the total development cost which exceeds the sum of any 

amount provided by the applicant from their own resources plus the amount of 

any loans approved for the applicant, considering the capacity of the applicant to 

amortize the loan.

§3560.563 Initial operating capital.

The requirements for §3560.64 apply to all applications for off-farm labor housing 

loans and grants.

§3560.564 Reserve accounts.

The requirements for §3560.65 apply to all applications for off-farm labor housing 

loans and grants.

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§3560.565 Participation with other funding or financing sources.

The requirements established in §3560.66 apply to all applications for off-farm labor 

housing loans and grants, except that the 25 percent requirements stated in paragraph 

§3560.66(b)(1) may consist of loan and/or grant funds.

§3560.566 Loan and grant rates and terms.

(a) Amortization period. The loan will be amortized over a period not to exceed 33 years. 

The amortization schedule will take into account the depreciation of the security and 

ensure that the loan will be adequately secured.

(b) Interest rate. The effective interest rate will be 1 percent.

(c) Term of grant agreement. The grant agreement will remain in effect for so long as 

there is a need for farm labor housing..

§3560.567 Establishing the profit base on initial investment.

The requirements established under §3560.68 apply to applicants eligible under 

§3560.555(a)(2) and operating as a limited partnership with a nonprofit general partner.

§3560.568 Supplemental requirements for seasonal off-farm labor housing.

For off-farm labor housing operating on a seasonal basis, the management plan must 

establish specific opening and closing dates. During the off-season, off-farm labor housing may 

be used as defined in subpart A of this part under short-term lease provisions. Where rents are 

charged on a per-unit basis and family income qualifies the household for rental assistance, 

rental assistance may be used.

§3560.569 Supplemental requirements for manufactured housing.

The requirements established in §3560.70 apply to all applications for off-farm labor 

housing loans and grants.

§3560.570 Construction financing.

The requirements established in §3560.71 apply to all applications involving off-farm 

labor housing loans and grants. In addition, the following requirements apply.

(a) Equity contributions being made by a borrower or grantee must be contributed and 

disbursed prior to any disbursement of interim loan funds and any loan or grant funds 

from the Agency.

(b) If the Agency is providing both loan and grant funds, loan funds must be fully 

released and expended prior to the release of grant funds by the Agency.

(c) If construction is financed with a Labor Housing grant, it is subject to the provisions 

of the Davis-Bacon Act (published in the Department of Labor regulations 29 CFR parts 

1, 2, and 5).
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§3560.571 Loan and grant closing.

The requirements established in §3560.72 apply to all applications for off-farm labor 

housing loans and grants. In addition, the following requirements apply.

(a) A nonprofit organization will have its Board of Directors adopt an Agency-approved 

loan and/or grant resolution, which is required as part of the loan docket before loan 

and/or grant approval. All other loan applicants will execute an Agency-approved loan 

agreement.

(b) For grants, an Agency approved grant agreement, must be executed by the applicant 

on the date of grant closing.

(c) The obligations incurred by the applicant, as a condition of accepting the grant, will 

be in accordance with the off-farm labor housing grant agreement.

(d) Off-farm labor housing loans used to build or acquire new units made pursuant to a 

contract entered into on or after the effective date of this regulation, will be subject to the 

restrictive-use provision stated in §3560.72(a)(2)(ii). All other off-farm labor housing 

loans are subject to the restrictive-use provisions contained in their loan documents and 

as outlined in subpart N of this regulation. Such restrictions must be included in the 

mortgage and deed of trust.

§3560.572 Subsequent loans.

The requirements established in §3560.73 will apply to all applications for subsequent 

off-farm labor housing loans.

§3560.573 Rental assistance.

(a) Rental assistance may be provided to income eligible tenants living in off-farm labor 

housing in accordance with subpart F of this part. The requirements established in 

§3560.252 apply to all tenants receiving rental assistance.

(b) For dormitory style facilities operating on a per bed basis, rental assistance will be 

made available to the housing on a per unit basis, but may be pro-rated to tenants on a per

bed basis. However, total rent charged for a unit must not exceed conventional rent for 

comparable units in the area or a similar area and per bed rents must be comparable to per 

bed rents in the market.

§3560.574 Operating assistance.

Operating assistance may be used in lieu of tenant-specific rental assistance in off- farm labor housing projects financed under section 514 or section 516(i) of the Housing Act of 

1949 (U.S.C. 1486(i)) that serve migrant farmworkers. Owners of eligible projects may choose 

tenant-specific rental assistance as described in §3560.573 or operating assistance, or a 

combination of both, however, any tenant or unit assisted under this section may not receive 

rental assistance under §3560.572. The objective of this program is to provide assistance toward 

the cost of operating the project so that rents may be set at rates that are affordable to very low 

and low-income migrant farmworkers.

(a) Project eligibility requirements. To be eligible for the operating assistance program, 

projects must be:

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(1) Off-farm labor housing projects financed under section 514 or section 516 

with units that are for migrant farmworkers. Housing units for year-round 

farmworker households are ineligible; and

(2) Eligible for the Agency's rental assistance program as defined in §3560.573.

(b) Operating assistance limits. The amount of operating assistance requested by the 

owner must be based on the project's actual income and expenses and must be approved 

by the Agency. In the case of a mixed project, the amount of operating assistance must 

be based on the portion of actual income and expenses that are attributable to the units 

that are for migrant farmworkers. In no instance may the annual amount of operating 

assistance exceed 90 percent of the annual operating costs that are attributable to the 

migrant units.

(c) Owner responsibilities. 

(1) Requesting for operating assistance program. Owners of off-farm labor 

housing projects with units for migrant farmworkers may request operating 

assistance by submitting a request to the Agency, which must include a budget. 

The budget must include:

(i) Estimated operating costs for the migrant units, including authorized

expenditures such as reserve deposits;

(ii) Proposed rental rates for the migrant units to generate sufficient funds 

for operating costs of those units, taking into consideration all other 

sources of project income; and

(iii) Estimated rental income from tenants, based on a tenant contribution 

of 30 percent of the average adjusted monthly income of migrant 

farmworker households in the area.

(2) Requesting operating assistance payments. Each month, the owner will submit 

a request for operating assistance to the Agency.

(3) Verifying tenant income eligibility. Owners are responsible for verifying 

tenant income eligibility. Only very low or low-income households are eligible 

for the operating assistance rents. Households with incomes above the low- income limits must pay the full rent.

(4) Reporting requirements. 

(i) Owners will complete and submit to the Agency tenant certifications to 

document tenant income and eligibility.

(ii) Owners will complete and submit monthly to the Agency a project 

worksheet for operating assistance.

(iii) Owners must submit an annual planning budget to the Agency prior to 

the project's fiscal year.
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§3560.575 Rental structure and changes.

Off-farm labor housing is subject to the tenant contribution and rental unit rent requirements 

for Plan II housing established under subpart E of this part, except where seasonal housing will be 

occupied for less than a 3-month period. In such instances the best available 

and practical income verification methods may be used with prior approval of the Agency.

§3560.576 Occupancy restrictions.

(a) Restrictions on conditions of occupancy. 

(1) No borrower or grantee will be permitted to require that an occupant work on any 

particular farm or for any particular owner or interest as a condition of occupancy of the

housing.

(2) Tenant selection should be in accordance with the loan agreement, subpart D of this 

part and §3560.577.

(3) No borrower or grantee will discriminate, or permit discrimination by any agent, 

lessee, or other operator in the use or occupancy of the housing or related facilities 

because of race, color, religion, sex, age, disability, familial status, or national origin.

(b) Eligible households. To be eligible for occupancy in off-farm labor housing, households must

meet the following requirements.

(1) Occupational. An eligible household must include a domestic tenant or co-tenant farm 

laborer, a retired domestic farm laborer, or a disabled domestic farm laborer.

(2) Income. The household must meet the definition of income eligible as established in 

§3560.152 and the tenant or co-tenant must receive a substantial portion of income from 

farm labor employment. To determine if a substantial portion of income is from farm 

labor employment, the following measures will be used.

(i) For housing rented to farm laborers and owned by public bodies, public or 

private nonprofit organizations, and limited partnerships when charging rent.

(A) Actual dollars earned from farm labor by domestic farm laborers 

other than migrant farmworkers must equal at least 65 percent of the 

annual income limits indicated for the Standard Federal regions as 

published by the Agency for their particular region of the country. For 

migrant farmworkers living in seasonal housing the actual dollars earned 

from farm labor by a domestic farm laborer must equal at least 50 

percent of annual income limits indicated for the Standard Federal 

regions, as published by the Agency.

(B) An alternate measure for determining substantial portion of income 

when actual earnings are not available may be the duration of time a 

farm laborer worked on a farm or other farming enterprise as a domestic 

farmworker during the preceding 12 months. In order to be considered as 

substantial the farm laborer 

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must have worked at least 110 whole days in farm work. For 

purposes of this section one whole day is the equivalent of at least 

7 hours. When using a period of more than 1 year, a yearly average 

must amount to at least 110 days per year.

