HB-3-3560

CHAPTER 8: SECURITY RESTRUCTURING REQUESTS 

8.1 INTRODUCTION 

During the term of an Agency loan, borrowers may face unexpected expenses or other 

financial difficulties that require additional financing from other sources to adequately maintain 

and operate the project. In such cases, the Agency will consider restructuring the borrower’s 

security, so long as doing so will not only help the property, but also be in the best interest of the 

tenants and the Government. Potential security restructuring activities that may be approved 

include subordinations and junior liens, disposition of security property, leasing of security 

property, and other liens against a property or other assets. 

This chapter describes the requirements regarding such security restructuring requests 

and Agency procedures for reviewing and approving those requests. 

SECTION 1: SUBORDINATIONS AND JUNIOR LIENS 

[7 CFR 3560.409]

8.2 OVERVIEW 

Borrowers may request a subordination or junior lien for any type of Agency loan. Prior 

Agency consent is required for all subordinations and junior liens. 

Because the requirements and procedures for subordinations and junior liens are so 

similar, they have been combined in this section. Where necessary, specific differences between 

the requirements and procedures for the two are identified. 

8.3 REQUIRED CONDITIONS 

The State Director may grant consent to subordinations or junior liens if the borrower 

adequately documents that the request is consistent with the conditions listed in Exhibit 8-1. 

If a junior lien is placed on any property without prior Agency consent, the State Director 

may pursue liquidation of the account. 

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Exhibit 8-1 

Required Conditions for Subordinations or Junior Liens 

• The action will enable the borrower to obtain credit to make needed improvements or repairs on 

the property in circumstances where a loan of the same type involved could be made and funds 

in the reserve account have been depleted. Repair costs should be reasonable and consistent 

with the local market; 

• The action will improve the borrower’s total financial condition or debt-paying ability;

• The borrower is unable to refinance the loan on terms that can reasonably be expected to be met 

yet still meet the intent of the program; 

• The action will not result in an unauthorized rent increase for the project or result in basic rents 

that exceed the Conventional Rents for Comparable Units (CRCU) standard as discussed in 

Chapter 4 of HB-2-3560; 

• The lienholder agrees in writing that foreclosure action under its lien will not be initiated before 

holding a discussion with the Loan Servicer, and after giving a reasonable period of notice to the 

Agency, and certifies that its operating plans are consistent with Agency requirements; 

• Security for the subordination or junior lien appears adequate; 

• The transaction must further loan objectives and not adversely affect the Agency’s security; 

• The total debt against the security after the transaction does not exceed the appraised value of 

the property and is within the State Director’s approval authority;

• There is no future advance clause that would allow the lender to advance additional money and 

maintain the security or mortgage position; and 

• All other applicable regulatory requirements have been met. 

8.4 EVALUATING BORROWER REQUESTS FOR SUBORDINATIONS AND 

JUNIOR LIENS 

The State Director will approve subordinations and junior liens only if they generally 

improve a borrower’s financial condition and allow for completion of improvements or repairs in 

cases of underfunded reserve accounts. Loan Servicers need to ensure that the request does not 

alter project operations to make it ineligible under Agency requirements. In addition, the 

subordination must not adversely affect the Agency’s ability to service the loan according to 

program regulations, and must be determined to be within the bounds of good judgment 

considering the intent, funding limitations, and respective program authorities. When evaluating 

borrower requests for subordinations or junior liens, Loan Servicers will review the request and 

check that the requirements listed in Exhibit 8-2 have been met. 

In most cases, the Agency will not require an appraisal of the property when a 

subordination or junior lien is proposed. For subordinations, the Agency needs to look more 

closely at the amount of non–Agency debt being assumed and to determine whether its 

secondary lien position is sufficient security for the remaining outstanding debt. In some cases, 

this determination may require an appraisal. For junior liens, appraisals are almost never 

required, provided project budgets demonstrate that the project has a sufficient income to support 

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the increased debt. Appraisals are unnecessary in such cases because the Agency retains its lien 

position. In either case, the Agency needs to determine whether projects are still in compliance 

with the conventional rents for comparable units standard following the subordination or junior 

lien. The State Director decides when appraisals will be required. 