(ii) For housing owned by a farmer, family-farm partnership, family-farm 

corporation, or an association of farmers which was initially provided on a 

non-rental basis, a substantial portion of 

income is earned when housing is provided by the owner as part of

employment compensation for farm labor.

(iii) When a natural disaster has occurred, such as a drought, flood, freeze, 

etc., figures for the 12 months preceding such disaster will be used to

determine substantial portion of income under paragraph (b)(2) of this 

section.

(iv) The tenant who qualifies as a domestic farm laborer residing in a 

property with a nonrestrictive farm labor clause in the mortgage covenants 

must not have adjusted income which exceeds the moderate income limit 

for the appropriate household size and appropriate geographical area.

(3) Occupancy. The household must remain in compliance with the borrower's 

occupancy policy as established in §3560.155.

(c) Tenant eligibility requirements for operating assistance rents. To be eligible for 

operating assistance rents, tenants must meet the rental assistance eligibility requirements 

described in §3560.573 and in §3560.252.

(d) Ineligible tenants. Tenants who, at any time, fail to meet all the requirements in 

paragraph (b) of this section will be deemed ineligible for occupancy in off-farm labor 

housing. Ineligible tenants in off-farm labor housing will be addressed in accordance with 

the requirements of §3560.158.

(e) Non-farm laborer tenants. When there is a diminished need for housing for persons or 

families in the above categories, units in off-farm labor housing complexes may be made 

available to persons or families eligible for occupancy under §3560.152. Eligible tenants

under this section may occupy the labor housing until such time the units are again 

needed by persons or families eligible under paragraph (b) of this section. As the basis for 

Agency approval or disapproval of the borrower's determination of diminished need, the 

borrower must submit a current analysis of need and demand to the Agency, identical to 

the market analysis that is required of loan applicants in the loan origination process. The 

borrower's determination and the MFH Leadership recommendation should be forwarded 

to the National Office for concurrence. The procedures specified in §3560.158 shall be 

followed when tenants are required to vacate housing to allow for occupancy by persons 

eligible under paragraph (b) of this section.
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§3560.577 Tenant priorities for labor housing.

Tenant occupancy in off-farm labor housing is based on eligible farm labor certified 

through the income certification process required by §3560.152 and is prioritized in the 

following order.

(a) First priority is to be given to eligible active farm laborer households with first 

priority going to very low-income households, next priority to low-income households, 

and last to moderate-income households.

(b) Second priority is given to retired domestic farm laborer households and disabled 

domestic farm laborer households who were active in the local farm labor market area at 

the time of retiring or becoming disabled. Occupancy priority will be given in accordance 

with paragraph (a) of this section.

(c) Third priority is to be given to retired domestic farm laborer households and disabled 

domestic farm laborer households who were not active in the local farm labor market at 

the time of retiring or becoming disabled. Occupancy priority will be given in accordance 

with paragraph (a) of this section.

§3560.578 Financial management of labor housing.

The requirements established in subpart G of this part will apply to all off-farm labor 

housing.

§3560.579 Servicing off-farm labor housing.

The requirements established in subparts I and J of this part will apply to all off-farm 

labor housing. Servicing according to subparts I and J of this part shall apply throughout the term 

of the loan or grant, whichever is longer.

§§3560.580-3560.599 [Reserved]

§3560.600 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart M--On-Farm Labor Housing

§3560.601 General.

This subpart contains the requirements for making loans for on-farm labor housing 

and for ongoing operation and management of on-farm labor housing. Unless otherwise specified 

in this subpart, the requirements of subparts A through K, N, O, and P of this part will apply in 

addition to requirements given in this subpart.

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§3560.602 Program objectives.

In addition to the objectives stated in §3560.52, on-farm labor housing funds will be 

used to increase:

(a) The supply of affordable housing for farm labor; and

(b) The ability of the farmer to provide affordable, decent, safe and sanitary housing for 

farm workers.

§3560.603 Loan purposes.

On-farm labor housing loans may be made only for the purposes established in 

§3560.553. Grants are not available for on-farm labor housing.

§3560.604 Restrictions on use of funds.

On-farm labor housing loans may not be used for any purpose prohibited by §3560.54 

except §3560.54(a)(1). On-farm labor housing may be used to serve migrant workers. In 

addition, on-farm labor housing loan funds may not be used to provide housing for members of 

the immediate family of the applicant when the applicant is an individual farm owner, family 

farm corporation, family farm partnership, or a member of an association of farmers. Immediate 

family includes mother, father, brothers, sisters, sons, and daughters of the applicant and spouse.

§3560.605 Eligibility requirements.

(a) To be eligible for an on-farm labor housing loan, the applicant must meet the 

requirements of §3560.55(a) with the exception of §3560.55(a)(1), (5), and (6) and the

following requirements.

(1) The applicant must be a farm owner, family farm partnership, family farm 

corporation, or an association of farmers engaged in agricultural or aquacultural 

farming operations whose farming operations demonstrate a need for on-farm 

labor housing and who will own the housing and operate it on a nonprofit basis.

(2) The applicant must agree to use the labor housing to engage in the farming 

operations of the individual farm owner applicant, or in the farming operations of 

its members if it is a family farm corporation or partnership, or an association of 

farmers.

(3) The applicant must, as determined by the Agency, be unable to provide the 

necessary housing from the applicant's own resources and be unable to obtain 

credit from any other source upon terms and conditions which the applicant could 

reasonably be expected to fulfill. If the applicant is an association of farmers or 

family farm corporation or partnership, the individual members, individually and 

jointly, must be unable to provide the necessary housing by utilizing their own 

resources and be unable, by pledging their personal liability, to obtain other credit 

that would enable them to provide housing for farm workers at rental rates they 

can afford to pay. The individual resources of family farm corporation or 

partnership members with less than a 10 percent corporate or partnership interest 

should not be considered when determining if the applicant can obtain credit 

elsewhere.
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(b) The Agency may make an exception to the requirement that an individual farm owner, family farm 

corporation, family farm partnership or an association of farmers be unable to obtain the necessary credit 

elsewhere when all of the following conditions exist:

(1) There is a housing need in the area for domestic farmworkers who are migrants and 

the applicant will provide such housing; and

(2) There are no qualified state or political subdivisions or public or private nonprofit 

organizations available, or likely to become available within 12 months of the 

application, that are willing and able to provide the housing.

(c) When an applicant is determined eligible under paragraph (b) of this section, the interest rate 

for such loans will be determined in accordance with 7 CFR part 1810, subpart A.

(d) On-farm labor housing that consists of buildings with less than three units is not subject to the 

requirement that five percent of the units be constructed as fully accessible units, as described in 

§3560.60(d).

§3560.606 Application requirements and processing.

(a) On-farm labor housing loan applications will be processed according to 7 CFR part 1940, 

subpart L. Applicants must submit an application in an Agency-approved format that adequately 

documents the need for the housing and the eligibility of the applicant.

(b) The applicant must certify that the farm workers for which the housing is intended are or will 

be involved in the applicant's agricultural or aquacultural farming operations.

(c) The applicant must certify that housing operations will be conducted in a non-profit manner 

such that income from the housing does not exceed eligible expenses associated with the housing. 

Eligible expenditures for the housing include, but are not limited to housing repairs and upkeep, 

payment of installments on the loan, taxes, insurance and reserves and other essential uses needed 

for success of the operations.

§3560.607 [Reserved]

§3560.608 Site and construction requirements.

(a) General. Cost and development standards for on-farm labor housing will be consistent with 

the requirements, standards, and cost limits specified in subpart B of this part, if the housing is a 

multi-family housing type structure, or consistent with section 502 of the Housing Act of 1949, if 

the housing is a single family type structure.

(b) Permanent units. On-farm labor housing occupied for 8 months or more of the year will be 

required to meet the following requirements.

(1) Housing may be multi-family or single family in type and may be located on the farm 

away from farm service buildings, or in the nearby community. Single-family type 

housing is defined as an individual or a group of individual single family detached 

dwelling units. All sites and housing shall be planned and constructed in accordance with 

7 CFR part 1924, subparts A and C.

(2) Sites must be accessible from a public road, when feasible.

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(c) Seasonal units. On-farm labor housing occupied for less than 8 months of the year will be 

considered seasonal housing. Such housing must meet the following requirements.

(1) Housing designed for seasonal occupancy may be either single family or multifamily.

(2) Seasonal housing may be constructed in accordance with exhibit I of 7 CFR part

1924, subpart A. If constructed in accordance with exhibit I, the housing must be 

suitable to allow for conversion to full-year occupancy if the need for migrant 

farmworkers in the area declines.

(d) Accessibility. On-farm labor housing that consists of buildings with less than three units, 

need not meet the requirement that five percent of the units be constructed as fully accessible 

units, as described in §3560.60(d). This does not, however, eliminate any other accessibility 

requirements.

§3560.609 [Reserved]

§3560.610 Security.

(a) Security instruments must meet the requirements established under §3560.560.

(b) When feasible, the on-farm labor housing will be located on a tract of land that is 

surveyed such that, for security purposes, it is considered separate and distinct from the farm. 

The security for the loan must include a lien on the tract of land where the on-farm labor 

housing is located and the security must have adequate value to protect the Federal 

government's interest. The Agency will seek a first or parity lien position on Agencyfinanced property in all instances, however, the Agency may accept a junior lien position if 

the Federal government's interests are adequately secured.

(c) The Agency will determine the value of the security for the loan in accordance with 7 

CFR part 1922, subpart B if the farm is used as security or in accordance with section 502 of 

the Housing Act of 1949, if only the on-farm labor housing and related land is used for 

security.

(d) If necessary to provide adequate security for the loan, the Agency may require that any 

household furnishings purchased with loan funds also be secured.

(e) Personal liability and recourse will be required of all borrowers, including the individual 

members, stockholders or partners of an association of farmers, family farm corporations or 

partnerships, respectively.

§3560.611 Technical, legal, insurance and other services.

When technical, legal, insurance, or services are required for development of on-farm 

labor housing, applicants must comply with the applicable requirements of §3560.62. Regarding 

insurance coverage, the requirements of §3560.62(d) apply to on-farm labor housing.

§3560.612 Loan limits.

The maximum loan amount will be 100 percent of the allowable total development costs 

of on-farm labor housing and related facilities subject to §§3560.603, 3560.604 and 3560.608.
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§3560.613 [Reserved]

§3560.614 Reserve accounts.

When on-farm labor housing operations include 12 or more units, the Agency will 

require such properties to comply with the reserve account requirements in §3560.65.

§3560.615 Participation with other funding sources.

The Agency encourages the use of other funding sources in conjunction with on-farm 

labor housing loans. Use of such financing in conjunction with an on-farm labor housing loan is 

subject to the approval of the Agency and must comply with the requirements of §3560.66.

§3560.616 Rates and terms.

(a) The interest rate for on-farm labor housing loans will be 1 percent.

(b) The term of the on-farm labor housing loan will not exceed 33 years.

(c) Loan amortization for on-farm labor housing may be on a monthly or an annual basis.

§3560.617 [Reserved]

§3560.618 Supplemental requirements for on-farm labor housing.

The management plan for on-farm labor housing operated on a seasonal basis must 

have specific opening and closing dates. During the off-season, on-farm labor housing may be 

used under short-term lease provisions.

§3560.619 Supplemental requirements for manufactured housing.

On-farm labor housing loan funds used for manufactured housing must comply with 

§3560.70. Manufactured housing located on-farm may consist of individual units.

§3560.620 Construction financing.

The requirements established in §3560.71 apply to all applications involving on-farm 

labor housing loans.

§3560.621 Loan closing.

Applicants for on-farm labor housing loans must execute an Agency-approved loan 

agreement. In addition, if determined appropriate by the Agency, on-farm labor housing loans 

made on or after the effective date of this regulation may be subject to the restrictive-use 

provisions as stated in §3560.72(a)(2)(ii). All other on-farm labor housing loans are subject to 

the restrictive-use provisions contained in their loan documents and as outlined in subpart N of 

this regulation.

§3560.622 Subsequent loans.

The requirements established in §3560.572 apply to all applications for on-farm labor 

housing subsequent loans.

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§3560.623 Housing management and operations.

Borrowers with on-farm labor housing loans must:

(a) Develop and submit to the Agency a management plan in a format specified by the 

Agency. At a minimum, the management plan will detail the borrower's operational and 

occupancy policies, how the borrower will deal with resident complaints, and how repairs 

will be completed; and

(b) Maintain a lease or employment contract with each tenant specifying employment with 

the borrower as a condition for continued occupancy.

§3560.624 Occupancy restrictions.

(a) The immediate relatives of the borrowers are ineligible occupants for on-farm labor 

housing.

(b) Occupants must meet the definition of a domestic farm laborer, as defined in §3560.11.

(c) Occupancy of on-farm labor housing is restricted to employees of the borrower unless 

otherwise approved by the Agency.

(d) With prior written permission of the Agency, on-farm labor housing may be occupied by 

ineligible tenants on a short-term basis. The permission of the Agency must also be for a 

limited duration.

§3560.625 Maintaining the physical asset.

On-farm labor housing must meet state and local building and occupancy codes.

§3560.626 Affirmative Fair Housing Marketing Plan.

On-farm labor housing must meet the requirements of §3560.104.

§3560.627 Response to resident complaints.

The management plan submitted in accordance with §3560.623 (a) will include a 

provision for dealing with resident complaints.

§3560.628 Establishing and modifying rental charges.

If it becomes necessary to establish or modify a shelter cost, the borrower must obtain 

Agency approval as specified in subpart E of this part.

§3560.629 Security deposits.

Borrowers that require security deposits to be paid by the tenants will be required to 

comply with the requirements of §3560.204.

§3560.630 Financial management.

Financial information must be submitted in an Agency-approved format and will show 

operation of the housing in a nonprofit manner.
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§3560.631 Agency monitoring.

A compliance review and physical inspection will be conducted by the Agency at least 

once every 3 years. The purpose of this review will be to inspect:

(a) Tenant eligibility documentation;

(b) Financial information on the operation and management of the labor housing, 

including relevant borrower financial materials;

(c) Payment of taxes, insurance and hazard insurance;

(d) Compliance with the security deposit requirements; 

(e) Compliance with the operating plan; 

(f) Compliance with the loan agreement; 

(g) Compliance with Agency requirements for affordable, decent, safe, and sanitary 

housing; and 

(h) Compliance with civil rights requirements.

§3560.632-3560.649 [Reserved] 

§3560.650 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart N--Housing Preservation 

§3560.651 General.

(a) This subpart contains the Agency’s housing preservation requirements as related to 

prepayment requests and restrictive-use provisions (RUPs). The requirements of this 

subpart support the Agency’s commitment to the preservation of decent, safe, sanitary, 

and affordable multi-family housing (MFH) for very low-, low-, and moderate-income 

households.

(b) The Agency will coordinate, direct, and monitor the Agency’s MFH preservation 

activities from the National Office level.

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§3560.652 Prepayment and restrictive-use categories.

(a) Loans with prepayment prohibitions include:

(1) Initial Section 515 loans made on or after December 15, 1989, and

(2) Subsequent loans made on or after December 15, 1989, for additional

rental units.

(b) Loans without prepayment prohibitions but with restrictive-use provisions include:

(1) All loans made after December 21, 1979, but prior to December 15, 1989;

(2) Subsequent loans made on or after December 15, 1989, for purposes other 

than additional rental units; or

(3) Loans subsequently restricted by servicing actions including transfers.

(c) Loans without prepayment prohibitions or restrictive-use provisions include all loans 

made on or before December 21, 1979, or loans that had restrictive-use provisions that 

have expired. Such loans are eligible to receive incentives subject to the provisions of 

this subpart.

(d) Loans may be prepaid if another loan or grant from the Agency imposes the same or 

more stringent restrictive-use provisions on the housing project covered by the loan being 

prepaid.

§3560.653 Prepayment requests.

(a) Borrowers seeking to prepay an Agency loan must submit a written prepayment 

request to the Agency at least 180 days in advance of the anticipated prepayment date and 

must obtain Agency approval before the Agency will accept prepayment.

(b) Prior to submitting a prepayment request, borrowers must take whatever actions are 

necessary to provide the following items:

(1) A clear description of the loan to be prepaid, the housing project covered by 

the loan being prepaid, and the requested date of prepayment.

(2) A statement documenting the borrower’s ability to prepay under the terms 

specified.

(3) A certification that the borrower will comply with any Federal, State, or local 

laws or regulations which may relate to the prepayment request and a statement of 

actions needed to assure such compliance.
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(4) A copy of lease language to be used during the period between the submission date 

and the final resolution of the prepayment request notifying tenant applicants that the 

owner of the housing project has submitted a prepayment request to the Agency and 

explaining the potential affect of the request on the lease.

(5) Borrowers are required to submit a signed release of information form along with the 

prepayment request. The Agency will notify nonprofit organizations and public bodies 

involved in providing affordable housing or financial assistance to tenants of the receipt 

of a borrower’s request to prepay their MFH loan(s). Additionally, the Agency is to 

notify nonprofit organizations and public bodies whenever a borrower, who has requested 

prepayment, is required or elects to offer their property for sale to a nonprofit or public 

body.

(6) A certification that the borrower has notified all governmental entities involved in 

providing affordable housing or financial assistance to tenants in the project has provided 

a statement specifying how long financial assistance from such parties will be provided to 

tenants after prepayment.