All requests for consent to subordinations or junior liens that do not satisfy the criteria of 

Exhibit 8-2 must be submitted to the National Office with complete comments and 

recommendations from both the Loan Servicer and State Director, and all of the borrower’s case 

files. The National Office will review such requests on a case-by-case basis, and appropriate 

authorization will be granted or withheld depending on the individual merits of the proposal and 

its compatibility with program requirements. 

Loan Servicers should follow the procedures in Paragraph 8.5 when evaluating these 

requests. 

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Exhibit 8-2 

Required Documentation for Subordinations or Junior Liens 

Loan Servicers may approve borrower requests only if they adequately document that the following 

requirements have been satisfied: 

• The account must be current; 

• The debt must be adequately secured; 

• The borrower must provide adequate management; 

• The terms and conditions of the prior lien or junior lien must be such that the borrower can 

reasonably be expected to meet them as well as all other debts; 

• The proposed use of funds must not adversely affect the borrower’s ability to meet the 

objectives of the program. Indeed, it must improve the borrower’s ability to repay the loan or 

be necessary to place the borrower’s operation on a sound basis; 

• Any proposed development must be planned and performed according to RD Instruction 

1924-A, or in a manner directed by the other lienholder that meets the objectives of RD 

Instruction 1924-A; 

• Funds to be used for development or enlargement of farm operations must be handled as 

prescribed for loan funds in RD Instruction 1902-A, except that if the lienholder will not 

permit the use of a supervised bank account, arrangements must be made to ensure that funds

will be spent for planned purposes and must be approved by the Agency before being 

released; 

• Form FEMA 81-93 must be completed;

• Subordinations or junior liens need not cover the entire site; 

• Subordinations or junior liens must be for a specific amount; 

• Subordinations or junior liens must not adversely affect the Agency’s ability to service the 

loan according to the requirements of this part; and 

• New prior or junior lienholders must agree to provide notice of foreclosure to the Agency, as 

required in RD Instruction 1927-B. Any junior lienholder’s consent to the foreclosure and 

use of proceeds will be obtained prior to approval of the foreclosure. 

8.5 PROCEDURES FOR AUTHORIZATION OF SUBORDINATIONS AND JUNIOR 

LIENS 

A. Borrower Requests

Loan Servicers should instruct the borrower that each request for subordinations or 

junior liens must be submitted on Form RD 3560-1, and provide a copy of the form to the 

Agency. 

B. Processing Borrower Requests 

Upon receipt of the completed form, Loan Servicers will make a preliminary 

feasibility determination regarding the request. Key areas that the Agency will analyze as 

part of this determination include: 

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• Rates and terms; 

• Post-restructuring project budget; 

• Current compliance status of the property; and 

• Capacity (for nonprofit borrowers). 

If Loan Servicers discover violations at the property, the request must not be 

approved without an Agency-approved work-out agreement. 

C. Recommendations to State Director 

If there are no violations at the property and all other applicable criteria are met, Loan 

Servicers forward a properly completed and executed copy of Form RD 3560-1 to the 

State Director. Accompanying Form RD 3560-1 should be a memo containing all 

information needed to justify approval or disapproval of the request, including an 

agreement from any new prior lienholder to provide the Agency advance notice of 

foreclosure. As appropriate, Loan Servicers will also obtain junior lienholder consent to 

any transaction and use of proceeds prior to approval of the transaction. When all 

required documentation has been assembled, the Loan Servicer will forward the 

subordination and junior lien request to the State Director for review. 

D. Final Decision 

If the State Director or designee agrees with the Field Office determination, they will 

forward the subordination or junior lien request to the Office of General Counsel (OGC) 

for review of legal sufficiency and closing comments. After OGC review, the closing 

process will begin. The State Director or designee should obtain OGC guidance in the 

preparation of documents necessary to effect the subordination. 

All subordination and junior lien requests exceeding the State Director’s approval 

authority limit must be submitted to the National Office for prior approval authorization. 

E. Appraisal Procedures 

The State Director may request an appraisal at any time deemed appropriate. As 

stated in Paragraph 8.4, most subordinations and junior liens will not require an appraisal. 

If an appraisal is deemed necessary, an Agency official authorized to make appraisals for 

the type of project involved will prepare an appraisal report. Alternatively, the new 

creditor may perform the appraisal as part of the due diligence process. If an appraisal 

that is less than one year old is available, it may be used in lieu of a new appraisal. 

8.6 POST-APPROVAL OF JUNIOR LIENS 

Sometimes a borrower will obtain additional credit (e.g., a personal loan) using the 

project as security for that credit, despite the Agency’s requirements that prohibit such actions. 

In effect, that loan functions as a junior lien on the property. When a junior lien is placed on any 

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property without the prior consent of the Agency, the Loan Servicer will normally service the 

account for liquidation with the guidance of OGC. 

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SECTION 2: PARTIAL DISPOSITION OF SECURITY PROPERTY 

[7 CFR 3560.407]

8.7 OVERVIEW 

Borrowers may also request Agency approval of the sale of a portion of an interest in the 

security property under certain circumstances. The borrower may use the proceeds from such 

sale in accordance with Exhibit 8-3. Alternatively, a borrower could grant a conveyance or right 

of way easement, among other actions. This section addresses each of these options, and the 

Agency’s procedures for reviewing and approving requests. 

Exhibit 8-3 

Allowable Uses for Proceeds from Disposition of Security Property

• To pay customary incidental closing costs such as title and recording fees appropriate to 

the transaction, including additional real estate tax the borrower is required to pay for the 

year for which alternate arrangements to pay cannot be made; 

• To pay debts owed to any prior lienholders; 

• To make extra payments on the loan; 

• To pay costs necessary to determine the reasonableness of an offer or asking price, such 

as fees for appraisal of minerals, land, or timber where the necessary appraisal cannot be 

obtained without costs; 

• To pay a real estate broker's commission if the borrower can reasonably expect to obtain 

proceeds at least equal to the commission in excess of what could otherwise be obtained 

without the broker's assistance; 

• To repair, develop, or enlarge the borrower’s facility for purposes for which a loan of the 

same type involved could be made, if the development or enlargement is necessary to 

improve the borrower’s debt-paying ability, place the operation on a more sound basis, or 

otherwise further loan objectives; 

• To purchase or acquire property to be used for purposes for which a loan of the same 

type involved is authorized, if the debt will be as well secured after the transaction as 

before (The Agency will obtain a lien on the acquired property, and obtain title

evidence); and 

• To increase reserves based on an Agency-approved capital plan. 

8.8 ALLOWABLE ACTIONS INVOLVING THE PARTIAL DISPOSITION OF 

SECURITY PROPERTY 

The State Director may grant consent to requests for the following actions involving the 

partial disposition of security property for a project: 

• Use of proceeds from the sale of a portion of or an interest in the security; 

• Exchange of all or a part of the undeveloped security for other real estate; or 

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• Granting or conveyance or rights-of-way subject to applicable conditions and 

requirements. 

8.9 ALLOWABLE USES FOR PROCEEDS FROM PARTIAL DISPOSITION OF 

SECURITY PROPERTY 

The Agency may consent to the partial disposition of security property if borrowers plan 

to use the proceeds for one or more of the uses listed in Exhibit 8-3. 

It should be noted that while borrowers may use proceeds from disposition of security

property for any of the purposes listed in Exhibit 8-3, there is a priority order for using such 

proceeds. The order in which the allowable uses are listed in Exhibit 8-3 roughly corresponds to

the Agency’s preferred priority order (although not all uses will apply to all projects). 