(7) A statement affirming that units in the property applying for prepayment will 

continue to be available for rent by eligible residents during the prepayment process.

(c) The Agency will review complete requests to determine if:

(1) The loan is eligible for prepayment under §3560.652(b);

(2) The borrower has the ability to prepay; and

(3) The borrower has complied or has the ability to comply with applicable Federal, 

State, and local laws related to the prepayment request.

(d) If a prepayment request lacks full and complete information on any item, the Agency will 

return the prepayment request to the borrower with a letter citing the deficiencies in the 

prepayment request. The Agency will offer borrowers an opportunity, within 30 days following 

the date of the return, to address the reasons given by the Agency for the return of the prepayment 

request and will allow the borrower to submit a revised prepayment request appropriately satisfies 

all the conditions listed in paragraph (d) of this section, the Agency will process the prepayment 

request and make a reasonable effort to enter into a new restrictive-use agreement with the 

borrower in accordance with §3560.662 or §3560.655. If the Agency determines that a loan is 

ineligible for prepayment or the borrower does not have the ability to prepay, the Agency will 

return the prepayment request to the borrower with a written explanation of the Agency’s 

determinations.

§3560.654 Tenant notification requirements.

(a) Within 30 calendar days of receiving a complete prepayment request, the Agency will send a 

prepayment request notice to each tenant in the housing project. Borrowers must post the 

Agency’s prepayment request notice in public areas throughout the housing 

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project from the date of the notice until the final resolution of the prepayment request. 

The prepayment request notice will establish a date and place where tenants may meet 

with the Agency to discuss the prepayment request and will advise tenants that:

(1) They may review all information submitted with the prepayment request 

except financial information regarding the borrower entity, which the Agency will 

withhold from tenant review unless given written permission for the release of the 

information from the borrower; and,

(2) They have 30 days from the date of the prepayment request notice to give the 

Agency comments on the prepayment request.

(b) Borrowers may provide a prepayment request notice of their own directly to tenants 

and may establish a date and place where tenants may meet with the borrower to discuss 

the prepayment request. The Agency and other providers of housing assistance for verylow, low, and moderate-income households may attend a borrower’s prepayment request 

meeting with tenants.

(c) If the Agency agrees to accept prepayment on a loan, the Agency will send a 

prepayment acceptance notice to each tenant in the housing project at least 60 days prior 

to the prepayment date. Borrowers must post copies of the Agency’s prepayment 

acceptance notice in public areas throughout the housing project until prepayment is 

made. If the prepayment acceptance was based on a borrower’s agreement to comply 

with restrictive-use provisions, the notice will describe the restrictive-use provisions that 

will apply to the housing project after prepayment and the tenant’s rights to enforcement 

of the provisions.

(d) If the borrower withdraws the prepayment request, the Agency will provide a 

prepayment request cancellation notice to each tenant in the housing project. Borrowers 

must post copies of the prepayment request cancellation notice in the public areas 

throughout the housing project for a period of 60 days following the date of the 

prepayment request cancellation notice.

(e) If the borrower agrees to accept incentives and restrictive-use provisions, the Agency 

will notify each tenant, in writing, of the agreement and provide a description of the 

restrictive-use provision.

(f) If a borrower agrees to sell a housing project involved in a prepayment request to a 

nonprofit organization or public body, the Agency will notify each tenant, in writing, of 

the proposed sale to a nonprofit organization or public body and will explain the 

timeframes involved with the proposed sale, any potential impact on tenants, and the 

actions tenants may take to alleviate any adverse impact. Borrowers must post copies of 

the Agency’s proposed sale notice in public areas throughout the housing project until the 

housing project is sold or the offer to sell is withdrawn.
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(g) If a tenant applicant signs a lease in a housing project for which a prepayment request has 

been submitted, the borrower must provide the tenant with copies of all notifications 

provided to tenants by the Agency or the borrower prior to the tenant’s occupancy in the 

housing project.

(h) If a borrower is unable to sell a housing project involved in a prepayment request to a 

nonprofit organization or public body within 180 days as specified in §3560.659, the Agency 

will send a notice to each tenant in the housing project explaining the potential impact of the 

borrower’s inability to sell the housing project on tenants and the actions tenants may take to 

alleviate any adverse impact. Borrowers must post the Agency’s notice in public areas 

throughout the housing project for a period of 60 days following the date of the notice.

§3560.655 Agency requested extension.

Before accepting an offer to prepay from a borrower with a restricted loan, the Agency must first 

make a reasonable effort to enter into a new restrictive-use agreement with the borrower. Under this 

agreement, the borrower would make a binding commitment to extend the low-income use of the 

housing and related facilities for 20 years for loans with interest credit, beginning on the date on 

which the new agreement is executed. If the borrower is unwilling to enter into a new restrictive-use 

provisions and restrictive-use agreement, the Agency should proceed to take the actions described in 

§3560.658.

§3560.656 Incentives offers.

(a) The Agency may offer a borrower, who submits a prepayment request meeting the 

conditions of §3560.653(d), incentives to agree to the restrictive-use period in §3560.662 if 

the following conditions are met:

(1) The market value of the housing project is determined by the Agency, based on 

an appraisal conducted in accordance with subpart P of this part.

(2) There are no restrictive-use agreements or prepayment prohibitions in effect.

(b) Specific incentives offered will be based on the Agency’s assessment of:

(1) The value of the housing project as determined by the Agency based on an “asis” market value appraisal conducted in accordance with subpart P of this part;

(2) An incentive amount that will provide a fair return to the borrower;

(3) An incentive amount that will not cause basic rents at the housing project to 

exceed conventional rents for comparable units; except that when determined 

necessary by the Agency to allow for decent, safe and sanitary housing to be provided 

in market areas where conventional rents are not sufficient to cover necessary 

operating, maintenance, and reserve costs. Basic rents may be allowed to exceed 

comparable rents for conventional units, but in no case by more than 150 percent of 

the comparable rent for conventional unit rent level; and

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(4) An incentive amount that will be the least costly alternative for the Federal 

Government while being consistent with the Agency’s commitment to the

preservation of housing for very-low, low, and moderate income households in 

rural areas.

(c) The Agency may offer the following incentives:

(1) The Agency may increase the borrower’s annual return on equity by one of 

the following two methods. The actual withdrawal of the return remains subject 

to the procedures and conditions for withdrawal specified in subpart G of this 

part.

(i) The Agency may recognize the borrower’s current equity in the 

housing project. The equity will be determined using an Agency accepted 

appraisal based on the housing project’s value as unsubsidized 

conventional housing.

(ii) When a current appraisal indicates an equity loan cannot be made, the 

Agency may recognize the borrower’s current equity in the housing 

project at the higher of the original rate of return or the current 15-year 

Treasury bond rate plus 2 percent rounded to the nearest one-quarter 

percent. The equity will be determined using the most recent Agency 

accepted appraisal of the housing project prior to receiving the prepayment 

request.

(2) The Agency may agree to convert projects without interest credit or with Plan 

I interest credit to Plan II interest credit or increase the interest credit subsidy for 

loans with Section 8 assistance to lower the interest rate on the loan and make 

basic rents more financially feasible.

(3) The Agency may offer additional rental assistance, or an increase in 

assistance provided under existing contracts under Section 521(a)(2), 521(a)(5) of 

the Housing Act of 1949 (42 U.S.C. 1490a(a)(2)) or Section 8 of the United States 

Housing Act of 1937 (42 U.S.C. 1437).

(4) The Agency may make an equity loan to the borrower. The equity loan must 

not adversely affect the borrower’s ability to repay other Agency loans held by 

the borrower and must be made in conformance with the following requirements:

(i) The equity loan must not exceed the difference between the current 

unpaid loan balance and 90 percent of the housing project’s value as 

determined by an “as-is” market value appraisal conducted in accordance 

with subpart P of this part.

(ii) Borrowers with farm labor housing loans are not eligible to receive 

equity loans as incentives.
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(iii) I f an incentive offer for an equity loan is accepted, the equity loan 

may be processed and closed with the borrower or any eligible transferee.

(iv) Excess reserve funds will be used to reduce the amount of an equity 

loan offered to a borrower.

(v) Equity loans may not be offered unless the Agency determines that 

other incentives are not adequate to provide a fair return on the investment 

of the borrower to prevent prepayment of the loan or to prevent 

displacement of project tenants.

(5) The Agency will offer rental assistance to protect tenants from rent 

overburden caused by any rent increase as a result of a borrower’s acceptance of 

an incentive offer or tenants who are currently overburdened.

(6) In housing projects with project-based Section 8 assistance, the Agency may 

permit the borrower to receive rents in excess of the amounts determined 

necessary by the Agency to defray the cost of long-term repair or maintenance of 

such a project.

(d) The Agency must determine that the combination of assistance provided is necessary 

to provide a fair return on the investment of the borrower and is the least costly 

alternative for the Federal Government.