If property to be sold or exchanged is to be used for the same or similar purposes for 

which the loan or grant was made, the purchaser is required to execute Form RD 400-4. The 

agreement will remain in effect for as long as the property continues to be used for the same or 

similar purpose for which the loan or grant was made. 

8.10 REQUIRED CONDITIONS FOR AGENCY CONSENT 

The State Director may grant consent to partial sales of security property, including the 

sale of individual units or developed portions of a multi-family housing project, so long as the 

conditions listed in Exhibit 8-4 are met. 

8.11 PROCESSING BORROWER REQUESTS 

The Agency grants consent to disposition of part of, or an interest in, security property by 

approving a completed Form RD 3560-1, or other forms approved by OGC or prescribed in State 

Supplements. 

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Exhibit 8-4 

Required Conditions for Agency Consent 

to Partial Disposition of Security Property 

• The transaction will not impair orderly payment of the Agency debt; 

• The transaction will not interfere with the successful operation of the project or prevent the 

borrower from carrying out the purpose for which the loan was made; 

• The borrower certifies compliance with fair housing laws; 

• The appropriate level of environmental review under the National Environmental Policy 

Act (NEPA) is completed and mitigation measures to protect any important resources are 

established; 

• The consideration is at least equal to the market value of the security property disposed of 

or the rights being granted, except that right-of-way easements may be granted or conveyed 

without consideration being offered or with only the minimal consideration being offered if 

the value of the security property will not be reduced, its suitability for the intended purpose 

will not be impaired, and the easement is granted for the borrower to develop additional lots 

or units that will be integrated into the project or with a public body for enhancement of 

streets or utilities benefiting the project;

– To establish market value, an authorized Agency official will either make a new 

appraisal if the current appraisal is more than one year old, or supplement the present 

appraisal report by inserting information as to the market value of the security

disposed; or 

– An authorized agency official may also accept a value determination for such 

easements that have been provided by other competent sources at no cost to the 

Government that is mutually acceptable to the borrower and the Agency. 

• The remaining property is adequate security for the unpaid balance of the loan; and 

• The proceeds from the disposition of the security are to be used for one or more approved 

purposes (e.g., to pay closing costs, make extra payments, pay brokers’ commission). 

A. Borrower Submission 

When a borrower requests consent to lease a portion of the security property or the 

Loan Servicer discovers that the borrower is leasing the security without consent, the 

Loan Servicer will require the borrower to complete Form RD 3560-1. The form will 

show the terms of the proposed lease and will specify the use of proceeds, including any 

proceeds to be released to the borrower. 

B. Agency Review

The Loan Servicer will forward to the State Director: 

• A properly completed and executed Form RD 3560-1;

• The proposed deed, easement, or other form of title conveyance; 

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• A memorandum from the Loan Servicer justifying the approval or disapproval of the 

proposed transaction; and 

• Any other information pertinent to the transaction.

The State Director will review the materials, obtain the guidance of OGC (if needed), 

prior to indicating approval or disapproval on Form RD 3560-1, and provide additional 

servicing instructions to the Loan Servicer. 

C. Agency Decision and Notice to Borrower 

Before the Agency consents to any transaction that affects its security or lien position, 

Loan Servicers must obtain the written consent of any other lienholders. Such consent 

should include an agreement on the disposition of any funds resulting from the 

transaction and must be consistent with loan program requirements. 

Loan Servicers should advise the borrower if the mortgage or deed of trust requires 

Agency consent to the sale or other transfer of real estate security. In such cases, the 

Loan Servicer should explain the applicable requirements to the borrower. 

8.12 AGENCY RELEASE OF SECURITY 

The Agency will release security for Agency loans in accordance with applicable 

program regulations and as follows: 

• The Agency will not release its lien until it receives from the borrower the appropriate 

sales proceeds for application on the Government’s claim. Loan Servicers will hold 

borrowers strictly accountable to the Agency for all proceeds derived from the sale of

mortgaged property that the Agency is entitled to receive under its lien. 