(e) At the time a specific incentive offer is developed, the Agency must take into 

consideration the costs of any deferred maintenance, items in the housing project’s 

operating budget, and any expected long-term repair or replacement costs based on a 

capital needs assessment developed in accordance with §3560.103(c). Deferred 

maintenance may include specific items identified in previous Agency inspections where 

the borrower has had the opportunity and resources available to take corrective actions 

and did not.

(1) Deferred maintenance does not include routine repair and replacement that 

results from normal wear and tear of the physical asset. The amount required for 

the reserve account to be considered fully funded will be adjusted accordingly. 

To determine if basic rents exceed conventional rents for comparable units in the 

area, monthly contributions necessary to obtain the adjusted fully funded reserve 

account will be included in the calculation of basic rents.

(2) Deferred maintenance including any deficiencies identified in project 

compliance with Section 504 of the Rehabilitation Act of 1973 must be addressed 

as part of the development of the incentive and must be completed as part of an 

acceptance agreement of any incentive.

(f) Existing loans must be consolidated, provided consolidation retains the Agency’s lien 

position, and reamortized in accordance with subparts I and J of this part, provided it 

maintains feasibility of the housing for the tenants or reduces the debt service or the level 

of monthly rental assistance.

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(g) The borrower must accept or reject the incentive offer within 30 days. If no answer to 

the offer is received within 30 days, the Agency may consider the incentive offer to be 

rejected.

(1) If the borrower accepts the incentive offer, procedures outlined in §3560.657 

must be followed.

(2) If the borrower rejects the incentive offer, the borrower must comply with 

requirements listed in §3560.658.

§3560.657 Processing and closing incentive offers.

(a) Borrower responsibilities. If a borrower accepts the Agency’s offer of incentives, the 

borrower must complete the following actions:

(1) Subject to the Agency’s approval, the borrower must legally restrict the use of the 

project in accordance with and for the number of years stated in §3560.662.

(2) If the incentive offer accepted includes an equity loan, the borrower must 

complete an application for the equity loan, and the borrower must continue to 

qualify as an eligible borrower or transferee in accordance with subpart B of this part.

(3) If the incentive offer accepted includes rent increases, the borrower must follow 

the rent increase requirements established in subpart E of this part.

(b) Waiting lists. If funds for components of incentive offers are limited, the Agency will 

establish a waiting list of accepted incentive offers for funding in the date order that the 

complete prepayment request was received.

(c) Unfunded incentive offers. If the borrower accepts the incentive offer but the Agency is 

unable to fund the incentive within 15 months, the borrower may choose one of the following 

actions:

(1) The borrower may offer to sell the housing project in accordance with §3650.659. 

In this case the borrower will be removed from the list of borrowers awaiting 

incentives.

(2) The borrower may stay on the list of borrowers awaiting incentives until the 

borrower’s incentive offer is funded. The Agency will not negotiate the incentive 

offer; but, at a borrower’s request, may adjust the incentive amount to reflect an 

updated appraisal, loan balance, and terms of third party financing.

(3) The borrower may withdraw the prepayment request and be removed from the 

list of borrowers awaiting incentives and either continue operating the housing 

project for program purposes and in accordance with Agency requirements or
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continue processing their prepayment process in accordance with §3560.658. If the 

borrower chooses to withdraw their request, the borrower may resubmit an updated 

prepayment request, at any time, and repeat the prepayment process in accordance with 

this subpart.

(4) The borrower may elect to obtain a third-party equity loan provided rents will not 

exceed comparable rents in the market area.

§3560.658 Borrower rejection of the incentive offer.

(a) If a borrower rejects the incentive package offered by the Agency or an Agency request to 

extended restrictive-use provisions, made in accordance with §3560.662, the loan will only be 

prepaid if the borrower elects to agree to the following:

(1) The borrower agrees to sign restrictive-use provisions to extend restrictive-use by 10 

years from the date of prepayment, and at the end of the restrictive-use period offer to sell 

the housing to a qualified nonprofit organization or public body in accordance with 

§3560.659.

(2) If housing opportunities for minorities would be lost as a result of prepayment, the 

borrower will offer to sell the housing to a qualified nonprofit organization or public 

body in accordance with §3560.659.

(b) If the borrower does not elect or agree to enter an agreement in accordance with paragraph (a)

of this section, then the Agency will assess the impact of prepayment on two factors: housing 

opportunities for minorities and the supply of decent, safe, sanitary, and affordable housing in the 

market area. The Agency will review relevant information to determine the availability of 

comparable affordable housing for existing tenants in the market area and if minorities in the 

project, on the waiting list or in the market area will be disproportionately adversely affected by 

the loss of the affordable rental housing units.

(1) If restrictive-use provisions are in place, the borrower will agree to sign the 

restrictive-use provisions, as determined by the Agency, and at the end of the restrictiveuse period, offer to sell the housing to a qualified nonprofit organization or public body in 

accordance with §3560.659.

(2) If the Agency determines that prepayment will have an adverse impact on minorities, 

then the borrower must offer to sell to a qualified nonprofit organization or public body 

in accordance with the provisions of paragraph (a) of this section.

(3) If the Agency determines that the prepayment will not have an adverse effect on 

housing opportunities for minorities but there is not an adequate supply of decent, safe, 

and sanitary rental housing affordable to program eligible tenant households in the 

market area, the loan may be prepaid only if the borrower agrees to sign restrictive-use 

provisions, as determined by the Agency, to protect tenants at the time of prepayment.

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(4) If the Agency determines that there is no adverse impact on minorities and 

there is an adequate supply of decent, safe, and sanitary rental housing affordable 

to program eligible tenant households in the market area the prepayment will be 

accepted with no further restriction.

(c) If the borrower agrees to the restrictive-use provisions, as determined by the Agency, 

the applicable language must be included in the release documents and the borrower must 

execute a restrictive-use agreement acceptable to the Agency and a deed restriction.

(d) If the borrower will not agree to applicable restrictive-use provisions, as determined 

by the Agency, the borrower must offer to sell to a nonprofit or public body in 

accordance with §3560.659 or withdraw their prepayment request.

§3560.659 Sale or transfer to nonprofit organizations and public bodies.

(a) Sales price. For the purposes of establishing a sales price when a borrower is 

required or elects to sell a housing project to a nonprofit organization or public body, two 

independent appraisals will be ordered, one by the Agency and one by the borrower. 

Both appraisals will conclude market value and be in accordance with subpart P of this

part. If the borrower’s assessment of the Agency’s appraised market value indicates that 

no further appraisal is needed, the borrower may agree to accept the Agency’s appraisal.

(1) The expense of the borrower’s appraisal shall be borne by the borrower. The 

appraiser selected may not have an identity of interest with the borrower.

(2) If the two appraisers fail to agree on the market value, the Agency and the 

borrower will jointly select an appraiser whose appraisal will be binding on the 

Agency and the borrower. The Agency and the borrower shall jointly fund the 

cost of the appraisal.

(b) Marketing to nonprofit organizations and public bodies. If a borrower must offer the 

property for sale to a nonprofit organization or public body under this paragraph, the 

borrower must take the following actions to inform appropriate entities of the sale:

(1) The borrower must advertise and offer to sell the project for a minimum of 

180 days. The borrower may choose to suspend advertising and other sales 

efforts while eligibility of an interested purchaser is determined. If the purchaser 

is determined to be ineligible, the borrower must resume advertising for the 

balance of the required 180 days.

 

(2) The Agency will assist the borrower in initially notifying nonprofit 

organizations and public bodies.
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(3) The borrower must provide the nonprofit organizations and public bodies contacted 

with sufficient information regarding the housing project and its operations for interested 

purchasers to make an informed decision. The information provided must include the 

minimum value of the housing project based on the market value determined in 

accordance with paragraph (a) of this section.

(4) If an interested purchaser requests additional information concerning the housing 

project, the borrower must promptly provide the requested materials.

(c) Preference for local nonprofit and public bodies. Local nonprofit organizations and public 

bodies have priority over regional and national nonprofit organizations and public bodies. The 

Agency may determine that no local nonprofit organizations or public bodies are available to 

purchase the housing project. After this determination, the borrower may accept an offer from a 

regional or national nonprofit organization or public body.

 

(d) Eligible nonprofit organizations. To be eligible to purchase properties under the conditions 

of this subpart, nonprofit organizations may not have among its officers or directorate any 

persons or parties with an identity-of-interest (or any persons or parties related to any person with 

identity-of-interest) in loans financed under Section 515 that have been prepaid. In addition to 

local nonprofit organizations, eligible nonprofit organizations include regional or national 

nonprofit organizations or public bodies provided no part of the net earnings of which accrue to 

the benefit of any member, founder, contributor or individual.

(e) Requirements for nonprofit organizations and public bodies. To purchase and operate a

housing project, a nonprofit organization or public body must meet the following requirements:

(1) The purchaser must agree to maintain the housing project for very low- and lowincome families or persons for the remaining useful life of the housing and related 

facilities. However, currently eligible moderate-income tenants will not be required to 

move.

(2) The purchaser must agree that no subsequent transfer of the housing project will be 

permitted for the remaining useful life of the housing project unless the Agency 

determines that the transfer will further the provision of housing for low-income 

households, or there is no longer a need for the housing project. Language to be included 

in the deed, conveyance instrument, loan resolution, and assumption agreement (as 

applicable) is provided in §3560.662.

(3) The purchaser must demonstrate financial feasibility of the housing project including 

anticipated funding.

(4) The purchaser must certify to the Agency that no identity-of-interest relationships in 

accordance with §3560.102(g). The purchaser must not have any identity of interest with 

the seller or any borrower that has previously prepaid or requested prepayment of an 

Agency MFH loan.

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(5) The purchaser must complete an Agency-approved application and obtain 

Agency approval in accordance with subpart B of this part.

(6) The purchaser must make a good faith offer taking into consideration the 

value of the housing project as determined in accordance with paragraph (a) of 

this section.

(f) Selection priorities. If more than one qualified nonprofit organization or public body 

submits an offer to purchase the project at the same time, priority will be given to local 

nonprofit organizations and public bodies over regional and national nonprofit 

organizations or public bodies. When selecting between offers equally meeting all other 

criteria, the borrower will first consider the success of the nonprofit organization’s or 

public body’s previous experience in developing and maintaining subsidized housing, 

with preference given to the most successful. If the offers continue to be equal, the 

borrower will then consider the number of years experience that the nonprofit 

organization or public body has had in developing and maintaining subsidized housing, 

with preference given to the greater number of years.

(g) Loans made by the Agency or other sources to nonprofit organizations and public 

bodies. Agency loans to nonprofit organizations or public bodies may be made for the 

purposes described in this paragraph. Agency loans will be processed in accordance with

subpart B of this part. Loans from other sources will be approved by the Agency in 

accordance with subpart I of this part.

(1) Agency loans to nonprofit organizations or public bodies for the purchase of a 

housing project will be based on the appraised value determined in accordance 

with paragraph (a) of this section.

(2) With proper justification, an Agency loan may be made to help the nonprofit 

organization or public body meet the housing project’s first year operating 

expenses if there are insufficient funds in the housing project’s general operating 

and expense account to meet such expenses. An Agency loan, for the purpose of 

covering first year operating expenses, may not exceed 2 percent of the housing 

project’s appraised value determined in accordance with paragraph (c) of this 

section.

(h) Advances for nonprofit organizations and public bodies. The Agency may make 

advances, in accordance with Section 502(c)(5)(c)(i), not in excess of limits established 

by Congress to nonprofit organizations or public bodies that are purchasing housing 

under this subpart. Grant funds may be used to cover any direct costs other than the 

purchase price, incurred by nonprofit organizations or public bodies in purchasing and 

assuming responsibility for the housing project.

(i) Waiting list. If funds for sales to nonprofit organizations and public bodies are 

limited, the Agency will add the funding requests to the waiting list for incentives and 

follow the process established in §3560.657(b) and (c).
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(j) Withdrawal from sales process. A borrower may withdraw the prepayment request at any 

time prior to the sale of the property. The borrower will be responsible for any damages 

associated with breaking a sales contract established with a nonprofit organization or public body.

(k) When no offer to purchase is received. Prepayment with no further restriction may be 

accepted by the Agency when the borrower agrees to offer the housing project for sale to a 

nonprofit organization or public body in accordance with §3560.659 and no good faith offer is 

received within 180 days from the date that the housing project was advertised for sale to a

nonprofit organization or public body, or a good faith offer was received within 180 days from 

the advertisement date but the offeror was unable to fulfill the terms of the offer within 24 months 

of the offer date, provided the owner cooperated with the potential purchaser.

§3560.660 Acceptance of prepayments.

(a) When the Agency agrees to accept prepayment, the Agency will notify borrowers, in writing, 

of the conditions under which the Agency will accept prepayment including the specific 

restrictive-use provisions to which the borrower has agreed and the date by which the borrower 

must make the prepayment.

(1) Prepayment must be made 180 days from the date of the Agency’s prepayment 

acceptance notice to the borrower.

(2) If the borrower’s prepayment is not received within 180 days of the prepayment 

acceptance notice and the Agency has not agreed to an alternative date based on a written 

request from the borrower, the Agency may cancel the prepayment acceptance 

agreement.

(b) Owners will provide certification stating that they will meet State and local laws prior to 

prepayment acceptance.

(c) Tenants will be notified of the prepayment acceptance agreement in accordance with 

§3560.654(c). If a prepayment is anticipated to result in increased net tenant contributions, 

displacements or involuntary relocations, the tenants, who are affected by such a circumstance, 

may request a Letter Of Priority Entitlement (LOPE) in accordance with §3560.159(c). Tenants 

must request a LOPE within one year of the prepayment acceptance notice date.

§3560.661 Sale or transfers.

(a) If a sale or transfer is to take place in conjunction with the Agency incentive offer, the sale or 

transfer must comply with the processing provisions of subpart I of this part.

(b) If a proposed transferee is determined not to be eligible for the transfer and assumption, the 

borrower will be given an additional 45 days to find another transferee.

(c) In cases where the existing owner is in program non-compliance or default, the Agency may 

make an offer of incentives contingent on the successful transfer of the 

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housing to an acceptable purchaser. The Agency may offer a smaller incentive or no 

incentive if the borrower does not agree to transfer the project to an acceptable purchaser, 

or if the transfer does not take place.

§3560.662 Restrictive-use provisions and agreements.

All restrictions require Agency approval and must be in accordance with the following 

restrictions:

(a) The undersigned, and any successors in interest, agree to use the property (described 

herein) in compliance with 42 U.S.C. 1484 or 1485, whichever is applicable, and 

applicable regulations and the subsequent amendments, for the purpose of housing:

(1) Very low-, or low-income households when required by §3560.658(a)(2), or 

(2) Very low-, low-, or moderate-income households.

(b) The period of the restriction will be inserted in accordance with the following:

(1) 10 years if required by §3560.658(a)(1);

(2) The last existing tenant (that occupied the property on the date of 

prepayment) voluntarily vacates if required by §3560.658(b)(3)

(3) 30 years if required by §3560.406(g); 

(4) Remaining period of existing restrictive-use provisions and any agreed 

extension if required by §3560.655 or §3560.658 (b)(1); 

(5) The remaining useful life of the housing and related facilities if required by 

§3560.658(a)(2); and 

(6) 20 years in all other cases.

(c) When required by §3560.658(a)(1) or (a)(2), the undersigned agrees that at the end of 

the expiration of the period described in paragraph (b) of this section, the property will be 

offered for sale to a qualified nonprofit organization or public body, in accordance with 

previously cited statutes and regulations.

(d) The Agency and eligible tenants or applicants may enforce these restrictions.

(e) The undersigned also agrees to:

(1) To set rents, other charges, and conditions of occupancy in a manner to meet 

these restrictions;

(2) To post an Agency approved notice of this restriction for the tenants of the 

property;
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(3) To adhere to applicable local, State, and Federal laws; and

(4) To obtain Agency concurrence for any rental procedures that deviate from those 

approved at the time of prepayment, prior to implementation.

(f) The undersigned will be released from these obligations before the termination period in 

paragraph (b) of this section only when the Agency determines that there is no longer a need 

for the housing or that financial assistance provided the residents of the housing will no 

longer be provided due to no fault, action or lack of action on the part of the borrower.

§3560.663 Post-payment responsibilities for loans subject to continued restrictive-use provisions.

(a) If a borrower prepays a loan and the housing project remains subject to restrictive-use 

provisions, the requirements of this section apply after prepayment.

(b) Owners of prepaid housing projects will be responsible for ensuring that the restrictiveuse provisions agreed to as a condition of prepayment are observed.

(c) Owners must maintain appropriate documentation to demonstrate compliance with the 

restrictive-use provisions and must make the documentation and the housing project site 

available for Federal Government inspection upon request.

(1) Owners must document rent increases in accordance with subpart G of this part.

(2) Owners must document tenant eligibility in accordance with §3560.152.

(3) In an Agency approved format, owners must provide the Agency with a signed 

and dated certification within 30 days of the beginning of each calendar year for the 

full period of the restrictive-use provisions establishing that the restrictive-use 

provisions are being met.

(d) Owners must observe Agency policies on tenant grievances as described in §3560.160. 

The Agency may enforce restrictive-use provisions through administrative and legal actions. 

Tenants may enforce the restrictive-use provisions by contacting the Agency or through legal 

action. The Agency will release the restrictive-use provisions when the Agency conditions 

have been met.

§3560.664-3560.699 [Reserved]

§3560.700 OMB control number.