• The State Director or his or her designee may release real estate security by using 

Form RD 3560-1 or other form approved by OGC. Satisfaction or termination of real 

estate security instruments when the Agency debt has been paid in full or satisfied by 

debt settlement action will be accomplished with Form RD 3560-58, Satisfaction.

• Any consent that results in an Agency loan account being paid in full is subject to all 

applicable prepayment provisions.

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SECTION 3: LEASING OF SECURITY PROPERTY [7 CFR 3560.408]

8.13 OVERVIEW 

Borrowers must obtain Agency approval to lease security property serving as security for 

Agency loans and grants. The Agency may approve leases to tenants for specific program

purposes or otherwise at its discretion. 

8.14 LEASES TO PUBLIC HOUSING AUTHORITIES 

Loan Servicers may only authorize multi-family housing borrowers to renew and 

continue leasing all or part of their housing facilities to a housing authority, although borrowers 

may not enter into any new leases. Such leases must be on a form provided by the housing 

authority, and Loan Servicers must determine that the lease terms will enable the borrower to 

continue the objectives of the loan and make payments on schedule. 

8.15 LEASE OF A PORTION OF THE SECURITY PROPERTY 

Loan Servicers may approve the leasing of related facilities such as kitchens, recreation 

facilities, and community buildings when the borrower will continue to operate the facilities for 

the purposes for which the loan or grant was made. Loan Servicers should not approve such 

leases, however, unless they can verify that all of the following conditions are met: 

• The lease is in the best interest of the borrower, the tenants, and the Government; 

• The amount of the consideration 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; 

• The lease provides at its termination for the restoration of the leased space to its 

original condition or to a condition acceptable to the owner and the Government; 

• Consent to the lease does not exceed three years at a time, unless a longer lease is 

clearly more advantageous to the borrower, the tenants, and the Government; 

• The borrower has obtained written consent from any other lienholders whose 

mortgages require consent to any lease; and 

• The borrower will obtain leases on the most advantageous terms to the project. The 

borrower will secure and credit to the project all discounts, rebates, or commissions 

obtainable with respect to project leases. 

8.16 MINERAL LEASES 

The Agency handles mineral leases according to the requirements set forth in 

7 CFR 3560.408(d). 

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SECTION 4: OTHER LIENS AGAINST A PROPERTY OR 

OTHER ASSETS [7 CFR 3560.409 (d)]

8.17 OVERVIEW 

If none of the options presented in Sections 1, 2, or 3 of this chapter are applicable to a 

particular borrower or property, the Agency may consent to other liens against the property or 

other assets. The State Director may approve other liens against a property or other assets or 

instruments of similar effect under which a borrower may acquire—through other credit—items 

that will not become part of real estate security. 

If additional liens are taken against other real property, the Loan Servicer must ensure

that appropriate NEPA environmental review and due diligence requirements are satisfied. 

8.18 REQUIRED CONDITIONS 

The Agency’s rule states that borrowers must not enter into any agreements placing a lien 

on the property or the equipment on it (e.g., items such as laundry equipment, air conditioning 

units, and basic household furnishings that will not become part of real estate security) without 

prior Agency approval and unless the following three conditions are met: 

• The transaction will not affect the Agency’s security position; 

• The items covered by the transaction are needed for the successful operation of the 

property; and 

• The financing arrangements are otherwise sound. 

The rule also specifies that borrowers must complete and file with the Agency a financing 

statement and a security agreement. 

8.19 AGENCY PROCEDURES

Requests for approval of other such liens will be made by the borrower on Form 

RD 3560-1. The Loan Servicer will forward to the State Director a properly completed and 

executed Form RD 3560-1, the proposed arrangement, the case file, and specific 

recommendations regarding the request. 

The State Director will indicate approval or disapproval on Form RD 3560-1. The State 

Director will request that OGC prepare or approve the arrangement and issue special instructions 

when necessary. 

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