The information collection requirements contained in this regulation have been approved 

by the Office of Management and Budget (OMB) and have been assigned OMB control number 

0575-0189. Public reporting burden for this collection of information is estimated to vary from 15 

minutes to 18 hours per response, including time for reviewing instructions, searching existing data 

sources, gathering and maintaining the data needed, and completing and reviewing the collection of 

information. A person is not required to respond to a collection of information unless it displays a 

currently valid OMB control number.

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Subpart O--Unauthorized Assistance

§3560.701 General.

(a) This subpart contains the policies for recapturing unauthorized assistance when the 

Agency determines that a borrower or tenant was ineligible for, or improperly used, 

assistance received from the Agency.

(b) The Agency may seek repayment of any unauthorized assistance provided to a borrower 

or tenant, plus the cost of collection, regardless of whether the unauthorized assistance was 

due to errors by the Agency, the borrower, or the tenant.

§3560.702 Unauthorized assistance sources and situations.

(a) Unauthorized assistance can be received by a borrower or tenant in the form of loans, 

grants, interest credit, rental assistance, or other assistance provided by the Agency including 

assistance received as a result of an incorrect interest rate being applied to an Agency loan. 

Agency officials may pursue identification and recapture of unauthorized assistance through 

any legal remedies available.

(b) Unauthorized assistance may result from situations such as:

(1) Assistance being provided to an ineligible borrower or tenant;

(2) Assistance to an eligible borrower or tenant being used for an unauthorized 

purpose;

(3) Assistance being obtained as a result of inaccurate, incomplete, or fraudulent 

information provided by a borrower or tenant; or

(4) Assistance being obtained as a result of errors by the Agency, borrower, or tenant.

§3560.703 Identification of unauthorized assistance.

(a) The Agency will use all available means to identify unauthorized assistance, including 

Agency monitoring activities, OIG reports, GAO reports, and reports from any source, if the 

information provided can be substantiated by the Agency.

(b) Borrowers have the primary responsibility for identifying repayment of unauthorized 

assistance received by tenants.

§3560.704 Unauthorized assistance determination notice.

(a) The Agency will notify borrowers, in writing, when a determination has been made that 

unauthorized assistance was received by the borrower. Borrowers will notify tenants, in 

writing, when a determination is made that unauthorized assistance was received by the 

tenant and will simultaneously send the Agency of copy of the written notice to the tenant.
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(b) The unauthorized assistance determination notice is a preliminary notice, not a demand letter. 

The unauthorized assistance determination notice will:

(1) Specify the reasons the assistance was determined to be unauthorized;

(2) State the amount of unauthorized assistance to be repaid and specify the party

responsible for repayment of the unauthorized assistance (i.e., the tenant or borrower) 

according to the provision of §3560.708;

(3) Establish a place and time when the person receiving the unauthorized assistance 

determination notice may meet with the Agency or, in the case of tenants, may meet with 

the borrower, to discuss issues related to the unauthorized assistance notice such as the 

establishment of a repayment schedule; and

(4) Advise the borrower or tenant that they may present facts, figures, written records, or 

other information within a specified period of time which might alter the determination 

that the assistance received was unauthorized.

(c) Upon request, the Agency or borrower, in the case of tenants, will grant additional time for 

discussions related to an unauthorized assistance determination notice. Borrowers must notify the 

Agency of schedule revisions when additional time is granted to a tenant in unauthorized 

assistance claims.

§3560.705 Recapture of unauthorized assistance.

(a) The Agency will seek repayment of all unauthorized assistance received by a borrower or 

tenant, plus the cost of collection, to the fullest extent permitted by law. Agency efforts to collect 

unauthorized assistance may include offsets, the use of private or public collection agents, and 

any other remedies available. Agency findings related to unauthorized assistance determinations 

will be referred to credit reporting bureaus and other federal, state, or local agencies with 

jurisdictions related to the unauthorized assistance findings for suspension, debarment, civil or 

criminal action to the fullest extent permitted by law.

(b) If a borrower or tenant agrees to repay unauthorized assistance, the amount due will be the 

amount stated in the unauthorized assistance determination notice unless another amount has been 

approved by the Agency.

(c) Repayment may be made either with a lump sum payment or through payments made over a 

period of time. If a borrower or tenant agrees to repay unauthorized assistance, the borrower or 

tenant proposed repayment schedule must be approved by Agency prior to implementation. 

Agency approval of a repayment schedule will take into consideration the best interest of the 

borrower, the tenant, and the Federal Government.

(d) Borrowers must retain copies of all correspondence and a record of all conversations between 

the borrower and a tenant regarding unauthorized assistance received by a tenant.

(e) When a tenant, who has received unauthorized assistance due to tenant error or fraud as 

determined by the Agency, moves out of a housing project, the borrower is no longer responsible 

for recapturing the unauthorized assistance provided that the borrower notifies the Agency of the 

tenant's move and transfers all records related to the tenant's unauthorized assistance to the 

Agency within 30 days of the tenant's move. The Agency will pursue collection of the 

unauthorized assistance from the tenant.

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(f) If a borrower refuses to enter into an unauthorized assistance repayment schedule with 

the Agency, the Agency will initiate liquidation procedures, in accordance with §3560.456, 

or other enforcement actions, such as suspension, debarment, civil, or criminal penalties, in 

accordance with §3560.461. If a tenant refuses to enter into an unauthorized assistance 

repayment schedule, the Agency will initiate recovery actions against the tenant.

(g) Borrowers may not use housing project funds to pay amounts due to the Agency as a 

result of unauthorized assistance due to borrower fraud.

§3560.706 Offsets.

Offsets and any other available remedies may be used by the Agency to recapture 

unauthorized assistance. Guidance concerning use of offsets can be found at 7 CFR 3550.210.

§3560.707 Program participation and corrective actions.

(a) With Agency approval, a borrower or tenant, who has received unauthorized assistance, 

may continue to participate in the project if they have the legal and financial capabilities to 

do so. Approval considerations for such forbearance and repayment are in §3560.705.

(b) A borrower or tenant who was responsible for the circumstances causing the unauthorized

assistance must take appropriate action to correct the problem within 90 days of the 

unauthorized assistance determination notice date, unless an alternative date is agreed to by 

the Agency.

(c) When the interest rate shown in a debt instrument resulted in the receipt of unauthorized 

assistance, the debt instrument will be modified to the correct interest rate. All payments 

made by the borrower at the incorrect interest rate will be reapplied at the correct interest 

rate, and remaining payments due on the loan will be recalculated on the basis of the correct 

interest rate, plus any amounts due to the Agency as a result of the use of an incorrect interest 

rate, unless the Agency agrees to a separate repayment process.

§3560.708 Unauthorized assistance received by tenants.

(a) Tenant actions that require tenant repayment of unauthorized assistance received by 

tenants include, but are not limited to:

(1) Knowingly or mistakenly misrepresenting income, assets, adjustments to income, 

or household status to the borrower as required under subpart D of this part; or

(2) Failure to properly report changes in income, assets, adjustments to income, or 

household status to the borrower as required in subpart D of this part.

(b) Borrower actions that require borrower repayment of unauthorized assistance received by 

tenants include, but are not limited to:

(1) Incorrect determination of tenant income or household status by the borrower, 

resulting in rental assistance or interest credit that is not allowable under the 

provisions of subparts D, E, or F of this part, as applicable; or

(2) Assignment of rental assistance to a household that is ineligible under the 

requirements of subpart F of this part.
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(c) When it is determined that a tenant has received unauthorized assistance, the borrower shall 

notify the tenant and the Agency through the procedure specified in §3560.704.

(d) Borrowers may not charge tenants to pay amounts due to the Agency as a result of 

unauthorized assistance to tenants through borrower error.

(e) Borrowers must notify the Agency of all collections from tenants as repayments for 

unauthorized assistance and must remit or credit the amounts collected to applicable housing 

project accounts.

(f) When rental assistance was improperly assigned to a tenant, for any reason, the rental 

assistance benefit must be canceled and reassigned.

(1) Before a borrower notifies a tenant of rental assistance cancellation, the borrower 

must request Agency approval. If the Agency determines that the unauthorized rental 

assistance was received by the tenant due to borrower fraud or error, the borrower must 

give the tenant 30 days notice, in writing, that the unit was assigned in error and that the 

rental assistance benefit will be canceled effective on date that the next monthly rental 

payment is due after the end of the 30-day notice period.

(2) Tenants also must be notified, in writing, that they may cancel their lease without 

penalty at the time the rental assistance is canceled. Tenants must be offered an 

opportunity to meet with a borrower to discuss the rental assistance cancellation.

§3560.709 Demand letter.

(a) If a borrower fails to respond to an unauthorized assistance determination notice or fails to 

agree to a repayment schedule, the Agency will send the borrower a demand letter specifying:

(1) The amount of unauthorized assistance to be repaid and the basis for the unauthorized 

assistance determination; and

(2) The actions to be taken by the Agency if repayment is not made by a specified date.

(b) If a tenant fails to respond to the unauthorized assistance determination notice or fails to 

agree to a repayment schedule, the borrower will send the tenant a demand letter specifying:

(1) The amount of unauthorized assistance to be repaid and the basis for the unauthorized 

assistance determination;

(2) The actions to be taken if repayment is not made by a specified date, including 

termination of tenancy; and

(3) The appeal rights of the tenant as specified in §3560.160.

(c) A demand letter may be sent to a borrower or tenant, in lieu of an unauthorized assistance 

determination notice, when the evidence documenting the unauthorized assistance determination 

is deemed to be conclusive by the Agency or borrower sending the letter.

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§§3560.710-3560.749 [Reserved]

§3560.750 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.

Subpart P--Appraisals

§3560.751 General.

This subpart sets forth appraisal policies for Agency-financed multi-family housing 

(MFH) projects consisting of five or more rental units. Agency-financed housing projects with 

fewer than five rental units may be appraised in accordance with the Agency's single family 

housing appraisal policies established under 7 CFR 3550.62.

§3560.752 Appraisal use, request, review, and release.

(a) Appraisal uses. The Agency will use appraisals to determine whether the security 

offered by an applicant or borrower is adequate to secure a loan or determine appropriate 

servicing or preservation decisions. Appraisals used for Agency decision-making must be 

current, unless the Agency and the applicant, or borrower, mutually agree to the use of an 

appraisal that is not current. A current appraisal is an appraisal with a report date that is 

not more than one year old.

(b) Appraisal requests. Appraisal requests must be in writing and must specify the client 

and other intended users, the intended use, the purpose, and the scope of work of the 

appraisal, including the type and definition of the value(s) to be developed.

(1) Type of Value. The appraisal request must indicate whether the “market 

value”, the “market value, subject to restricted rents”, or any other type of value 

of the housing project and related facilities is to be concluded.

(i) A request for “market value, subject to restricted rents” means the 

appraisal will take into consideration any rent limits, rent subsidies, 

expense abatements, or restrictive-use conditions that will affect the 

property as a result of an agreement with the Agency or any other 

financing source. Each type of financing involved, including, but not 

limited to, interest credit subsidy, low-interest loans from other sources, 

tax-exempt bond financing, tax credits, and grants, must be valued 

separately in the appraisal.

(ii) A request for “market value” means the appraisal will take into 

consideration the most probable price which a property should bring in a 

competitive and open market under all conditions requisite to a fair sale, 

the buyer and seller each acting prudently and knowledgeably, and 
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assuming the price is not affected by undue stimulus. Implicit in this definition is 

the consummation of a sale as of a specified date and the passing of title from 

seller to buyer under conditions whereby:

(A) Buyer and seller are typically motivated;

(B) Both parties are well informed or well advised and acting in what 

they consider their best interests;

(C) A reasonable time is allowed for exposure in the open market;

(D) Payment is made in terms of cash in United States dollars or in terms 

of financial arrangements comparable thereto; and

(E) The price represents the normal consideration for the property sold 

unaffected by special or creative financing or sales concessions granted 

by anyone associated with the sale.

(2) “As-is Value” or “Prospective Value”. The appraisal request must indicate whether 

the “as-is value” or “prospective value” of the housing is to be concluded.

(i) “As-is value” means the value of the housing and related facilities as of the 

effective date of the appraisal. It relates to what physically exists and is legally 

permissible at the time of the appraisal and excludes all hypothetical conditions.

(ii) “Prospective value” means the forecasted value of the housing and related 

facilities as of a specified future date. For Agency appraisals, this date will 

typically be the projected completion date of proposed new construction or 

rehabilitation.

(3) Section 8 project-based assistance. Depending on the intended use of the appraisal, 

the Agency will specify whether or not section 8 project-based assistance will be 

considered in the valuation of the housing. The remaining term of the section 8 contract 

and the probability of subsequent renewal terms being authorized will be taken into 

consideration when making this determination.

(4) Low-Income Housing Tax Credit (LIHTC) and other financing sources. Depending 

on the intended use of the appraisal, the Agency will specify whether or not tax credits 

and other financing sources involved in the housing will be considered in the valuation of 

the housing.

(c) Appraisal review. All MFH appraisals that were not written by an Agency appraiser will be 

reviewed by an Agency appraiser, who will write and file a technical review report that complies 

with the Uniform Standards of Professional Appraisal Practice (USPAP) and Agency 

requirements.

(d) Release of appraisals. MFH appraisals procured by the Agency will be released to 

owners/applicants, from their own files, upon their request.

§3560.753 Agency appraisal standards and requirements.

(a) General. The Agency recognizes USPAP as the basic standards for appraisals. Appraisals 

used by the Agency must comply with USPAP and this subpart.

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(b) Appraisers. MFH appraisals prepared for the Agency will be written by Agency appraisers or 

independent fee appraisers who are state certified general appraisers, certified in the state where 

the property is located. Technical review reports will be written by Agency state certified general 

appraisers.

(c) Appraisal report. The appraisal report format may be a form appraisal or a narrative appraisal. 

The Agency will specify the appraisal format that is most appropriate for the scope of work 

involved when the appraisal is requested.

(1) Form appraisal reports. The Agency will accept appraisal report forms that meet 

generally accepted industry standards, comply with USPAP, and have been approved by 

the Agency.

(2) Narrative appraisal reports. Narrative appraisal reports must, at a minimum, contain 

the following items:

(i) Transmittal letter;

(ii) Factual information about the property;

(iii) Regional and neighborhood data;

(iv) Description of the subject property;

(v) Description of existing and planned improvements;

(vi) A highest and best use analysis;

(vii) A statement regarding any environmental issues, such as potential 

contamination of the property from hazardous substances, hazardous wastes, or 

petroleum products;

(viii) A cost approach analysis (if applicable);

(ix) A sales comparison approach analysis (if applicable);

(x) An income approach analysis (if applicable);

(xi) A reconciliation of the value indications derived from the included 

approaches to value; and

(xii) A signed and dated certification of value.

(3) At the time an appraisal is requested, the Agency will specify either a complete or a 

limited appraisal and one of the following types of appraisal reports, based upon the 

complexity of the appraisal assignment.

(i) A self-contained report that comprehensively describes all information 

significant to the solution of the appraisal problem;

(ii) A summary report that summarizes all information significant to the solution 

of the appraisal problem; or

(iii) A restricted use report, intended for Agency use only, that briefly 
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states all information significant to the solution of the appraisal problem.

(d) Highest and best use statement and analysis. The highest and best use is to be 

concluded for the subject site as though it was vacant, and for the subject property as 

improved, if improvements have been made. If the highest and best use of a subject 

property is for something other than MFH, the appraisal report must provide this 

information to the Agency for consideration in the loan process. In addition to being 

reasonably probable and appropriately supported, the highest and best use of both the 

land as though vacant and the property as improved must meet four implicit criteria. The 

highest and best use must be:

(1) Physically possible;

(2) Legally permissible;

(3) Financially feasible; and

(4) Maximally productive.

(e) Valuation methods and variances. The final opinion of value presented in an 

appraisal report must have considered a cost approach, a sales comparison approach, and 

an income approach. If one of these standard approaches is not used, the reconciliation 

narrative will provide a full and complete explanation of the reasons the approach was 

excluded. The reconciliation will fully discuss and reconcile variances in the value 

indications concluded by each approach.

(f) Real estate history. Appraisals must contain a 5-year ownership and sales history for 

the housing project being appraised.

(g) Reserve accounts. Funds in the housing project's reserve account will not be 

considered in the valuation of the housing project.

(h) Escrow accounts. Short-term prepaid escrow accounts for general operating 

expenses, such as taxes and insurance, shall not be considered in the valuation of the 

housing project.

(i) Rental rates comparison. The appraisal report must document whether the housing 

project's basic rents are less than, equal to, or greater than market rents for comparable 

conventional, or non-subsidized, units in the area where the housing is located.

(j) Description of housing and property rights. The appraisal report must identify and 

describe both the real estate, which is the land and improvements, and the real property, 

or property rights, being appraised.

(k) Exclusion of rental units from valuation. The Agency will provide appraisers with 

instructions and supporting information on any rental units that do not produce rental 

income at the time of the appraisal.

(l) Non-contiguous sites. When a housing project has real property located on noncontiguous sites, a separate appraisal must be developed for each site.

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§§3560.754-3560.799 [Reserved]

§3560.800 OMB control number.

The information collection requirements contained in this regulation have been 

approved by the Office of Management and Budget (OMB) and have been assigned OMB 

control number 0575-0189. Public reporting burden for this collection of information is 

estimated to vary from 15 minutes to 18 hours per response, including time for reviewing 

instructions, searching existing data sources, gathering and maintaining the data needed, and 

completing and reviewing the collection of information. A person is not required to respond to a 

collection of information unless it displays a currently valid OMB control number.